The Supreme Court/The Supreme Court.iso/mac/ascii/1989/89_1448/89_1448.cd2

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Subject: 89-1448 -- CONCUR/DISSENT, VIRGINIA BANKSHARES, INC. v. SANDBERG




    SUPREME COURT OF THE UNITED STATES


No. 89-1448



VIRGINIA BANKSHARES, INC., et al., PETITIONERS v. DORIS I. SANDBERG et al.


on writ of certiorari to the united states court of appeals for the fourth
circuit

[June 27, 1991]



    Justice Kennedy, with whom Justice Marshall, Justice Blackmun, and
Justice Stevens join, concurring in part and dissenting in part.

    I am in general agreement with Parts I and II of the majority opinion,
but do not agree with the views expressed in Part III regarding the proof
of causation required to establish a violation of MDRV 14(a).  With
respect, I dissent from Part III of the Court's opinion.

I
    Review of the jury's finding on causation is complicated because the
distinction between reliance and causation was not addressed in explicit
terms in the earlier stages of this litigation.  Petitioners, in effect,
though, recognized the distinction when they accepted the District Court's
essential link instruction as to reliance but not as to causation.  So I
agree with the Court that the issue has been preserved for our review here.
{1}
    The Court of Appeals considered the essential link presumption in
rejecting petitioners' argument that Sandberg must show reliance by
demonstrating that she read the proxy and then voted in favor of the
proposal or took some other specific action in reliance upon it.  In the
Court of Appeals, the parties did not brief, nor did the panel address, the
possibility that nonvoting causation theories would suffice to allow for
recovery.

    Before this Court petitioners do not argue that Sandberg must
demonstrate reliance on her part or on the part of other shareholders.  The
matter of causation, however, must be addressed.

II


A
    The severe limits the Court places upon possible proof of nonvoting
causation in a MDRV 14(a) private action are justified neither by our
precedents nor any case in the courts of appeals.  These limits are said to
flow from a shift in our approach to implied causes of action that has
occurred since we recognized the MDRV 14(a) implied private action in J. I.
Case Co. v. Borak, 377 U. S. 426 (1964).  Ante, at 17-19.

    I acknowledge that we should exercise caution in creating implied
private rights of action and that we must respect the primacy of
congressional intent in that inquiry.  See ante, at 17.  Where an implied
cause of action is well accepted by our own cases and has become an
established part of the securities laws, however, we should enforce it as a
meaningful remedy unless we are to eliminate it altogether.  As the Court
phrases it, we must consider the causation question in light of the
underlying "policy reasons for deciding where the outer limits of the right
should lie."  Ante, at 19; see Blue Chip Stamps v. Manor Drug Stores, 421
U. S. 723, 737 (1975).

    According to the Court, acceptance of non-voting causation theories
would "extend the scope of Borak actions beyond the ambit of Mills."  Ante,
at 17.  But Mills v. Electric AutoLite Co., 396 U. S. 375 (1970), did not
purport to limit the scope of Borak actions, and as footnote 7 of Mills
indicates, some courts have applied nonvoting causation theories to Borak
actions for at least the past 25 years.  See also L. Loss, Fundamentals of
Securities Regulation 1119, n. 59 (1983).

    To the extent the Court's analysis considers the purposes underlying
MDRV 14(a), it does so with the avowed aim to limit the cause of action and
with undue emphasis upon fears of "speculative claims and procedural
intractability."  Ante, at 20.  The result is a sort of guerrilla warfare
to restrict a wellestablished implied right of action.  If the analysis
adopted by the Court today is any guide, Congress and those charged with
enforcement of the securities laws stand forewarned that unresolved
questions concerning the scope of those causes of action are likely to be
answered by the Court in favor of defendants.

B
    The Court seems to assume, based upon the footnote in Mills reserving
the question, that Sandberg bears a special burden to demonstrate causation
because the public shareholders held only 15 percent of the Bank's stock.
Justice Stevens is right to reject this theory.  Here, First American
Bankshares, Inc. (FABI) and Virginia Bankshares, Inc. (VBI) retained the
option to back out of the transaction if dissatisfied with the reaction of
the minority shareholders, or if concerned that the merger would result in
liability for violation of duties to the minority shareholders.  The merger
agreement was conditioned upon approval by two-thirds of the shareholders,
App. 463, and VBI could have voted its shares against the merger if it so
decided.  To this extent, the Court's distinction between cases where the
"minority" shareholders could have voted down the transaction and those
where causation must be proved by nonvoting theories is suspect.  Minority
shareholders are identified only by a post hoc inquiry.  The real question
ought to be whether an injury was shown by the effect the nondisclosure had
on the entire merger process, including the period before votes are cast.
    The Court's distinction presumes that a majority shareholder will vote
in favor of management's proposal even if proxy disclosure suggests that
the transaction is unfair to minority shareholders or that the board of
directors or ma jority shareholder are in breach of fiduciary duties to the
minority.  If the majority shareholder votes against the transaction in
order to comply with its state law duties, or out of fear of liability, or
upon concluding that the transaction will injure the reputation of the
business, this ought not to be characterized as nonvoting causation.  Of
course, when the majority shareholder dominates the voting process, as was
the case here, it may prefer to avoid the embarrassment of voting against
its own proposal and so may cancel the meeting of shareholders at which the
vote was to have been taken.  For practical purposes, the result is the
same: because of full disclosure the transaction does not go forward and
the resulting injury to minority shareholders is avoided.  The Court's
distinction between voting and nonvoting causation does not create clear
legal categories.
III
    Our decision in Mills v. Electric Auto-Lite Co., supra, at 385, rested
upon the impracticality of attempting to determine the extent of reliance
by thousands of shareholders on alleged misrepresentations or omissions.  A
misstatement or an omission in a proxy statement does not violate MDRV
14(a) unless "there is a substantial likelihood that a reasonable
shareholder would consider it important in deciding how to vote."  TSC
Industries, Inc. v. Northway, Inc., 426 U. S. 438, 449 (1976).  If minority
shareholders hold sufficient votes to defeat a management proposal and if
the misstatement or omission is likely to be considered important in
deciding how to vote, then there exists a likely causal link between the
proxy violation and the enactment of the proposal; and one can justify
recovery by minority shareholders for damages resulting from enactment of
management's proposal.

    If, for sake of argument, we accept a distinction between voting and
nonvoting causation, we must determine whether the Mills essential link
theory applies where a majority shareholder holds sufficient votes to force
adoption of a proposal.  The merit of the essential link formulation is
that it rests upon the likelihood of causation and eliminates the
difficulty of proof.  Even where a minority lacks votes to defeat a
proposal, both these factors weigh in favor of finding causation so long as
the solicitation of proxies is an essential link in the transaction.

A
    The Court argues that a nonvoting causation theory would "turn on
`hazy' issues inviting self-serving testimony, strike suits, and protracted
discovery, with little chance of reasonable resolution by pretrial
process."  Ante, at 20 (citing Blue Chip Stamps, 421 U. S. at 742-743
(1975)).  The Court's description does not fit this case and is not a sound
objection in any event.  Any causation inquiry under MDRV 14(a) requires a
court to consider a hypothetical universe in which adequate disclosure is
made.  Indeed, the analysis is inevitable in almost any suit when we are
invited to compare what was with what ought to have been.  The causation
inquiry is not intractable.  On balance, I am convinced that the likelihood
that causation exists supports elimination of any requirement that the
plaintiff prove the material misstatement or omission caused the
transaction to go forward when it otherwise would have been halted or voted
down.  This is the usual rule under Mills, and the difficulties of proving
or disproving causation are, if anything, greater where the minority lacks
sufficient votes to defeat the proposal.  A presumption will assist courts
in managing a circumstance in which direct proof is rendered difficult.
See Basic Inc. v. Levinson, 485 U. S. 224, 245 (1988) (discussing
presumptions in securities law).

B
    There is no authority whatsoever for limiting MDRV 14(a) to protecting
those minority shareholders whose numerical strength could permit them to
vote down a proposal.  One of Section 14(a)'s "chief purposes is `the
protection of investors.' "  J. I. Case Co., v. Borak, 377 U. S., at 432.
Those who lack the strength to vote down a proposal have all the more need
of disclosure.  The voting process involves not only casting ballots but
also the formulation and withdrawal of proposals, the minority's right to
block a vote through court action or the threat of adverse consequences, or
the negotiation of an increase in price.  The proxy rules support this
deliberative process.  These practicalities can result in causation
sufficient to support recovery.
    The facts in the case before us prove this point.  Sandberg argues that
had all the material facts been disclosed, FABI or the Bank likely would
have withdrawn or revised the merger proposal.  The evidence in the record,
and more that might be available upon remand, see infra, at 8-9, meets any
reasonable requirement of specific and nonspeculative proof.

    FABI wanted a "friendly transaction" with a price viewed as "so high
that any reasonable shareholder will accept it."  App. 99.  Management
expressed concern that the transaction result in "no loss of support for
the bank out in the community, which was important."  Id., at 109.
Although FABI had the votes to push through any proposal, it wanted a
favorable response from the minority shareholders.  Id., at 192.  Because
of the "human element involved in a transaction of this nature," FABI
attempted to "show those minority shareholders that [it was] being fair."
Id., at 347.

    The theory that FABI would not have pursued the transaction if full
disclosure had been provided and the shareholders had realized the
inadequacy of the price is supported not only by the trial testimony but
also by notes of the meeting of the Bank's board which approved the merger.
The inquiry into causation can proceed not by "opposing claims of
hypothetical diffidence and hypothetical boldness," ante, at 20, but
through an examination of evidence of the same type the Court finds
acceptable in its determination that directors' statements of reasons can
lead to liability.  Discussion at the board meeting focused upon matters
such as "how to keep PR afloat" and "how to prevent adverse
reac[tion]/perception," App. 454, demonstrating the directors' concern that
an unpopular merger proposal could injure the Bank.

    Only a year or so before the Virginia merger, FABI had failed in an
almost identical transaction, an attempt to freeze out the minority
shareholders of its Maryland subsidiary.  FABI retained Keefe, Bruyette &
Woods (KBW) for that transaction as well, and KBW had given an opinion that
FABI's price was fair.  The subsidiary's board of directors then retained
its own adviser and concluded that the price offered by FABI was
inadequate.  Id., at 297, 319.  The Maryland transaction failed when the
directors of the Maryland bank refused to proceed; and this was despite the
minority's inability to outvote FABI if it had pressed on with the deal.

    In the Virginia transaction, FABI again decided to retain KBW.  Beddow,
who sat on the boards of both FABI and the Bank, discouraged the Bank from
hiring its own financial adviser, out of fear that the Maryland experience
would be repeated if the Bank received independent advice.  Directors of
the Bank testified they would not have voted to approve the transaction if
the price had been demonstrated unfair to the minority.  Further, approval
by the Bank's board of directors was facilitated by FABI's representation
that the transaction also would be approved by the minority shareholders.
    These facts alone suffice to support a finding of causation, but here
Sandberg might have had yet more evidence to link the nondisclosure with
completion of the merger.  FABI executive Robert Altman and Bank Chairman
Drewer met on the day before the shareholders meeting when the vote was
taken.  Notes produced by petitioners suggested that Drewer, who had
received some shareholder objections to the $42 price, considered
postponing the meeting and ob taining independent advice on valuation.
Altman persuaded him to go forward without any of these cautionary
measures.  This information, which was produced in the course of discovery,
was kept from the jury on grounds of privilege.  Sand berg attacked the
privilege ruling on five grounds in the Court of Appeals.  In light of its
ruling in favor of Sandberg, however, the panel had no occasion to consider
the admissibility of this evidence.

    Though I would not require a shareholder to present such evidence of
causation, this case itself demonstrates that nonvoting causation theories
are quite plausible where the misstatement or omission is material and the
damage sustained by minority shareholders is serious.  As Professor Loss
summarized the holdings of a "substantial number of cases," even if the
minority cannot alone vote down a transaction,


"minority stockholders will be in a better position to protect their
interests with full disclosure and . . . an unfavorable minority vote might
influence the majority to modify or reconsider the transaction in question.
In [Schlick v. Penn-Dixie Cement Corp., 507 F. 2d 374, 384 (CA2 1974),]
where the stockholders had no appraisal rights under state law because the
stock was listed on the New York Stock Exchange, the court advanced two
additional considerations: (1) the market would be informed; and (2) even
`a rapacious controlling management' might modify the terms of a merger
because it would not want to `hang its dirty linen out on the line and
thereby expose itself to suit or Securities Commission or other action --
in terms of reputation and future takeovers.' "  L. Loss, Fundamentals of
Securities Regulation at 1119-1120 (footnote omitted).


    I conclude that causation is more than plausible; it is likely, even
where the public shareholders cannot vote down management's proposal.
Causation is established where the proxy statement is an essential link in
completing the transaction, even if the minority lacks sufficient votes to
defeat a proposal of management.

IV
    The majority avoids the question whether a plaintiff may prove
causation by demonstrating that the misrepresentation or omission deprived
her of a state law remedy.  I do not think the question difficult, as the
whole point of federal proxy rules is to support state law principles of
corporate governance.  Nor do I think that the Court can avoid this issue
if it orders judgment for petitioners.  The majority asserts that
respondents show no loss of a state law remedy, because if "the material
facts of the transaction and Beddow's interest were not accurately
disclosed, then the minority votes were inadequate to ratify the merger
under Virginia law."  Ante, at 22.  This theory requires us to conclude
that the Virginia statute governing director conflicts of interest, Va.
Code 13.1-691(A)(2) (1989), incorporates the same definition of materiality
as the federal proxy rules.  I find no support for that proposition.  If
the definitions are not the same, then Sandberg may have lost her state law
remedy.  For all we know, disclosure to the minority shareholders that the
price is $42 per share may satisfy Virginia's requirement.  If that is the
case, then approval by the minority without full disclosure may have
deprived Sandberg of the ability to void the merger.
    In all events, the theory that the merger would have been voidable
absent minority shareholder approval is far more speculative than the
theory that FABI and the Bank would have called off the transaction.  Even
so, this possibility would support a remand, as the lower courts have yet
to consider the question.  We are not well positioned as an institution to
provide a definitive resolution to state law questions of this kind.  Here
again, the difficulty of knowing what would have happened in the
hypothetical universe of full disclosure suggests that we should "resolv[e]
doubts in favor of those the statute is designed to protect" in order to
"effectuate the congressional policy of ensuring that the shareholders are
able to make an informed choice when they are consulted on corporate
transactions."  Mills, 396 U. S., at 385.

    I would affirm the judgment of the Court of Appeals.







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1
    In the District Court, petitioners asked for jury instructions
requiring respondent Sandberg to prove causation as an element of her cause
of action.  App. 83, 92.  The District Court gave an instruction close in
substance to those requested:

    "The fourth element under Count I that Ms. Sandberg must establish is
that the conduct of the defendants proximately caused the damage to the
plaintiff.  In order for an act or omission to be considered a proximate
cause of damage, it must be a substantial factor in causing the damage, and
the damage must either have been a direct result or a reasonably probable
consequence of the act or omission.

    "In order to satisfy this element, the plaintiff need not prove that
the defendants' conduct was the only cause of the plaintiff's damage.  It
is sufficient if you find that the actions of the defendants were a
substantial and significant contributing cause to the damage which the
plaintiff asserts she suffered."  Id., at 424.

    The District Court also gave a jury instruction on reliance, i. e., did
Sandberg actually read the proxy statement and rely upon the misstatements
or omissions.  Here, the District Court gave Sandberg's proposed
Instruction No. 29, which indicated that it was not necessary for Sandberg
to "establish a separate showing of reliance by her on the material
misstatement or omissions if any in the proxy statement."  Id., at 426.
The instruction continued, in a manner the Court finds problematic, to
provide:

"If you find that there are omissions or misstatements in the proxy
statement, and that these omissions or misstatements are material, a
shareholder such as Ms. Sandberg has made a sufficient showing of a causal
relation between the violation and the injury for which she seeks redress
if she proves that the proxy solicitation itself rather than the particular
defect in the solicitation material was an essential link in the
accomplishment of the transaction.

    "If you find that it was necessary for the bank to solicit proxies from
minority shareholders in order to proceed with the merger, you may find
that the proxy solicitation was an essential link in the accomplishment of
the transaction.

    ". . . you are instructed it is no defense that the votes of the
minority stockholders were not needed to approve the transaction."  Id., at
426-427.

Petitioners objected to the "essential link" jury instruction upon the
ground that it decided the question left open in footnote 7 of Mills v.
Electric Auto-Lite Co., 396 U. S. 375, 385, n. 7 (1970), App. 435.