Virginia Bankshares, Inc. v. Sandberg
501 U.S. 1083, 115 L. Ed. 2d 929, 1991 U.S. LEXIS 3819 (1991)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A knowingly false statement of opinion or belief in a proxy solicitation may be an actionable misstatement of material fact under § 14(a) if there is objective evidence that the statement is misleading about its subject matter. However, causation of damages is not established for minority shareholders whose votes are not legally required to authorize the transaction, based on theories that the directors desired their votes for cosmetic reasons or to preempt a state-law challenge that was not actually lost.
Facts:
- First American Bankshares, Inc. (FABI), a bank holding company, owned 85% of First American Bank of Virginia (the Bank), with the remaining 15% held by approximately 2,000 minority shareholders.
- In 1986, FABI initiated a 'freeze-out' merger to acquire the remaining 15% of the Bank by merging it into Virginia Bankshares, Inc. (VBI), a wholly owned subsidiary of FABI.
- FABI hired an investment banking firm, Keefe, Bruyette & Woods (KBW), which provided an opinion that $42 per share would be a fair price for the minority stock.
- The Bank's board of directors approved the merger proposal at the $42 price.
- Although not required by law to gain approval from the minority shareholders, the directors solicited proxies from all shareholders for a vote on the proposal.
- In the proxy solicitation, the directors recommended adoption of the merger, stating that they had approved the plan because it provided an opportunity for minority shareholders to achieve a 'high' value and a 'fair' price for their stock.
- Shareholder Doris Sandberg, along with others, did not submit her proxy, but the merger was approved due to FABI's 85% ownership.
- Evidence presented at trial indicated that the directors did not believe the price was high, that the bank's underlying assets were worth more than disclosed (over $60 per share), and that the directors approved the merger to remain on the board.
Procedural Posture:
- Doris Sandberg sued Virginia Bankshares, Inc. (VBI), First American Bankshares, Inc. (FABI), and the Bank's directors in the U.S. District Court for the Eastern District of Virginia for violations of § 14(a) and breach of state fiduciary duties.
- A jury returned a verdict in favor of Sandberg on both counts.
- Subsequently, another group of minority shareholders successfully pleaded collateral estoppel to obtain summary judgment on liability against the same defendants.
- The defendants (VBI et al.) appealed to the U.S. Court of Appeals for the Fourth Circuit.
- The Court of Appeals affirmed the District Court's judgment, holding that the proxy statements were materially misleading and that the shareholders could maintain their action even though their votes were not needed to effectuate the merger.
- The defendants, as petitioners, were granted a writ of certiorari by the U.S. Supreme Court.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a minority shareholder, whose vote is not legally required to approve a merger, establish causation under § 14(a) by showing that a materially misleading proxy solicitation was an 'essential link' because the directors sought the minority's votes to avoid bad public relations or to insulate the merger from a potential state-law challenge?
Opinions:
Majority - Justice Souter
No. Causation of damages under § 14(a) cannot be demonstrated by a member of a class of minority shareholders whose votes are not legally required to authorize the corporate action subject to the proxy solicitation. While knowingly false statements of reasons or belief in a proxy statement are actionable as misstatements of material fact, a plaintiff must still demonstrate a causal link between the misleading solicitation and the alleged harm. The 'essential link' test from Mills v. Electric Auto-Lite Co. is not satisfied by showing that directors solicited votes to avoid bad public relations, as this would lead to speculative litigation about hypothetical managerial motives. Nor is causation established by arguing the solicitation was needed to foreclose a state-law remedy, when the facts show that under state law, a vote predicated on a materially misleading disclosure would not have foreclosed such a remedy anyway; thus, no state-law right was lost.
Dissenting - Justice Stevens
Yes. Shareholders should be able to bring an action for damages under § 14(a) whenever materially false statements are made in proxy statements, regardless of whether their votes were legally required. The rationale of Mills should be extended to this situation because management found it necessary, for 'legal or practical reasons,' to solicit proxies from minority shareholders. That decision to solicit made the proxy statement an 'essential link in the accomplishment of the transaction.' Denying a remedy to injured shareholders simply because management already controlled enough votes undermines the statute's purpose of ensuring informed corporate suffrage.
Concurring - Justice Scalia
No. The statement at issue, 'The Plan of Merger has been approved... because it provides... a high value for their shares,' should be read as a statement of fact, not merely opinion. It asserts both the directors' reason for acting and the factual correctness of that reason. While he agrees with the majority's conclusion on causation, he notes his general view that the federal cause of action under § 14(a) was judicially created rather than congressionally enacted, and therefore, narrowing its scope is a faithful application of judicial duty.
Concurring-in-part-and-dissenting-in-part - Justice Kennedy
Yes. The majority's severe limits on proving nonvoting causation are not justified by precedent and represent an improper restriction of the well-established private right of action under § 14(a). Causation should be established where the proxy statement is an essential link, even if the minority lacks votes to defeat the proposal, because full disclosure can influence the entire transaction process. In this case, there was substantial evidence that FABI wanted a 'friendly transaction' and might have withdrawn or revised the proposal if full disclosure had led to significant minority opposition, making the solicitation a crucial part of the merger process.
Analysis:
This case significantly clarifies and narrows the scope of the implied private right of action under § 14(a) of the Securities Exchange Act. While it affirms that directors' conclusory statements of opinion and belief can be actionable if knowingly false and objectively misleading, it erects a substantial barrier to causation for minority shareholders in freeze-out mergers. By rejecting 'shame facts' or 'sue facts' theories of causation, the Court effectively limits recovery to situations where minority votes are statutorily required or where the misleading proxy directly causes the loss of a tangible state-law remedy. This decision makes it much more difficult for shareholders whose votes are not necessary to challenge a transaction based on misrepresentations in a proxy statement, thereby reducing the litigation risk for controlling shareholders executing such mergers.
