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Levin v. Metro-Goldwyn-Mayer, Inc.

District Court, S.D. New York
264 F.Supp. 797 (1967)
ELI5:

Rule of Law:

Incumbent corporate management may use corporate funds for reasonable and proper expenses in a proxy contest, provided the contest is over disputes of corporate policy and not a mere personal power struggle.


Facts:

  • A conflict for corporate control arose at Metro-Goldwyn-Mayer, Inc. (MGM) between the incumbent management, led by Robert H. O'Brien ('the O'Brien group'), and a group of dissident stockholders, led by director Philip Levin ('the Levin group').
  • Both groups planned to nominate competing slates of directors at the upcoming annual stockholder meeting and began actively soliciting proxies from shareholders.
  • The dispute between the groups centered on significant, divergent business policy disagreements, including the number of films to produce, television licensing strategies, and dividend policies, rather than personal conflicts.
  • In its proxy solicitation efforts, the O'Brien group used MGM corporate funds to hire two proxy solicitation firms (Georgeson & Co. and Kissel-Blake Organization), a public relations firm, and special legal counsel.
  • The O'Brien group also utilized MGM employees, including 31 branch managers, and company offices to aid in their solicitation of proxies from stockholders.
  • The Levin group, in their complaint, did not allege that the O'Brien group had made any false or fraudulent statements in their solicitations, nor did they claim any corruption for personal gain.
  • The O'Brien group fully disclosed in its proxy statement that MGM would bear all solicitation costs, estimated at $125,000, and detailed its use of proxy solicitors and employees.

Procedural Posture:

  • Philip Levin and five other stockholders filed suit against MGM and five of its directors in the Supreme Court, County of New York, a state trial court.
  • The defendants removed the action to the United States District Court for the Southern District of New York.
  • The plaintiffs then applied to the federal district court for a preliminary injunction to stop the defendants from using corporate funds and resources in the ongoing proxy contest.

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Issue:

Does incumbent corporate management unlawfully or unfairly use corporate funds and resources when, in a proxy contest centered on policy disputes, it pays for proxy solicitors, public relations firms, and special legal counsel, and utilizes corporate employees to solicit proxies?


Opinions:

Majority - Ryan, District Judge

No. The use of corporate funds and resources by incumbent management in this proxy contest is not illegal or unfair. When a proxy contest involves genuine disputes over corporate policy, as opposed to a mere personality-driven power struggle, management may use corporate funds for reasonable expenses to inform stockholders of its position. The court found that the expenses incurred for proxy solicitors, public relations, and legal counsel were not excessive for a corporation of MGM's size, and the methods employed were not coercive, misleading, or otherwise illegal. The use of a limited number of employees for solicitation was consistent with past corporate practice and was not unreasonable. Crucially, management made full and truthful disclosures to the stockholders regarding its solicitation methods and expenses, which is the primary concern of the court in such matters.



Analysis:

This case reinforces the legal principle that incumbent directors have the right to use corporate funds to defend their positions in a proxy contest, but it conditions this right on the nature of the dispute. By distinguishing between policy-based contests and personal power struggles, the decision establishes a crucial boundary for the proper use of corporate assets. It gives management a degree of legal protection when informing shareholders and soliciting their support, so long as the expenses are reasonable and the methods are fair and fully disclosed. This provides a practical framework for courts to evaluate the legitimacy of management's actions in corporate control battles, balancing the incumbents' need to communicate with shareholders against the risk of entrenching management at the corporation's expense.

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