ADW Draft 4/24/12
AP edits 5/12/12
Chapter 15 Shareholder Information Rights
Primary Sources Used in This Chapter
DGCL §220
SEC Rule 14a-9
State ex rel. Pillsbury v. Honeywell, Inc.
Saito v. McKesson HBOC, Inc.
Virginia Bankshares, Inc. v. Sandberg
Concepts for this Chapter

Inspection rights o Procedure

Qualified shareholder

Expedited court review o Proper purpose – shareholder wealth maximization (SWM)

State law o Notice o Duty of disclosure

Federal law o Proxy regulation o Proxy antifraud rule
 Private cause of action

Elements: materiality, culpability, causation

Remedies (recessionary damages)
Introduction
Question: Why do shareholders need information from the corporation?
Answer: Shareholders need information from the corporation to exercise their right to vote effectively, especially when shareholders attempt to institute corporate reforms.
Shareholder information rights facilitate shareholder voting rights, as well liquidity rights and litigation rights.
Question: What kind of information do shareholders need?
Answer: The kind of information that shareholders need may depend on what they need it for. For example, notice of the time and place of shareholders meetings, and
1

disclosure of financial results of operations, are kinds of information that shareholders are entitled to receive. But what about the identities of their fellow shareholders, when shareholders consider engaging in a proxy contest? Or valuations when the corporation is considering a merger or acquisition? To what extent are shareholder information rights, effectively, discovery rights prior to litigation? In fact, inspection often used in anticipation of a derivative suit or securities fraud class action given the heightened pleading requirements for both.
A. Shareholder Inspection Rights
Question: Under state laws, what can shareholders inspect?
Answer: Inspection rights were traditionally equitable. Modern state statutes, however, generally allow shareholders to inspect the corporation’s books and records if they have a proper purpose. Federal law requires public corporations to make disclosures in their proxy materials when votes are solicited.
Delaware permits inspection of:

The stock ledger


The stockholder list
Other books and records
DGCL § 220. Inspection of books and records.
(a) As used in this section:
(1) "Stockholder" means a holder of record of stock in a stock corporation, or a
(b)
(c) person who is the beneficial owner of shares of such stock held either in a voting trust or by a nominee on behalf of such person.
* * *
Any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose, and to make copies and extracts from:
(1) The corporation's stock ledger, a list of its stockholders, and its other books and records;
* * *
A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder.
If the corporation, or an officer or agent thereof, refuses to permit an inspection sought by a stockholder or attorney or other agent acting for the stockholder pursuant to subsection
(b) of this section or does not reply to the demand within 5 business days after the demand has been made, the stockholder may apply to the Court of Chancery for an order to compel such inspection.
* * *
Where the stockholder seeks to inspect the corporation's books and records, other than its stock ledger or list of stockholders, such stockholder shall first establish that:
(1) Such stockholder is a stockholder;
(2) Such stockholder has complied with this section respecting the form and manner of making demand for inspection of such documents; and
(3) The inspection such stockholder seeks is for a proper purpose.
Where the stockholder seeks to inspect the corporation's stock ledger or list of
2

stockholders . . . the burden of proof shall be upon the corporation to establish that the inspection such stockholder seeks is for an improper purpose. http://delcode.delaware.gov/title8/c001/sc07/index.shtml
The MBCA has a similar approach. The MBCA allows for:

Ready inspection o Articles of incorporation o o o
Bylaws
Minutes of shareholder meetings
Names of directors and officers

Inspection with a showing of proper purpose o o o
Board minutes
Accounting records
Shareholder lists
When information is requires a showing of proper purpose, shareholders have to describe the purpose, and the records to be inspected with “reasonable particularity.” The records must be directly connected to the purpose.
Question: Which shareholders have inspection rights?
Answer : Both Delaware law and the MBCA permit inspection by both shareholders of record (whose names appear in the corporation’s stock ledger) and beneficial owners
(whose stock is held by another, such as a securities firm). Minimum shareholding percentage or time requirements are no longer common.
1.
Proper Purpose
Question: What is a proper purpose?
Answer: A purpose reasonably related to a person’s interest as a stockholder.
State ex rel. Pillsbury v. Honeywell, Inc. 291 Minn. 322, 191 N.W.2d 406 (1971)
[wrong slide]
Facts: On July 3, 1969 Charles Pillsbury attended a meeting of a group involved in the
“Honeywell Project,” which as created to get Honeywell to cease its production of anti-personnel fragmentation bombs being used in the Vietnam War. On July 14, 1969, Pillsbury, who opposed the war, instructed his fiscal agent to purchase 100 shares of Honeywell stock in order to obtain a voice in Honeywell’s affairs so he could persuade Honeywell to cease producing munitions. The agent registered those shares in the name of the family nominee. Pillsbury subsequently bought a single share of Honeywell, which was registered in his own name.
3

Pillsbury requests the stockholders list from Honeywell so that he can solicit proxies for the election of new directors. Honeywell refuses to provide the list. Pillsbury filed for a writ of mandamus. The trial court ruled for Honeywell, and Pillsbury appealed.
Issue: Did Pillsbury, who bought shares in Honeywell for the purpose of changing its policy of manufacturing war munitions, have a proper purpose germane to his shareholder's interest when he sought to inspect Honeywell’s corporate books and records.
Holding: No inspection allowed. Proper purpose must have a concern with investment and
Pillsbury did not have a proper purpose.
Reasoning: Under DGCL § 220 a shareholder must prove a proper purpose to inspect corporate records other than shareholder lists. Although the court will not allow inspection for curiosity, speculation or vexation, it may permit inspection for adverseness to management or desire to gain control of the corporation for economic benefit. The Court is careful about letting things qualify as a “proper purpose,” claiming that “[b]ecause the power to inspect may be the power to destroy, it is important that only those with a bona fide interest in the corporation may enjoy that power.” This means that inspecting shareholder must have the proper standing, and it may mean that courts will not compel inspection by a shareholder holding an insignificant amount of stock.
The court implies that Pillsbury had the wrong reason for seeking inspection. It is concerned with Pillsbury’s lack of investment interest in Honeywell. It notes that he was not concerned with Honeywell, or the short or long term effects of manufacturing bombs, rather Pillsbury was only concerned with his social and political agenda: “Pillsbury had utterly no interest in
Honeywell before he learned about its production of fragmentation bombs”
Points for Discussion (p. 416)
1. Shareholder wealth maximization
Question: Would Pillsbury have been more successful if the request had been couched in terms of SWM?
Answer: Maybe. The proposal might have been more successful if couched in economic, rather than social and political, terms. He could have claimed an economic concern about the bomb business. However, the court would require a significant likelihood that the proposal would positively affect value. If the proposal backed up its assertions with credible and substantial connection between the bombs, the company’s reputation, and its profitability or liability, a case could be made. However, there would have to be enough connection to show that the main purpose was corporate value.
2. Purpose of the corporation
Question: If corporations can have purposes other than shareholder wealth maximization, why shouldn’t a shareholder be able to contact other shareholders to install a new board committed to corporate social responsibility?
4

Answer: Perhaps the reason is that although a corporation has various purposes, this court viewed shareholder value as the driving force behind what is required of corporations. Ultimately, value must be of some importance, otherwise there would be little reason for investors to take a stake in the corporation. Nevertheless, the board and shareholders do have some power to steer the corporation in a direction that fulfills other purposes while still pursuing value for the shareholders.
Saito v. McKesson HBOC, Inc. 806 A.2d 113 (Del. 2002)
Facts: On October 17, 1998, McKesson Corporation entered into a stock-for-stock merger agreement with HBO & Company (“HBOC”).” Several days later, Saito purchased McKesson stock. The merger was completed in January 1999 and the combined company was renamed
McKesson HBOC, Incorporated. Between April and July 1999, McKesson HBOC announced a series of financial restatements triggered by its year-end audit process. Apparently, the restatements were needed because of HBOC accounting irregularities. The company then decreased their revenues by $327.4 million for the three preceding fiscal years.
These announcements caused several lawsuits, including a derivative action ( Ash v. McCall ).
Saito was one of four plaintiffs in the derivative action that alleged (1) the directors breached
5

their fiduciary duties by failing to discover accounting irregularities before the merger, (2) corporate waste by entering into the merger, (3) breach of duty by failing to monitor compliance with financial reporting requirements prior to the merger, and (4) failure in the same respect following the merger.
Saito sought information under DGCL Sec. 220.
The Court of Chancery dismissed the action and instructed the Plaintiffs to “use the tools at hand” to obtain the requisite information to sue derivatively. Saito was the only person that followed the Court’s advice and demanded access to eleven categories of documents. Some of the documents that he requested related to information prior to his acquisition of the stock. The
Court of Chancery held that “Saito stated a proper purpose for the inspection of books and records – to ferret out possible wrongdoing in connection with the merger of HBOC and
McKesson. But . . . the proper purpose only extended to potential wrongdoing after the date on which Saito acquired his McKesson stock.” The Court of Chancery also held that “Saito was not entitled to documents relating to possible wrongdoing by the financial advisors to the merging companies.” Saito appealed.
Issue: What are the limitations on a stockholder’s statutory right to inspect corporate books and records?
Holding: A stockholder who demands inspection for a proper purpose should be given access to all of the documents in the corporation’s possession, custody or control, that are necessary to satisfy that proper purpose. The scope of inspection is limited however “to those books and records that are necessary and essential to accomplish the stated, proper purpose."
Reasoning: Like the Court of Chancery, the Delaware Supreme Court engaged in a demand-bydemand review of the different categories of documents that Saito had sought to inspect:
Standing Limitation
The Court of Chancery held that Saito was limited to examining those documents that followed the announcement of the merger since “[b]y statute, stockholders who bring derivative suits must allege that they were stockholders of the corporation ‘at the time of the transaction of which such stockholder complains.’”
The Delaware Supreme Court disagreed, stating, “[e]ven where a stockholder’s only purpose is to gather information for a derivative suit, the date of his or her stock purchase should not be used as an automatic “cut-off” date in a §220 action. The Supreme Court attributed this to the fact that
(1) the potential derivative claim may involve a continuing wrong that both predates and postdates the stockholder’s purchase date, and
(2) the alleged post-purchase date wrongs may have their foundation in events that transpired earlier. Therefore, the Supreme Court concluded, “the date on which a
6

stockholder first acquired the corporation’s stock does not control the scope of records available under §220.”
“If activities that occurred before the purchase date are ‘reasonably related’ to the stockholder’s interest as a stockholder, then the stockholder should be given access to records necessary to an understanding of those activities.”
The Financial Advisors’ Documents
The Court of Chancery held that Saito did not have a proper purpose to inspect documents relating to potential claims against third party advisors who counseled the boards in connection with the merger.
The Delaware Supreme Court disagreed, stating. “[t]he source of the documents and the manner in which they were obtained by the corporation have little or no bearing on a stockholder’s inspection rights.”
“The issue is whether the documents are necessary and essential to satisfy the stockholder’s proper purpose.” Here, Saito wants to investigate possible wrongdoings relating to McKesson and McKesson HBOC’s failure to discover HBOC’s accounting irregularities. “Since McKesson and McKesson HBOC relied on financial and accounting advisors to evaluate HBOC’s financial condition and reporting, those advisors’ reports and correspondence would be critical to Saito’s investigation.”
HBOC Documents
The Court of Chancery held that Saito was not entitled to any HBOC documents because he was not a stockholder of HBOC before or after the merger (Saito was a stockholder of HBOC’s parent, McKesson HBOC).
The Delaware Supreme Court agreed with the principle used by the Court of Chancery, but disagreed with its application to the facts. Absent a showing of a fraud or that a subsidiary is in fact the mere alter ego of the parent, stockholders of a parent corporation are not entitled to inspect a subsidiary’s books and records.
The Supreme Court found that the rule applied to the HBOC books and records that were never provided to McKesson or to McKesson
HBOC, but not to the relevant documents that HBOC gave to McKesson before the merger or
McKesson HBOC after the merger. The Supreme Court stated, “[a]s with the third party advisors’ documents, Saito would need access to relevant HBOC documents in order to understand what his company’s directors knew and why they failed to recognize HBOC’s accounting irregularities.”
Points for Discussion (p. 422)
1. “Proper purpose”
Question: Is there a unifying thread to the Delaware requirements for showing a proper purpose?
Does the Delaware court address the question of whether a shareholder could seek documents about the company’s social or political activities? Does the Delaware allocation of the burden of
7

proof make sense?
Answer: Shareholders should be able to protect their ownership interests by inquiring about activities related to that interest. This resembles limitations on the discovery process in litigation. We want parties to have some degree of access to information that can help them assess their claims and later prove the case. However, there are various ways that the law limits that access. First, a plaintiff must have a proper purpose to get access to discovery; in civil litigation, a feasible claim that could be shown with evidence meets that test. Next, the access by both parties to information requires the possibility that it has some relevance to the dispute; while this is sometimes a liberal interpretation of relevance, there are limits to the information that can be sought. Likewise, to exercise inspection rights shareholders must show that they have an interest that is potentially being violated, and then the corporation is obligated only to produce information related to the shareholder’s primary purpose. If the political or social activities were substantial enough that the information sought could show their legitimate effect on the shareholder’s interest, the shareholder would satisfy the “proper purpose” test.
2. Nature of judicial review
Question: Why not make inspection, and the review of the documents being sought by the shareholder, part of the litigation process?
Answer: Without some pre-litigation access to information, the shareholder will be powerless to survive a motion to dismiss – the shareholder will not be able to allege any claim because it will not yet know what claims it could pursue. In typical litigation, the claimant has at least some basis to establish the claim before going into discovery.
Delaware courts have to balance allowing the shareholder to have some access to information and giving so much access that the corporation (and the shareholder’s interest as well) will be harmed.
3. Fishing expedition
Question: How can shareholders get pre-inspection information?
Answer: Pre-inspection information may come from public filings, annual reports, public statements by the corporation, and other publicly available sources that may suggest possible wrongdoing. The standards for this may be lower than the pleading standards for a proper complaint, but should still prevent shareholders with meritless claims from getting access to information.
4. Confidentiality conditions
Question: How can information obtained in an inspection be kept confidential?
Answer: Delaware courts have wide discretion in prescribing inspection conditions.
8

Confidentiality conditions are part of the landscape of litigating in Delaware.
5. Publicly available information
Question: Should a shareholder be able to seek inspection of information or documents that are publicly available, or for which summaries are publicly available?
Answer: There might be a situation in which publicly available documents are based on opinion letters or other underlying documents, and it is only the underlying documents that actually provide a shareholder the basis for a lawsuit. But it seems fair for the courts to require that shareholders look to public information first. If there is a conceivable way that information could establish a claim, however, the court may allow inspection of the underlying documents.
2. “Stockholder List”
Question: Do you get a stock certificate when you buy stock?
Answer: Not any more. Today U.S. stocks are seldom certificated, and seldom in
“bearer” form. Instead, investors receive confirmation that their stock is held by their brokerage firm, which in turn has the stock held by a depositary company, which appears as the “stockholder of record.” The corporation keeps then track of its “stockholders of record,” the persons who hold legal title to its stock.
Question: What is the difference between a “record” and a “beneficial” owner of stock?
Answer: A “record” owner’s name appears on the corporation’s list of stockholders of record. A “beneficial” owner holds the stock for someone else.
Question : What is “street name” ownership?
Answer : It is the system in which investors hold their stock in nominee accounts, in
“street name,” instead of in their own name as record holders. As a result, a corporation’s list of record owners may show much of its stock held in street name, and may not indicate who really (or beneficially) owns the stock. Nominee holders are stock brokerages and securities firms.
Question: So what do you get when you request the names of the stockholders of record?
Answer: You may find out that the Depository Trust Company owns 80% of the shares.
The DTC lists all names as CEDE & Co., so you will have to ask for a “CEDE
Breakdown.” The CEDE Breakdown will show the percentages that each brokerage owns. The broker is then obligated to provide the list of stockholders who have consented to having their names released: the Non-Objecting Beneficial Owner (NOBO) list. Although institutional investors are often directly in the CEDE list, the corporations
9

list of stockholders of record may not be very useful if it is not possible to identify the actual owners of the stock.
3. Shareholder Standing and “Encumbered Shares”
Question: Who has standing to demand information rights? Should a stockholder with a short position be able to seek information that could be used to undermine the corporation’s value?
Answer: A stockholder who sells “short” has financial incentives that are the opposite of a stockholder because someone holding a short position stands to gain if the stock loses value. In Deephaven Risk Arb Trading Ltd. v. UnitedGlobalCom, Inc.
(Del Ch 2005), the
Court of Chancery considered an investor that held both long (a “pure” or regular shareholder) and short positions and ruled that the investor was entitled to exercise inspection rights based on its long positions. In other words, beneficial ownership determines shareholder rights, not the investor’s net financial position.
Question: Why might the Court of Chancery have preferred to decide based on beneficial ownership instead of financial interest?
Answer : Some possible reasons mentioned by the Court were:
10



Analyzing why and how a §220 plaintiff came to hold company shares could be very complicated
Analyzing a plaintiff’s financial position net of stock, options and other derivatives would be complex


The possibility of having to disclose their sophisticated and proprietary trading techniques might have a chilling effect on the use of §220 by stockholders
§220 already has a built-in safeguard against plaintiffs with economic incentives that are not aligned with other stockholders: the proper purpose analysis
B. Information Required for Shareholder Voting
1. State Law: Notice of Shareholder Meetings
Question: What information does state law require for shareholder voting?
Answer: As discussed in Chapter 14, state laws require minimal information. For regular meetings, shareholders receive notice of when and where the meeting will be held, but not (usually) information about what will be voted on at the meeting. Notice of the matter to be considered is usually only required if there is to be a special meeting or a proposal to amend the articles of incorporation.
2. SEC Rules: Disclosure in Proxy Statements
Question: What kind of information does federal law require for shareholder voting?
Answer: Federal securities laws regulate the solicitation of proxies for shareholder votes in public companies. The laws ensure that public company shareholders receive extensive information on matters on which they are asked for their votes (e.g., board elections, amendments of the article of incorporation, mergers)
Question: What does it mean to be a public company?
Answer: A public company, also known as a reporting company, is one that has a class of securities (either debt or equity) listed on a national stock exchange, or one that has a class of equity securities owned by 500 or more holders of record and assets of at least
$10 million. [The new JOBS Act, signed into law on April 5, 2012, creates a new category of company called “Emerging Growth Company” (generally one with less than
$1 billion in annual revenues) that can have up to 2,000 shareholders, including 500 nonaccredited (small and unsophisticated) investors, without having to register with the
SEC.] Once a company is a public, or reporting, company it is subject to SEC regulation, which includes filing informational reports annually (10-K), quarterly (10-Q), and when special events occur (8-K). In general, public companies must also provide special disclosure (14A – proxy statements) when they solicit votes from their shareholders.
Question: How do shareholders vote?
11

Answer: Shareholders may vote in person, or by proxy.
Question: What is “voting by proxy”?
Answer: “Voting by proxy” means appointing an individual (agent) to vote your shares.
A proxy specifies what matters to vote on and may or may not specify how to vote. In order to get the required quorum and votes, some companies may send shareholders a request for their proxies. The federal securities laws require a disclosure document to accompany that request, which is called a “ proxy statement.” In many instances, the proxy statement must be filed with (and sometimes reviewed in advance by) the SEC.
The letter sent to shareholders asking for their proxies is known as a “proxy solicitation .” As we will discuss in the next chapter, the determination of what constitutes a proxy solicitation may foster or quell shareholder activism. A broad definition of a proxy solicitation (which then must be filed with and vetted by the SEC) may prevent shareholders from communicating with one another in order to change things in a corporation.
Question: What must go in a proxy statement?
Answer: SEC Schedule 14A is the SEC form that specifies information that may need to be included in a proxy statement. For example, the statement may need to provide information about:












Date, time and place of the meeting,
Revocability of the proxy,
The persons making the solicitation (if it is not the company),
The company’s voting securities and the principal holders thereof,
The company directors and officers
Compensation of directors and officers,
The independent public accountants,
Compensation plans,
Authorization or issuance of securities,
Modification or exchange of securities,
Financial information, mergers, consolidations, acquisitions and similar matters,
Acquisition or disposition of property http://taft.law.uc.edu/CCL/34ActRls/rule14a-101.html
Public companies must file copies of proposed (non-routine) proxy statements with the
SEC for review at least 10 days before sending them to shareholders.
The Breakout Box on p. 429 includes an example of the language that might go in a proxy statement asking shareholders to approve a charter amendment that would create a staggered board.
Question: What form can companies use for the ballot sent to shareholders?
12

Answer: The SEC also regulates the form of the proxy, known as the
“proxy card.”
For example, shareholders must have the opportunity to vote for or against each matter, or to abstain. They must be able to vote for directors, or withhold their vote, for either the directors as a group or individual candidates. The Breakout Box on p. 431 includes a form of proxy for BankcorpSouth, Inc.
C. Regulation of Proxy Fraud
SEC Rule 14a-9 promulgated under the Securities Exchange Act of 1934 prohibits false or misleading statements in a proxy solicitation.
SEC Rule 14a-9 False or Misleading Statements a.
b.
No solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other communication, written or oral, containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.
The fact that a proxy statement, form of proxy or other soliciting material has been filed with or examined by the Commission shall not be deemed a finding by the Commission that such material is accurate or complete or not false or misleading, or that the
Commission has passed upon the merits of or approved any statement contained therein or any matter to be acted upon by security holders. No representation contrary to the foregoing shall be made. http://taft.law.uc.edu/CCL/34ActRls/rule14a-9.html
1. Implied Cause of Action
Question : How is Rule 14a-9 enforced?
Answer : The SEC may enforce Rule 14a-9. In addition, federal courts have implied a private right of action for misrepresentations in proxy statements that violate Rule 14a-9.
Plaintiffs must show
 a false or misleading statement,


 of material fact
upon which shareholders relied causing them to suffer losses
This private right of action mirrors the Rule 10b-5 private right of action that will be discussed in Chapter 24.
Question: When are shareholders likely to file suit under Rule 14a-9’s implied private right of action?
13

Answer: The Rule 14a-9 implied right of action gives shareholders a federal remedy for corporate actions. Shareholders might exercise that right to challenge shareholder approval of certain actions (e.g. mergers), arguing that their fellow shareholders were misled by the proxy materials. In some ways, this may give shareholders the opportunity to second-guess company decisions that would receive deferential treatment under state corporation law review (BJR).
2. Contours of Implied § 14(a) Private Action
Question: What is a freeze-out merger?
Answer: In a freeze-out merger a parent company that owns (as is the case in Virginia
Bankshares) 85% of the shares of a subsidiary can merge that subsidiary into itself without a vote. Although minority shareholders do not get to vote, they often have a right to an appraisal proceeding to determine the “fair value” of their shares. Note that in this case the minority shareholders were given the right to vote.
Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991)
Facts : First American Bankshares, Inc (FABI), a bank holding company, owned 100% of
Virginia Bankshares, Inc., (VBI). VBI owned 85% of the shares of First American Bank of
Virginia (Bank). The remaining 15% of Bank’s shares were held by about 2000 minority shareholders.
In December 1986, FABI began a “freeze-out” merger to merge Bank into VBI. FABI hired an investment banking firm (Keefe, Bruyette & Woods (KBW)) to provide an opinion on the appropriate price for the shares of the minority stockholders who would lose their interest in
Bank as a result of the merger. KBW opined that $42/share would be a fair price. Bank’s executive committee and Board of Directors approved the merger proposal at $42/share.
“Although Virginia law required only that such a merger proposal be submitted to a vote at a shareholders’ meeting, and that the meeting be preceded by circulation of a statement of information to the shareholders, the directors nevertheless solicited proxies for voting on the proposal at the annual meeting set for April 21, 1987.” The directors recommended that the proposal should be adopted stating that they had approved the plan because of its opportunity for the minority shareholders to achieve a “high” value, which they elsewhere described as a “fair” price, for their stock.”
Sandberg did not give her proxy and filed suit against VBI, FABI and the directors of Bank after approval of the merger. Sandberg alleged proxy solicitation violations of Exchange Act §14(a) and Rule 14a-9, and that the directors breached their fiduciary duties to the minority shareholders. Sandberg contended that the directors did not really believe that the price offered was “high” or that the terms of the merger were “fair,” but that they had recommended the
14

merger only because they believed they had no alternative if they wished to remain on the board.
At the trial court, the jury found for Sandberg on all counts and awarded her $18/share believing that she would have received $60/share if the stock had been properly valued. The Court of
Appeals for the Fourth Circuit affirmed.
Issue: Can a statement couched in conclusory or qualitative terms purporting to explain directors’ reasons for recommending certain corporate action be materially misleading within the meaning of Rule 14a-9?
Holding: Yes. Opinions by the board of directors are material and actionable if they are fraudulent, in the sense that the directors neither believed their own opinion and the subject matter of their opinion lacks objective support.
Reasoning: The Supreme Court ruled first that statements of reasons, opinion or belief by the directors are likely to be material to shareholders. The Court then went on to consider whether statements of reasons, opinions or beliefs are statements “with respect to material facts” that would fall within Rule 14a-9. The Court reasoned that directors’ statements of reasons or belief are factual in two senses:
 as statements that the directors do act for the reasons given or hold the belief stated and
 as statements about the subject matter of the reason or belief expressed.
Here, whether $42 was “high,” and whether the proposal was “fair” to the minority shareholders, depended on whether provable facts about the Bank’s assets and levels of operation substantiated the $42/share value and were therefore verifiable. Sandberg provided evidence of such facts such as evidence that the “going concern” value of Bank was in excess of $60. Because of the verifiability, there was no undue risk of open ended liability or uncontrollable litigation from this kind of suit.
Under §14(a) a plaintiff may prove that a specific statement of reason for the board’s action knowingly false or misleadingly incomplete. However, the board’s disbelief in its own statement alone (without proof by objective evidence that the statement also asserted something false or misleading about the subject matter) is not, alone, enough for liability under §14(a).
To recognize liability on mere disbelief or undisclosed motivation without any demonstration that the proxy statement was false or misleading about its subject would authorize §14(a) litigation confined solely to . . . the “impurities” of a director’s “unclean heart.” We therefore hold disbelief or undisclosed motivation, standing alone, insufficient to satisfy the element of fact that must be established under §14(a).
Points for Discussion
2. Statement of fact
In Justice Scalia’s opinion, concurring in part and concurring in the judgment, he emphasized
15

that the “high value” statement was a factual statement that (1) the directors held such an opinion and (2) that the merger had a high value. Justice Scalia noted “not every sentence that has the word ‘opinion’ in it . . . leads us into this psychic thicket. Sometimes such a sentence actually represents facts as facts rather than opinions.”
Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991)
Facts: See above
Issue:
“Whether causation of damages compensable through the implied private right of action under §14(a) can be demonstrated by a member of a class of minority shareholders whose votes are not required by law or corporate bylaw to authorize the transaction giving rise to the claim”?
Holding: No.
Analysis: The Supreme Court took this opportunity to resolve an issue left open in a prior test to decide if misstatements in a proxy solicitation that would not have changed the voting outcome
(because the majority shareholders proposing the transaction had enough votes to ensure its approval) nonetheless caused losses to minority shareholders. Sandberg made two arguments:

Shame Facts: The causation link existed because VBI and FABOI would not have wanted to proceed with the merger without the minority shareholder proxies, which in turn could only be obtained with the express misstatements and misleading omissions in the proxy solicitation (the causal connection depending on the desire to avoid bad shareholder and public relations)

Sue Facts: The proxy statement was an essential causation link between the directors’ proposal and the merger because it was the means to satisfy a state statutory requirement of minority shareholder approval as a condition for saving the merger from voidability because of a conflict of interest of one of the Bank’s directors (causation depending upon the use of the proxy statement to obtain the votes sufficient to bar a minority shareholder from commencing proceedings to declare the merger void).
The Court rejected both theories as not showing the proxy solicitation as “essential” in the sense of linking the directors’ proposal with the votes legally required to authorize the action proposed.
The Court noted that Sandberg’s theory of causation linked through the desire for a cosmetic vote would raise threats of speculative claims and procedural intractability, and would turn on inferences about what the corporate directors would have thought and dine without the minority shareholder approval unneeded to authorized action. The Court also rejected the argument about shareholder approval saving the merger from voidability under state law, noting that if the material facts about the merger were not accurately disclosed, then the minority votes were inadequate to ratify the merger under state law.
Points for Discussion
1. Guerilla warfare”
To some extent, the causation holding in Virginia Bankshares is part of the struggle by the
16

Supreme Court to delineate the allocation of supervision of corporate governance between state and federal law. Notice that by deciding the case could not be pursued in federal court, the plaintiffs were left to their state remedies – such as appraisal or a fiduciary challenge.
In 10b-5 cases (see Chapter 24, Securities Fraud Class Actions) shareholders can challenge executive opportunism. How does a federal 10b-5 action with fit with state fiduciary law? The
Supreme Court has held that Rule 10b-5 does not extend to claims that fully-disclosed corporate transactions were “unfair” to minority shareholders. Santa Fe Industries v. Green , 430 U.S. 462
(1977) (leaving challenge of short-form merger to state law). Yet the Court has accepted that shareholders may bring claims that management intentionally misrepresented material facts about the company and its prospects. Basic, Inc. v. Levinson , 485 U.S. 224 (1988). Over the last couple decades, claims of corporate fraud brought in federal court have perhaps become a more potent tool against management abuse than claims of breaches of fiduciary duty brought in state court. In surveys, corporate executives report that they fear a shareholders’ lawsuit alleging securities fraud more than one alleging fiduciary breaches.
As described by Bob Thompson and Hillary Sale, securities fraud class actions may be displacing state fiduciary cases:
State law, long at center stage in discussions of corporate governance, continues to provide the legal skeleton for the corporate form and state fiduciary duty litigation continues as a frequent means to monitor managers. Yet, in today's world, state law does so almost entirely in the specific contexts of decisions about acquisitions or in selfdealing transactions. The empirical evidence in this Article illustrates that corporate governance outside of these areas has passed to federal law and in particular to shareholder litigation under Rule 10b-5.
The Sarbanes-Oxley Act of 2002, passed by Congress in the wake of the current corporate accountability scandals, provides new evidence of the expanded role of federal law. But, the move to federal corporate governance is broader than that law and has a longer history than the current scandals. The ascendancy of federal law in corporate governance reflects at least three factors. First, disclosure has become the most important method to regulate corporate managers and disclosure has been predominantly a federal, not a state, methodology. Second, state law has focused largely on the duties and liabilities of directors, and not officers, and federal law has increasingly occupied the space defining the duties and liabilities of officers. Officers have become the fulcrum of governance in today's corporations. Third, federal shareholder litigation based on securities fraud has several practical advantages over state shareholder litigation based on fiduciary duty that have contributed to the greater use of the federal forum. As a result of these trends, federal law now occupies the largest part of the legal corporate governance infrastructure in the 21st century. The outpouring of suggested reforms that have followed in the wake of Enron and WorldCom have focused on federal law and on the conduct of officers and directors, rather than state law, which in practice, focuses mainly on directors. Indeed, the discussions about reforms have excluded state law almost entirely.
17

In this article, we develop the idea of federal law as corporate governance in three parts organized around history, empirical data, and analysis. In Part I, we begin with the traditional legal template. State corporate law is the focus and federal securities law plays a supporting role. In Part II, we present empirical data on the use of both federal and state litigation to regulate corporate governance. We begin with a data set we have developed of securities fraud class action complaints filed in 1999. Our analysis of those complaints shows that securities fraud class action litigation is being used mostly in areas that relate to the managers' operation of the business. Not surprisingly, for example, many of the complaints raise concerns about the ways in which managers have recognized revenues or engaged in some form of accounting manipulation. From that base, we expand the story using data developed by others on securities fraud class actions more generally.
Then, we compare transactions that give rise to securities fraud claims to another data set that covers all corporate cases filed in the Delaware Chancery Court for that same year.
The result is a surprisingly narrow focus for state litigation and a much broader one for federal suits, revealing a gap in the standard learning about corporate governance. In Part
III, we address how the federal securities fraud picture we provide might fit with state shareholder litigation in a current theory of corporate governance.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=362860
[In fact, it seems this federalism point should be introduced in the text, even this early!]
Notice how narrow the Steinberg piece is:
This article focuses on the narrow “strike zone” that plaintiffs must overcome in private securities actions instituted in the Fourth Circuit. Based on empirical data generated over a fourteen-year span, there emerges a clear finding that during that time period defendants were victorious in almost all cases, either on the merits of the case or due to procedural obstacles. The authors posit that this pattern of difficulty for plaintiffs arises, at least in part, from the Fourth Circuit’s restrictive interpretation of various requisite elements of these causes of action, such as materiality and scienter, as well as the Fourth Circuit’s approach to the pleading standards mandated by the PSLRA and the Federal Rules of Civil
Procedure. The authors examine in detail some of the leading securities cases that establish Fourth Circuit precedent in these areas, as well as notable cases from the survey period, to illustrate the confines of the narrow “strike zone” available to plaintiffs to establish a meritorious claim.
Do you have any other suggestions? I think I’d strike the Steinberg reference. I’m not sure this article about the 4 th
Circuit is a good representation of what’s happening at the Supreme Court.
Lately, the Court has both given and taketh away. For example, it gave the plaintiffs the nod when there’s a pleading tie on scienter. Tellabs (2007). And gave plaintiffs the regular pleading burden, rather than requiring heightened pleading, for loss causation. See Halliburton (2011). Yet
18

it took away a whole class of defendant, making it hard to get at schemers. Stoneridge (2008).
And it said “speechwriters” aren’t liable when a different corporation actually makes the
“speech.” Janus (2011)
Summary
The main ideas in this chapter are
Inspection rights cover the mundane (names of directors and officers, the somewhat interesting
(shareholder lists) and the really useful (books and records about corporate business and affairs)

A stockholder (record or beneficial) can seek to inspect corporate records o Must make a written request under oath o With a proper purpose (DGCL §220) o Often subject to a confidentiality stipulation o Must be “long” (not necessarily “net long”)

Proper purpose must relate to the shareholder’s financial interest in the corporation o Must articulate some vote, voice, sue, sell – agenda to advance SWM o Other purposes can exist (according to the Delaware courts) o Non-SWM purpose of antiwar activist is not valid (Pillsbury v. Honeywell case)

Shareholder can obtain ownership/record list o In public corporations, stock held by intermediary DTC (CEDE) o Clients of brokerage firms must not object to being revealed to management o Inspecting shareholder gets useful lists only if management already has them

Shareholders in public companies receive information from company when they vote o Proxy statement describes matters on which shareholders vote, principally information about executive compensation, the board and individual directors o Proxy statements also cover information about mergers, when shareholders vote on a merger or other fundamental transaction o Shareholders can sue in federal court challenging false statements in proxy statements, such as pricing information in a merger o Issues in such suits include “materiality” (was information something reasonable shareholder would consider important) and “causation” (was shareholder vote necessary to the transaction)
19