Long Island Lighting Company v. Barbash
779 F.2d 793 (2d Cir. 1985)
Matthews owned some shares in
a private utility company called LILCO. He asked for a special
shareholder's meeting to decide if the company should become a
Some of the other
shareholders who agreed with Matthews placed an ad in the newspaper
accusing the LILCO directors of mismanagement and urging support for the
campaign to make the utility public.
LILCO sued to block the
LILCO argued that the ad was
unlawful because it constituted a proxy solicitation for which no proxy statement had been filed with the SEC.
Basically, LILCO was arguing
that the ad was a request to all the shareholders to vote for Matthews'
proposal. But Matthews' proposal had not yet been approved by the SEC.
That would be a violation
of Rule 14a-1. The SEC has very
specific rules for what a proxy solicitation can and
cannot contain. Mostly the rules are designed to forbid people from
misleading the shareholders by telling them only one side of the story,
or just outright lying about the implications of a vote.
The Trial Court found the ad
was legal. LILCO appealed.
The Trial Court found that
the ad was not a proxy solicitation
because it was placed in a general newspaper, and wasn't specifically
directed at the LILCO shareholders. Therefore it would only indirectly
affect the proxy contest.
The Appellate Court reversed.
The Appellate Court found
that SEC proxy rules apply not only to direct requests to furnish,
revoke, or withhold proxies, but also to communications which may
indirectly accomplish such a result or constitute a step in the chain of
communications designed ultimately to accomplish such a result.
See Rule 14a-6(g).
The Court felt that limiting
the proxy solicitation rules to
things that directly targeted the shareholders would make it too easy to
evade the SEC requirements.
In a dissent it was argued
that there was a 1st Amendment right to free speech, and the right to criticize corporate
behavior doesn't diminish as shareholder meetings become imminent.