Virginia Bankshares, Inc. v. Sandberg

Brief Fact Summary.

Following a freeze-out merger, where minority shareholders of First American Bank of Virginia (Bank) lost their interest, Sandberg (Plaintiff) and other minority shareholders sued for damages, claiming violation of § 14(a) and Rule 14a-9 and a breach of the fiduciary duties.

Synopsis of Rule of Law.

(1) A person is allowed to prove a specific statement of reason that is knowingly false or materially misleading, even when the statement is couched in conclusory terms.  (2) Causation of damages compensable through a federal implied private right of action cannot be demonstrated by minority shareholders whose votes are not required to authorize the transaction that gave rise to the claim.

Facts.

The First American Bank of Virginia (Bank) merged into Virginia Bankshares, Inc. (VBI) (Defendant).  First American Bankshares, Inc., (FABI) (Defendant), the parent company of VBI (Defendant), hired an investment banking firm to give its opinion on the appropriate price for shares of the minority holders who would lose their interest due to the merger.  Based on market quotations and unverified information from FABI (Defendant), the investment banking firm determined that $42 a share would be a fair price.  According to the directors’ proxy solicitation, the merger proposal was approved at that price, as it was an opportunity for the minority shareholders to get a high value and a fair price for their minority stock.  Sandberg (Plaintiff), who had not voted for the merger, then filed suit against VBI (Defendant) and FABI (Defendant), alleging violation of § 14(a) and Rule 14a-9, and breach of fiduciary duties owed the minority shareholders under state law.  The jury held for Plaintiff, finding that she would have received $60 per share had her stock been valued properly.  The court of appeals affirmed, and VBI (Defendant) appealed.

Issue.

(1) Is a person allowed to prove a specific statement of reason that is knowingly false or materially misleading, even when the statement is couched in conclusory terms?  (2) Can causation of damages compensable through a federal implied private right of action be demonstrated by minority shareholders whose votes are not required to authorize the transaction that gave rise to the claim?

Held.

(Souter, J.) (1) Yes.  A person is allowed to prove a specific statement of reason that is knowingly false or materially misleading, even when the statement is couched in conclusory terms.  In this case, there was evidence of a “going concern†value for the Bank of more than $60 per share of common stock, a fact not disclosed.  Therefore the directors’ statement was materially misleading on its face.  The evidence invoked by VBI (D) fell short of compelling the jury to find that the facial materiality of the misleading statement was offset, or that the risk of real deception was invalidated, by any statements in the proxy solicitation that were true.  (2) No.  Causation of damages compensable through a federal implied private right of action cannot be demonstrated by minority shareholders whose votes are not required to authorize the transaction that gave rise to the claim.  The private right of action would be extended beyond the scope congressionally intended by the Securities Exchange Act of 1934 by application of the “essential link†causation test to the facts of this case.  Causation would then turn on inferences regarding what the corporate directors would have thought and done without the minority shareholder approval not required to authorize action.  Assuming that the material facts about the merger were not accurately disclosed, the minority votes were not adequate to ratify the merger under state law, and there was no loss of a state appraisal remedy to connect the proxy solicitation with harm to minority shareholders.  The court of appeal’s judgment is reversed.

Dissent.

(Stevens, J.)  Under § 14(a), shareholders may bring an action for damages whenever materially false or misleading statements are made in proxy statements.  Corporate officers, once they have decided for whatever reason to solicit proxies, are not authorized to avoid the constraints of the statute when the solicitation of proxies is not required by law or by the bylaws of a corporation.  The judgment of the court of appeals should therefore be affirmed.

(Kennedy, J.)  Neither the Court’s precedents nor any case in the court of appeals justifies the severe limits placed by the majority upon possible proof of nonvoting causation in a § 14(a) private action.  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.

Concurrence.

(Scalia, J.)  Sometimes a sentence with the word “opinion†in it actually represents facts as facts rather than opinions and, therefore, nothing more is needed than to apply the normal rules for § 14(a) liability.  Such is the case here.

Discussion.

Although a misleading statement may lose its deceptive edge, simply by joinder with others that are true, deception is not always neutralized by such a combination.  Sandberg (Plaintiff) invoked language from the opinion of the Court in Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970), permitting the jury could find for the Plaintiff without a showing of her own reliance on the alleged misstatements, so long as the misstatements were material and the proxy solicitation was an “essential link†in the merger process.  However, Justice Souter distinguished the case in this instance from Mills, where a majority stockholder controlled just over half of the corporation’s shares and a two-thirds vote was needed for approval of the merger proposal.