Gittlin (Defendant) was a shareholder of less-than-1 percent of Studebaker Corporation (Plaintiff) and was enjoined successfully from using authorizations of other shareholders to access inspection of a shareholder list as the solicitation of such authorizations was made without compliance with the Securities Exchange Commission’s (SEC) Proxy Solicitation Rules.
A â€œproxy solicitationâ€ is any communication that seeks the support of a shareholder in an action that is part of a continuous plan for the solicitation of the shareholder’s right to vote and must comply with the proxy solicitation rules.
According to New York Law (Â§ 1315), a corporation is required to permit shareholders to inspect a list of the names and addresses of other shareholders (i.e., a shareholder list) if, in addition to other conditions, he owns or represents a minimum 5 percent of any class of outstanding shares.Â Gittlin (Defendant) owned 5,000 shares and obtained the authorization of 42 additional shareholders totaling 145,000 shares, an amount that exceeded 5 percent of Studebaker Corporation’s (Plaintiff) outstanding shares.Â These authorizations merely entitled Defendant to use the weight of these 145,000 shares toward meeting the 5 percent requirement in order to acquire the shareholder list, however it did not entitle him to vote the shares in a corporate election or otherwise at a shareholders’ meeting.Â Defendant gathered these 42 authorizations simply by asking for them either orally or in writing.Â He did not provide the 42 shareholders with extensive information on the corporation (as Rule 14a-3 requires of proxy solicitations) and the information that was provided to them was not filed first with the SEC prior to using it (as required of proxy solicitations by Rule 14a-6).Â Defendant then began a proceeding in New York State court to enforce his rights under Â§ 1315 to inspect the shareholder list.Â The ultimate purpose Defendant had in obtaining the shareholder list was to take over control of the corporation by acquiring proxies of the shareholders on the list.Â However, to prevent their own ousters, the existing management, in the name of Plaintiff, filed the present suit in federal district court to enjoin Defendant’s use of these authorizations.Â Their contention was that the communications used to obtain these authorizations were proxy solicitations and, therefore, were obtained invalidly due to non-compliance with the above-noted SEC rules.
Is a request for shareholder’s authorization to inspect a shareholder list a sufficient use of another shareholder’s stock rights to qualify as a proxy solicitation and, therefore, to require compliance with the proxy solicitation rules?
(Friendly, J.)Â Yes.Â A communication to a shareholder is considered a sufficient solicitation of his voting rights to require compliance with the proxy solicitation of his voting rights to require compliance with the proxy solicitation rules if such communication seeks the shareholder’s support in action that is a part of a continuous plan intended to end in the solicitation of shareholder’s right to vote.Â This standard for defining â€œproxy solicitationâ€ had been chosen in prior case law, specifically SEC v. Okin, 132 F.2d 784 (2d Cir. 1943), because during the early stages of preparing for a corporate takeover misinformation may spread and render the Commission ineffective to then protect shareholders by requiring an accurate proxy request.
This case illustrates that access to the names and addresses of a corporation’s shareholders is the sine qua non of a proxy battle, and as a result, a corporate takeover by new management.Â The consequences of discovering that a â€œproxy solicitationâ€ has occurred is that the rules regulating such solicitations (i.e., Rules 14a-1 to 14a-12) must be complied with, in case any proxies obtained afterwards are not useable.Â It is therefore essential to determine when a communication to another shareholder is a request for his proxy (i.e., the right to vote his shares).Â The position of the Commission is that any request to use the stock rights of another is a proxy solicitation, regardless of whether the use is voting the shares or acquiring enough shareholder representation to obtain a shareholder list under statutes such as N.Y. Â§ 1315, or any other purpose.Â The Studebaker court did not, however, need to use the Commission’s proposed criteria to determine that the Defendant authorizations were improper as criteria already established under prior case law (including SEC v. Okin) would be enough to cause Defendant’s request for â€œauthorizationsâ€ to fall within the term â€œproxy solicitations.â€Â The criterion used is the extent to which the communication seeking the consent of the shareholders to a course of action (e.g., inspecting a shareholder list) is part of a continuous plan intended to end with the solicitation of the shareholder’s right to vote.Â Using this criterion, The Okin case held that a request to the holders of 15 percent of the outstanding shares to join the defendant in calling a shareholders’ meeting was a â€œproxy solicitationâ€ because the defendant eventually intended to solicit the right to vote shares to remove a specific director at the meeting he was calling.Â Even greater â€œplan continuityâ€ is exhibited in the Studebaker case where there is a request to consent to Defendant’s demand to inspect a shareholder listâ€”the very purpose of which is to know to whom and where to send requests for the right to vote shares (i.e., the conventional proxy solicitation).