of the alleged violations. * * *." Though the defendants had
the necessary two-thirds control of the common stock, they had
less than two-thirds of the preferred shares. Though they
could redeem the preferred, they had not done so. The case is
unclear as to what facts were presented and as to whether a
summary judgment by the plaintiffs would have been granted.
No causal connection was found in Cohen v. Colvin et al.,
266 F. Supp. 677 (1967), where the alleged benefit to the
defendant occurred before the issuance of the Proxy Statement
containing the false statements and omissions and the
corporation was not adversely affected.
In Laurenzano v. Einbender, 264 F. Supp. 356, (E.D.N Y
1966), Judge Dooling was troubled as to whether the doctrine
of Barnett v. Anaconda, supra, be accepted and directed an
immediate appeal of this question. He suggested that a causal
connection might be inferred where, though the proxy statement
was not a necessary or indispensable ingredient of the
transaction, it was "calculatedly infused into the matrix of
The cases appear to indicate that for a causal connection to
exist the misrepresentations or omissions in the proxy
statements must have a transactional function involving
corporate action. Laurenzano v. Einbender, supra. The proxy
statement must not be merely "randomly present" in the context
of the transaction with no transactional function. Cohen v.
Colvin, supra; Hoover v. Allen, supra; Robbins v. Banner
Industries, Inc., CCH Fed.Sec.L.Rep. ¶ 91,861, p. 95, 950
Where the accused proxy material is not merely "randomly
present" in the context of the transaction, a causal
relationship is established as intimate and direct,
particularly where a merger is involved. Laurenzano v.
Einbender, supra. Such a direct causal relationship exists in
the present case.
When false or misleading solicitation material has been used
to secure stockholder approval of plans conferring pensions,
bonuses or stock options to defendant directors relief appears
well grounded. In those instances in which a plan would
clearly have failed had the stockholders known the true facts,
the plan may be terminated or rescinded with recoupment of any
benefits previously conferred. Comment, supra, 12 U.C.L.A.
L.Rev. 1150, 1181 (1966).
The cases which have considered the issue of causality have
ignored the fact that an action under Section 14 is for
enforcement. I had conducted a hearing to make a factual
determination of the issue of causality, proceeding under the
assumption that such a determination must be made as that
suggested by the cases discussed above. But, after fully
considering these cases and the opinion in Borak, along with
the facts presented at the hearing, I have decided that Borak
implies a different approach.
The Borak decision, by conferring upon the Federal Courts the
authority to determine what type of relief may be granted for
federally created rights, placed the Courts in a position where
they may affect the national economy. As in Textile Workers
Union of America v. Lincoln Mills, 353 U.S. 448, 77 S.Ct. 912,
1 L.Ed.2d 972 (1957), in the field of labor relations, the
Federal Courts are now authorized to fashion a body of Federal
Law for the enforcement of regulations of proxy solicitation.
The Federal Courts may borrow from state law. But this
development of Federal Common Law will grow on an ad hoc basis.
The course of development will be based upon a consideration
of the needs of the national economy. In Borak, the plaintiff
is given a right to sue derivatively under Section 14 in order
to enforce the Securities and Exchange Act for the good of the
corporation and the benefit of the economy.
Causal connection must be decided within this context.
Finding a causal relationship is finding prima facie that the
circumstances surrounding the merger are not in the interests
national economy as it relates to the industries involved in
the merger so as to justify a derivative suit to prevent an
existing corporation from evolving into the type of corporate
structure which should not exist. From the evidence I have
before me, I am convinced that the areas of industrial
activity linked by the merger are so inherently unrelated as
to cause the new corporation to fall in that category of
business enterprises as referred to recently by the Supreme
Court as constituting a conglomerate merger, and to be
inherently dangerous to a healthy economy. United States v.
Von's Grocery, 384 U.S. 270, 86 S.Ct. 1478, 16 L.Ed.2d 555
(1965); Federal Trade Commission v. Proctor & Gamble Co.,
386 U.S. 568, 87 S.Ct. 1224, 18 L.Ed.2d 303 (1966); Rill,
Conglomerate Mergers: The Problem of Super Concentration, 14
U.C.L.A. L.Rev. 947.
That finding being today completed and made, I am now able
to proceed to complete my ruling on plaintiffs' motion for
summary judgment and grant the motion and it is so ordered.
The Master heretofore appointed by this Court to proceed with
those matters resulting upon this order, but whose direction
to proceed was held up by order of this Court pending the
further determination of plaintiffs' motion for summary
judgment, is now hereby directed to proceed forthwith. Quoting
from my interim order of November 29, 1965, and redirecting
the Master in the same language, I herein direct as follows:
(1) The Master shall act as his own counsel, but may use
members and associates of his firm to assist him in his
duties. He may employ such accountants and experts as he may
deem necessary, but before doing so shall file an application
with this Court for approval of such employment.
(2) The Master shall have the right to examine any and all
corporate documents of Eltra, Mergenthaler and Auto-Lite as he
may deem necessary, including, without limiting the foregoing,
minute books, correspondence, proxy statements, annual
reports, contracts and financial statements.
(3) The Master is authorized to hold such hearings, upon
notice, as he may deem necessary, to take the testimony of the
Officers and Directors of the above corporations, and to
employ Court Reporters to take such testimony and transcribe
the same. The Master shall file such testimony with his report
thereon, with this Court.
(4) The Master shall perform such other duties as the Court
shall order and direct, and shall generally perform such
duties as are performed by Masters in Chancery in similar
(5) In order to expedite the disposition of this litigation,
the Court hereby directs the Master to make a preliminary
report to this Court as promptly as possible.
The order entered today formally setting forth Findings of
Fact and Granting Motion for Summary Judgment are incorporated
herein by reference.
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