Mills v. Electric Auto-Lite Co.
396 U.S. 375 (1970)
A company called Mergenthaler
bought more than 50% of the stock of Auto-Lite. They then attempted to
merge both Auto-Lite and Mergenthaler with a third company called American
Auto-Lite's directors send
out a proxy statement recommending
approval, and the Auto-Lite shareholders voted in favor of it.
shareholders, led by Mills, sued to stop the merger.
Mills argued that the proxy
statement was in violation of the Securities
Exchange Act of 1934 Rule 14a-9 which prohibits the
solicitation of proxies by means of materially false or misleading
Mills argued that the proxy
statement was misleading because it
neglected to mention that all of Auto-Lite's directors were actually
nominated by Mergenthaler.
The Trial Court found for
Mills in summary judgment. Auto-Lite appealed.
The Trial Court found that
the proxy statement had a material omission.
The Court found that there
was a causal connection between
the omission and the voting, because Mergenthaler needed 66% of the votes
to approve the merger, yet did not own 66% of the stock. So they needed
the minority shareholders to vote with them.
The Appellate Court reversed
The Appellate Court found
that if Auto-Lite could show that the terms of the merger were fair, then
it could be concluded that a majority of the shareholders would have
voted for the merger, and thus there was no causation.
That would be a question of
fact for a jury to decide.
The US Supreme Court reversed.
The US Supreme Court found
that "fairness" was not a defense to making material
misrepresentations of omissions on a proxy statement.
"outrageous misrepresentations in a proxy solicitation, if they did
not relate to the terms of the transaction, would give rise to no cause
of action under Rule 14(a)."
The Court found that where
there is a finding of materiality,
a shareholder has made sufficient showing of casual relationship between
the violation and the injury for which he seeks redress if, as here, he
proves that the proxy solicitation itself, rather than the particular defect in the solicitation
materials, was an essential link in the accomplishment of the
So Mills didn't have to
establish that people actually did change their vote in order to show causation, only that their vote was required for the
Basically, once it has been
shown that a false statement is material (meaning that it is the kind of thing that might make a
reasonable person vote a different way), then there must also be a showing
of causation, meaning that a
vote is required.
If the situation had been
different, and Mergenthaler had owned more than 66% of Auto-Lite's stock
(and could therefore approve a merger without any other shareholder
consent), then there is no causation,
because whatever the vote was, the merger would be approved regardless.
That was the situation in Virginia
Bankshares, Inc. v. Sandberg (501
U.S. 1083 (1991)).