The opinion of the court was delivered by: BROTMAN
This opinion enlarges upon and supersedes the comments made orally by the court on December 28, 1981, in denying plaintiffs' motion for a temporary restraining order.
Plaintiffs, shareholders bringing this derivative action, made an application on December 22, 1981, for a temporary restraining order, pending hearing of their motion for a preliminary injunction. They seek to stay the taking of any action at a shareholders' meeting scheduled for December 29, 1981, in connection with the purchase of securities by Caesars World, Inc. from Clifford and Stuart Perlman. The Perlmans, substantial shareholders of Caesars World as well as directors on leave of absence, own 18.2 per cent of Caesars World stock and 2.4 per cent of Caesars New Jersey, an 85 per cent-owned subsidiary of Caesars World. Caesars World agreed to purchase their shares for close to one hundred million dollars, which was approximately twice the market price at the time of the agreement in October of 1981. This transaction was agreed to by the board of directors as a means of complying with the order of New Jersey Casino Control Commission requiring Caesars to either sever ties with the Perlmans or withdraw from the casino industry in Atlantic City. In the Matter of the Application of Boardwalk Regency Corporation and the Jemm Company for Casino Licenses, Docket No. 80-CL-1, Final Order Granting Conditional Casino Licenses, October 25, 1980 (Plaintiffs' Exhibit E). Caesars World, Inc."s appeal of the Commission's order is pending before the Supreme Court of New Jersey, Nos. A-810-80 and A-951-80.
Plaintiffs allege that a proxy statement issued December 4, 1981, soliciting shareholder approval of the purchase, is materially false and misleading in violation of federal securities law, specifically Section 14(a) of the Securities Exchange Act of 1934 and Rule 14-a9 promulgated by the Securities Exchange Commission, 15 U.S.C. § 78n(a) and 17 C.F.R. § 240.14a9. The complaint alleges the following misstatements or omissions:
1. the failure to state that the Perlman defendants are not entitled to vote their shares on the proposal;
2. the failure to describe adequately a number of derivative actions challenging the purchase;
3. the failure to describe adequately the effect of the departure of the Perlmans on the operations of Caesars;
4. the failure to describe the financial effect of the Perlman buy-out on the continuing operations of Caesars, including its competitive position in the future;
5. the failure to describe adequately the reasons why the New Jersey Casino Control Commission imposed conditions on the granting of the casino license to Caesars' New Jersey subsidiary, including the reasons for finding defendants Stuart and Clifford Perlman not qualified to be stockholders of a licensee;
6. the failure to disclose or issue correcting proxy materials disclosing the existence of a proposal from Resorts International, Inc. to buy the Perlmans' securities at a price which plaintiffs believe approximates the price offered by Caesars; and
7. the conveyance to the shareholders by the proxy materials, and in particular the proxy card, of the misleading impression that the company is faced with only two alternatives: the proposed buy-out at $ 98,891,485 or a complete withdrawal from Caesars' highly profitable New Jersey operations, when in fact a third alternative exists, that is, for the Perlmans to sell their securities to a third party. That misleading impression is reinforced by the failure to disclose the existence of the Resorts' offer described in paragraph 6.
In seeking temporary injunctive relief, plaintiffs bear a heavy burden. To grant the injunction, we must determine that plaintiffs have made four necessary showings: first, that they have a reasonable probability of eventual success on the merits; second, that the corporation, on whose behalf they have brought suit, will suffer irreparable injury pendente lite if relief is not granted to maintain the status quo; third, that the balance of the parties' hardships, if relief is granted, weighs in favor of plaintiffs; and fourth, that the public interest will be served by granting injunctive relief. A. O. Smith Corp. v. F.T.C., 530 F.2d 515, 525 (3rd Cir. 1976); Gewertz v. Jackman, 467 F. Supp. 1047, 1055 (D.N.J.1979).
I. Likelihood of Success on the Merits.
To succeed on the merits on plaintiffs' Section 14(a) claim, the plaintiffs must demonstrate that the defects in the proxy statement are material. Materiality has been defined by the Supreme Court as follows:
An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. This standard is fully consistent with Mills (v. Electric Auto-Lite Co., 396 U.S. 375 (90 S. Ct. 616, 24 L. Ed. 2d 593) (1970) ) general description of materiality as a requirement that "the defect have a significant propensity to affect the voting process." It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all circumstances, the omitted ...