Brief Fact Summary.
Borak (P), a shareholder of J.I. Case Co. (D), sought private relief arguing that shareholders approved a merger with another corporation with proxy statements that violated federal securities laws.
Synopsis of Rule of Law.
The court is free to design an appropriate remedy, and a private civil action will lie, when a federal securities act has been violated, but no private right of action is specifically authorized or prohibited.
When a federal statute condemns an act as unlawful, the extent and nature of the legal consequences of the condemnation, though left by the statute to judicial determination, are nevertheless federal questions, the answers to which are to be derived from the statute and the federal policy which it has adopted.View Full Point of Law
A proposal of merger was submitted to the shareholders for their approval by the management of J.I. Case Co. (D).Â In connection with this proposal and in support of the merger, management solicited shareholder proxies.Â Borak (P) argued that the proxy solicitations were false and misleading, which violated Â§ 14(a) of the Securities Exchange Act.Â He sought rescission of the consummated merger plus damages for himself and all other shareholders in a similar situation and any other equitable relief appropriate.Â The trial court held that the federal statute authorized declaratory relief only, and any other remedies would have to be sought under state law. The court set $75,000 for the posting of security for expenses, as required by the applicable Wisconsin statute.Â Borak (P) refused to post the security, and all counts of the complaint were dismissed except the portion that would result in a judgment of declaratory relief.Â Borak (P) appealed, arguing that the Securities Exchange Act authorized a private right of action by implication and that he was not limited to the state courts for other than declaratory relief.
Where a federal regulation relating to proxy statements is violated and no private right of action is specifically authorized, nor private remedies specified, is a shareholder entitled to seek rescission of a merger or damages?
(Clark, J.)Â Yes.Â The purpose of Â§ 14(a) is to prevent management or others from obtaining authorization for corporate action through the use of false or misleading proxy solicitations.Â In order to enact whatever rules and regulations are deemed necessary to protect the interests of shareholders and the public interest, the ACT under which the rule was promulgated authorized the Securities and Exchange Commission to do so.Â An available judicial remedy is required by the congressional mandate to enforce the protection of the interests of the investors.Â The Securities and Exchange Commission (SEC) states that it is not equipped to investigate the accuracy of all proxy statements submitted for registration.Â A private right of action for shareholders who believe they have been wronged must be afforded if the investors’ interests are to be protected in the spirit of the congressional mandate.Â The statute does not provide for specific types of relief, therefore, the court must determine for itself the appropriate remedies to redress the alleged wrong.Â In this regard, any remedy available to a federal court can be used to provide for the plaintiff’s relief.Â To hold that the plaintiff is restricted to declaratory relief in federal courts, and require any other relief be pursued in a state court, could conceivably leave the plaintiff with no effective remedy.Â Once having obtained the federal declaration of his rights, the plaintiff might discover that the state does not determine actions of the defendant to be unlawful.Â The plaintiff would therefore be left with no means to enforce his judicially declared rights.Â The case is remanded to the trial court for a hearing on the merits with relief to be granted in accordance with the outcome.Â Affirmed.
The court relieved plaintiffs of a huge burden in many instances by completely removing state law from consideration in cases claiming violations of federal securities laws.Â A large number of jurisdictions require that the plaintiff post a security for expenses on behalf of the defendant.Â This requirement can be a heavy burden, especially if complex issues are involved in the case that would result in prolonged litigation.Â Borak (P) would have had to post $75,000 if he had been required to proceed under state law.Â A burden such as this might likely stop the plaintiff from proceeding with his case, regardless of its merits.Â In addition, the Court’s ruling expands the remedies available to a plaintiff shareholder greatly.Â Shareholders who dissent from a merger are limited by most state statutes to a right of appraisal for his shares.Â If that action was called for, the federal court could possibly rescind the merger completely.Â A broad range of enforcement techniques resulted from this decision, which greatly expanded the effectiveness of the federal securities regulations.