On Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. Civil Action No. 74-2274).
Aldisert, Gibbons and Weis, Circuit Judges.
Plaintiff Richard Ash, a stockholder in defendant LFE Corporation, appeals from an order of the district court denying a preliminary and permanent injunction and dismissing his complaint.*fn1 Alleging jurisdiction under § 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, Ash complained that a management proxy solicitation was misleading with respect to a proposed employee pension plan to be voted upon at LFE's September 12, 1974 annual meeting. Although the complaint was filed a week before the annual meeting was held, Ash did not seek a temporary restraining order. Thus the annual meeting was held as scheduled and an overwhelming number of proxies were voted in favor of the pension plan.*fn2 Thereafter, before the effective date for implementation of the approved plan, the court held a hearing on Ash's motion for a preliminary injunction against carrying it into effect. At that hearing Ash urged that with respect to the plan, the management proxy statement (1) was misleading and omitted material facts, in violation of SEC Proxy Rule 14a-9, 17 C.F.R. § 240.14a-9, and (2) was not clearly presented, as required by Rule 14a-5, 17 C.F.R. § 240.14a-5. The district court compressed the hearing on the preliminary and permanent injunctions, rejected Ash's contentions, and dismissed the complaint. This appeal followed. We affirm.
I. THE RULE 14a-9 CLAIMS.
Ash contends that the proxy statement violated Rule 14a-9 in several respects. Some factual background is required for an appreciation of these contentions. LFE is a diversified manufacturer of process controls and metering equipment, incorporated in Delaware, with its principal executive office in Massachusetts. It operates various divisions which it has acquired over the years since its incorporation in 1946. In the past when it acquired a business, the pension or retirement programs in effect at the time of the acquisition were continued in force. As a result, in 1974 LFE employees were covered by four different retirement programs and a profit sharing plan. The management proposal for which proxies were solicited terminated all these programs and substituted a single pension plan for all employees except for employees in one subsidiary for whom retirement benefits were set forth in a collective bargaining agreement.
Since its incorporation LFE has never paid a dividend on its common stock. By virtue of loan agreements with financial institutions it is prohibited from paying such dividends except with the consent of certain lenders. Since its incorporation LFE has earned a profit in excess of $200,000 in only nine years, has lost money in eleven years, and has operated at approximately the break-even level in eight years. Although in 1974 it earned over a million dollars after taxes, the most profitable year since 1961, its stock was trading at or near all-time lows. It had a substantial retained earnings deficit.
The new pension plan provides pension benefits for management substantially in excess of those available under the previous arrangements, and at a substantially higher cost to LFE. Ash points out that the effect of the new plan is to saddle LFE with additional liability for past services and additional future financial obligations. He contends that the improvidence of its adoption for a corporation with the LFE earnings history is not adequately disclosed.
The proxy statement states that the Board of Directors "has proposed" the plan. The first violation of Rule 14a-9 alleged by Ash pertains to that statement. He argues that it implies that the directors were the authors of the proposal and that they used care and judgment in recommending it, whereas in fact it was prepared by an outside pension plan consultant with the assistance of interested employees, and at least one director knew very little about its impact. This "misrepresentation" is said to be material because at least some of the directors were disinterested and would presumably carry more weight with the stockholders. The Supreme Court has defined a material defect for the purposes of Rule 14a-9 as one that might "have a significant propensity to affect the voting process...." Mills v. Electric Auto-Lite Co., 396 U.S. 375, 384, 24 L. Ed. 2d 593, 90 S. Ct. 616 (1970) (emphasis in original). A cause of action cannot be predicated on a claimed defect so trivial that correction would not further the interests protected by the rule. It is common knowledge that a great deal of corporate decisionmaking is based upon the advice of outside consultants. Where there is no suggestion of any conflict of interest on the part of the consultants it does not seem to us that disclosure that the Board of Directors acted upon their advice would have any significant propensity to affect the voting process. The same is true of the participation of the interested employees. As we point out hereafter, the degree of director interest in the proposal is disclosed, and any rational stockholder must have known that the corporate management had a hand in its preparation. Certainly the representation in the proxy statement that the directors "proposed" the plan cannot be construed, as Ash seems to suggest, either as a representation that the Board's action with respect to this piece of business was of a different character than normal board action, or as a representation of the state of familiarity of each director with details.
Ash next urges that the proxy statement fails to disclose fully and fairly certain directors' financial interests. He concedes that all information necessary to a determination of director interest is included, but urges that a lack of clarity is the equivalent in this instance of actual concealment. Certainly director interest in the pension proposal is material for the purposes of Rule 14a-9. But our review of the proxy statement convinces us that the disclosure of such interest was sufficient. As required by Schedule 14A, Item 7, 17 C.F.R. § 240.14a-101, the proxy statement set forth in tabular form remuneration of directors and officers under existing contractual arrangements. That part of the proxy statement is required in connection with the annual election of directors. In a note to the column tabulating estimated annual retirement benefits under the existing arrangements there is a cross reference to the proposed new plan:
The Company has proposed an amendment to this plan which is described in proposal no. 3.
Proposal No. 3 discusses the proposed plan in detail, and contains this specific disclosure:
"Pensions of Certain Directors and Officers - Messrs. Roth, Kerzner, and Saint-Amour will be eligible for the amended plan and their annual pensions upon retiring at age 65, assuming continuation of last year's compensation rate and the same social ...