Virginia Bankshares, Inc. v. Sandberg

Brief Fact Summary. The Board of Directors of Virginia Bankshares (Defendant) in petitioning proxies to vote on a suggested merger, stood for to its minority shareholders, counting Sandberg, (Plaintiff) that $42 a share was a “high value†and “fair price†for their stock, regardless of a conviction that the amount was neither high nor fair.

Synopsis of Rule of Law. A minority shareholder who claims that a corporate board of directors intentionally presented fabricatedexplanations for recommendation of specific action states a private cause of action under Securities Exchange Act § 14(a) and SEC Rule 14a-9, even if such explanations were defined in conclusory or approximate terms.

Facts. Virginia Bankshares, a subsidiary of a bank holding company, possessed 85% of the shares of a different bank and in a plot hatched by its parent, Virginia Bankshares suggested to merge the bank with the institution where it possessed a majority interest into itself in a “freeze outâ€, to do this however, would require the 15% of outstanding shares still held by a few thousand minority shareholders. It hired an investment banking firm to give an opinion on the suitable price for the minority shares, with the firm opining that a reasonable price would be $42 a share and the board of directors approving. The solicitation materials provided at the annual shareholders meeting, where the plan would be voted on and attended by the recently solicited proxies, stated that the board of directors had approved the merger due to the its ability to provide minority shareholders with a “high value†and “fair price†for their stock.  While a majority of the minority shareholders provided the proxies demanded, Sandberg failed to. Sandberg claimed, in a federal district court action, that the board of Virginia Bankshares was in violation of the SecuritiesExchange Act § 14(a) and Rule 14a-9 and had violated the fiduciary duties to the shareholders due to its members distrusting that the price presentedto the minority was high or fair, and that the merger was only suggested to keep their board seats. A jury concurred with Sandberg with the Fourth Circuit affirming. The Supreme Court granted certiorari.

Issue. Is a minority shareholder who claims that a corporate board of directors intentionally presented fabricated explanations for endorsements of specific action states a private cause of action under Securities Exchange Act § 14(a) and SEC Rule 14a-9, even if such explanations were defined in conclusory or approximate terms?

Held. (Souter, J.) Yes. A minority shareholder who claims that a corporate board of directors intentionally presented fabricated explanations for endorsements of specific action states a private cause of action under Securities Exchange Act § 14(a) and SEC Rule 14a-9, even if such explanations were defined in conclusory or approximate terms. Shareholders know that directors generally have knowledge and expertise significantly beyond that of normal investor’s resources, and knowing that directors are obligated by state law to exercise their judgment in the shareholders’ interest. Thus, when offered a conclusory or qualitative statement during a proxy solicitation, shareholders reasonably comprehend a statement whose precision is warranted by a fact based foundation. In this instance, the statement that the price offered to the minority shareholders of the acquired bank was “fair†or “high†and offered a premium above both market price and book value was disproven by proof of the “growing concern†worth of the bank  and the true worth of the acquired bank’s real estate holding (signifying a $60/share appraisal). Usually, Sandberg along with the other minority shareholders, in spite of the conclusory quality of the directors’ proxy solicitation statements, would be held to have stated palpable claims under Securities Exchange Act § 14(a), although, Sandberg lacks evidence to demonstrate that the proxy statement was a vital connection between the directors’ proposal and the merger, and that the necessary causation component is existent. The proxy solicitation was not necessary by relevant state law, and minority approval of the merger was not the only way the board of directors could protect it from a postmerger condemnation for conflict of interest.  Congress was discreet about the capacity of a private, self-help right of action under § 14(a), and lacking unmistakable congressional intent to give a private remedy permitting such an expansive theory of causation, the likelihood of theoretical assertions must supersede the minority rights in this sort of fact situation. Reversed.

Discussion. Regardless of this case’s extensive analysis of the actionablility per se of statements of belief, intention, orjudgment by a corporation’s board of directors given the necessary component of causality, the Court explicitlyengaged the inquiry of ifscienter was a requiredcomponent of liability under S 14(a) of the Securities Exchange Act. TSC Industries, Inc. v. Norway, Inc., 426 U.S. 438, 444 n.7 (1976), inquires if scienter is a required component of a private claim for  14(a) misrepresentation. Regardless of the fact that lack of causation is not grounds for a federal claim, the Court was considerate of the presence of state law remedies that is not reliant on the missing link between the detriment to minority shareholders and the proxy solicitation , an example of which is appraisal.