p. 426J. I. CASE CO. ET AL. v. BORAK.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR
THE SEVENTH CIRCUIT.No. 402. Argued April 22-23, 1964.—Decided June 8, 1964.
Respondent, stockholder of petitioner company, brought a civil action
in federal court for deprivation of his and other stockholders’ pre-
emptive rights by reason of a merger involving the company,
allegedly effected through use of a false and misleading proxy state-
ment. The complaint has two counts, one based on diversity and
claiming a breach of directors’ fiduciary duty to stockholders and
the other alleging a violation of § 14 (a) of the Securities Exchange
Act of 1934. The District Court held that, in a private suit, it
could grant only declaratory relief under § 27 of the Act as to the
second count and that a state statute requiring security for expenses
in derivative actions applied to everything but that part of Count 2
seeking a declaratory judgment. The Court of Appeals reversed,
holding that the state law was inapplicable and that the District
Court had power to grant remedial relief. Held:
1. Private suits are permissible under § 27 for violation of § 14 (a)
for both derivative and direct causes. Pp. 430-431.
2. Federal courts will provide the remedies required to carry out
the congressional purpose of protecting federal rights. Pp. 433-435.
(a) Remedies are not limited to prospective or declaratory
relief, but the overriding federal law controls the measure of redress.
P. 434.
(b) The character of the right remains federal, although state
law questions must also be decided. P. 434.
(c) The determination of a remedy in this case must await
trial on the merits. P. 435.
317 F. 2d 838, affirmed.
Malcolm K. Whyte argued the cause for petitioner J. I.
Case Co. With him on the briefs was Robert P. Harland.
Walter S. Davis argued the cause for petitioners Barr
et al. With him on the brief were Clark M. Robertson,
H. Maxwell Manzer and Ray T. McCann.
p. 427Alex Elson argued the cause for respondent. With him
on the brief were Arnold I. Shure, Willard J. Lassers,
Aaron S. Wolff and Bruno V. Bitker.
Philip A. Loomis, Jr., by special leave of Court, argued
the cause for the Securities and Exchange Commission,
as amicus curiae, urging affirmance. With him on the
brief were Solicitor General Cox, Stephen J. Pollak and
David Ferber.
Mr . Just ice Clark delivered the opinion of the Court.
This is a civil action brought by respondent, a stock-
holder of petitioner J. I. Case Company, charging depriva-
tion of the pre-emptive rights of respondent and other
shareholders by reason of a merger between Case and
the American Tractor Corporation. It is alleged that
the merger was effected through the circulation of a
false and misleading proxy statement by those proposing
the merger. The complaint was in two counts, the first
based on diversity and claiming a breach of the direc-
tors’ fiduciary duty to the stockholders. The second
count alleged a violation of § 14 (a)1 of the Securities
Exchange Act of 1934 with reference to the proxy solici-
tation material. The trial court held that as to this
count it had no power to redress the alleged violations of
the Act but was limited solely to the granting of declara-
p. 428tory relief thereon under § 27 of the Act.2 The court
held Wis. Stat., 1961, § 180.405 (4), which requires post-
ing security for expenses in derivative actions, applicable
to both counts, except that portion of Count 2 requesting
declaratory relief. It ordered the respondent to furnish
a bond in the amount of $75,000 thereunder and, upon
his failure to do so, dismissed the complaint, save that
part of Count 2 seeking a declaratory judgment. On
interlocutory appeal the Court of Appeals reversed on
both counts, holding that the District Court had the
power to grant remedial relief and that the Wisconsin
statute was not applicable.
317 F. 2d 838. We granted
certiorari.
375 U. S. 901. We consider only the ques-
tion of whether § 27 of the Act authorizes a federal cause
of action for rescission or damages to a corporate stock-
holder with respect to a consummated merger which was
authorized pursuant to the use of a proxy statement
alleged to contain false and misleading statements viola-
tive of § 14 (a) of the Act. This being the sole question
raised by petitioners in their petition for certiorari, we
will not consider other questions subsequently presented.
p. 429See Supreme Court Rule 40 (l)(d)(2); 3 Local 1976,
United Brotherhood of Carpenters v. Labor Board,
357
U. S. 93, 96 (1958);
Irvine v. California, 347 U. S. 128,
129-130 (1954).
Respondent, the owner of 2,000 shares of common stock
of Case acquired prior to the merger, brought this suit
based on diversity jurisdiction seeking to enjoin a pro-
posed merger between Case and the American Tractor
Corporation (ATC) on various grounds, including breach
of the fiduciary duties of the Case directors, self-dealing
among the management of Case and ATC and misrepre-
sentations contained in the material circulated to obtain
proxies. The injunction was denied and the merger
was thereafter consummated. Subsequently successive
amended complaints were filed and the case was heard on
the aforesaid two-count complaint. The claims perti-
nent to the asserted violation of the Securities Exchange
Act were predicated on diversity jurisdiction as well as on
§ 27 of the Act. They alleged: that petitioners, or their
predecessors, solicited or permitted their names to be used
in the solicitation of proxies of Case stockholders for use
at a special stockholders’ meeting at which the proposed
merger with ATC was to be voted upon; that the proxy
solicitation material so circulated was false and mislead-
ing in violation of § 14 (a) of the Act and Rule 14a-9
which the Commission had promulgated thereunder; 4
p. 430that the merger was approved at the meeting by a small
margin of votes and was thereafter consummated; that
the merger would not have been approved but for the
false and misleading statements in the proxy solicitation
material; and that Case stockholders were damaged
thereby. The respondent sought judgment holding the
merger void and damages for himself and all other stock-
holders similarly situated, as well as such further relief
“as equity shall require.” The District Court ruled that
the Wisconsin security for expenses statute did not apply
to Count 2 since it arose under federal law. However,
the court found that its jurisdiction was limited to
declaratory relief in a private, as opposed to a govern-
ment, suit alleging violation of § 14 (a) of the Act.
Since the additional equitable relief and damages prayed
for by the respondent would, therefore, be available only
under state law, it ruled those claims subject to the secu-
rity for expenses statute. After setting the amount of
security at $75,000 and upon the representation of counsel
that the security would not be posted, the court dismissed
the complaint, save that portion of Count 2 seeking a
declaration that the proxy solicitation material was false
and misleading and that the proxies and, hence, the
merger were void.
It appears clear that private parties have a right
under § 27 to bring suit for violation of § 14 (a) of the
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.”
p. 431Act. Indeed, this section specifically grants the appro-
priate District Courts jurisdiction over “all suits in
equity and actions at law brought to enforce any liability
or duty created” under the Act. The petitioners make no
concessions, however, emphasizing that Congress made no
specific reference to a private right of action in § 14 (a) ;
that, in any event, the right would not extend to deriva-
tive suits and should be limited to prospective relief only.
In addition, some of the petitioners argue that the merger
can be dissolved only if it was fraudulent or non-benefi-
cial, issues upon which the proxy material would not bear.
But the causal relationship of the proxy material and the
merger are questions of fact to be resolved at trial, not
here. We therefore do not discuss this point further.
While the respondent contends that his Count 2
claim is not a derivative one, we need not embrace that
view, for we believe that a right of action exists as to both
derivative and direct causes.
The purpose of § 14 (a) is to prevent management or
others from obtaining authorization for corporate action
by means of deceptive or inadequate disclosure in proxy
solicitation. The section stemmed from the congressional
belief that “[f] air corporate suffrage is an important right
that should attach to every equity security bought on a
public exchange.” H. R. Rep. No. 1383, 73d Cong., 2d
Sess., 13. It was intended to “control the conditions
under which proxies may be solicited with a view to pre-
venting the recurrence of abuses which . . . [had] frus-
trated the free exercise of the voting rights of stock-
holders.” Id., at 14. “Too often proxies are solicited
without explanation to the stockholder of the real nature
of the questions for which authority to cast his vote is
sought.” S. Rep. No. 792, 73d Cong., 2d Sess., 12. These
broad remedial purposes are evidenced in the language of
729-256 0-65-32
p. 432the section which makes it “unlawful for any person . . .
to solicit or to permit the use of his name to solicit any
proxy or consent or authorization in respect of any secu-
rity . . . registered on any national securities exchange
in contravention of such rules and regulations as the
Commission may prescribe as necessary or appropriate in
the public interest or for the protection of investors.”
(Italics supplied.) While this language makes no spe-
cific reference to a private right of action, among its chief
purposes is “the protection of investors,” which certainly
implies the availability of judicial relief where necessary
to achieve that result.
The injury which a stockholder suffers from corporate
action pursuant to a deceptive proxy solicitation ordi-
narily flows from the damage done the corporation, rather
than from the damage inflicted directly upon the stock-
holder. The damage suffered results not from the deceit
practiced on him alone but rather from the deceit prac-
ticed on the stockholders as a group. To hold that de-
rivative actions are not within the sweep of the section
would therefore be tantamount to a denial of private
relief. Private enforcement of the proxy rules provides a
necessary supplement to Commission action. As in anti-
trust treble damage litigation, the possibility of civil dam-
ages or injunctive relief serves as a most effective weapon
in the enforcement of the proxy requirements. The Com-
mission advises that it examines over 2,000 proxy state-
ments annually and each of them must necessarily be
expedited. Time does not permit an independent exami-
nation of the facts set out in the proxy material and this
results in the Commission’s acceptance of the representa-
tions contained therein at their face value, unless con-
trary to other material on file with it. Indeed, on the
allegations of respondent’s complaint, the proxy material
failed to disclose alleged unlawful market manipulation
of the stock of ATC, and this unlawful manipulation
p. 433would not have been apparent to the Commission until
after the merger.
We, therefore, believe that under the circumstances
here it is the duty of the courts to be alert to provide
such remedies as are necessary to make effective the con-
gressional purpose. As was said in
Sola Electric Co. v.
Jefferson Electric Co., 317 U. S. 173, 176 (1942):
“When a federal statute condemns an act as unlaw-
ful, the extent and nature of the legal consequences
of the condemnation, though left by the statute to
judicial determination, are nevertheless federal ques-
tions, the answers to which are to be derived from the
statute and the federal policy which it has adopted.”
See also Tunstall v. Brotherhood of Locomotive Firemen
& Enginemen,
323 U. S. 210, 213 (1944);
Deitrick v.
Greaney, 309 U. S. 190, 201 (1940). It is for the federal
courts “to adjust their remedies so as to grant the neces-
sary relief” where federally secured rights are invaded.
“And it is also well settled that where legal rights have
been invaded, and a federal statute provides for a general
right to sue for such invasion, federal courts may use any
available remedy to make good the wrong done.”
Bell
v. Hood, 327 U. S. 678, 684 (1946). Section 27 grants
the District Courts jurisdiction “of all suits in equity and
actions at law brought to enforce any liability or duty
created by this title . . . .” In passing on almost iden-
tical language found in the Securities Act of 1933, the
Court found the words entirely sufficient to fashion a
remedy to rescind a fraudulent sale, secure restitution
and even to enforce the right to restitution against a third
party holding assets of the vendor. Deckert v. Inde-
pendence Shares Corp.,
311 U. S. 282 (1940). This
significant language was used:
“The power to enforce implies the power to make
effective the right of recovery afforded by the Act.
p. 434And the power to make the right of recovery effec-
tive implies the power to utilize any of the pro-
cedures or actions normally available to the litigant
according to the exigencies of the particular case.”
At 288.
See also
Porter v. Warner Holding Co., 328 U. S. 395
(1946); Mitchell v. Robert DeMario Jewelry, Inc.,
361
U. S. 288 (1960); Schine Chain Theatres, Inc., v. United
States,
334 U. S. 110 (1948).
Nor do we find merit in the contention that such rem-
edies are limited to prospective relief. This was the po-
sition taken in Dann n . Studebaker-Packard Corp.,
288
F. 2d 201, where it was held that the “preponderance of
questions of state law which would have to be interpreted
and applied in order to grant the relief sought ... is so
great that the federal question involved ... is really
negligible in comparison.” At 214. But we believe that
the overriding federal law applicable here would, where
the facts required, control the appropriateness of redress
despite the provisions of state corporation law, for it “is
not uncommon for federal courts to fashion federal law
where federal rights are concerned.” Textile Workers v.
Lincoln Mills,
353 U. S. 448, 457 (1957). In addition,
the fact that questions of state law must be decided does
not change the character of the right; it remains federal.
As Chief Justice Marshall: said in Osborn v. Bank of the
United States,
9 Wheat. 738 (1824):
“If this were sufficient to withdraw a case from
the jurisdiction of the federal Courts, almost every
case, although involving the construction of a law,
would be withdrawn . . . .” At 819-820.
Moreover, if federal jurisdiction were limited to the
granting of declaratory relief, victims of deceptive proxy
statements would be obliged to go into state courts for
remedial relief. And if the law of the State happened
p. 435to attach no responsibility to the use of misleading proxy
statements, the whole purpose of the section might be
frustrated. Furthermore, the hurdles that the victim
might face (such as separate suits, as contemplated by
Dann n . Studebaker-Packard Corp., supra, security for
expenses statutes, bringing in all parties necessary for
complete relief, etc.) might well prove insuperable to
effective relief.
Our finding that federal courts have the power to grant
all necessary remedial relief is not to be construed as any
indication of what we believe to be the necessary and
appropriate relief in this case. We are concerned here
only with a determination that federal jurisdiction for
this purpose does exist. Whatever remedy is necessary
must await the trial on the merits.
The other contentions of the petitioners are denied.
Affirmed.