Bernstein, Jack J.

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Volume 9 Issue 2 Article 12 1964 Corporations - Proxy Regulations - Federal Courts Can Grant Complete Relief in Shareholder's Suit for Violation of Section 14(a) of Securities Exchange Act of 1934 Jack J. Bernstein Follow this and additional works at: https://digitalcommons.law.villanova.edu/vlr  Part of the Business Organizations Law Commons, and the Securities Law Commons Recommended Citation Jack J. Bernstein, Corporations - Proxy Regulations - Federal Courts Can Grant Complete Relief in Shareholder's Suit for Violation of Section 14(a) of Securities Exchange Act of 1934, 9 Vill. L. Rev. 330 (1964). Available at: https://digitalcommons.law.villanova.edu/vlr/vol9/iss2/12 This Note is brought to you for free and open access by Villanova University Charles Widger School of Law Digital Repository. It has been accepted for inclusion in Villanova Law Review by an authorized editor of Villanova University Charles Widger School of Law Digital Repository. VILLANOVA LAW REVIEWrequirements of the tax law. What the effects of this form will be in fieldsother than taxation is for the state courts to decide under their owncorporate law. Alleigro determined a problem similar to the one involvedhere by one method. The court in the instant case found it unnecessaryto go so far and determined the answer by viewing the fiduciary duties ofthe parties involved. This appears to be the simpler method, and theresult seems correct.2 4Conrad J. DeSantisCORPORATIONS-PROXY REGULATIONS- FEDERAL COURTS CANGRANT COMPLETE RELIEF IN SHAREHOLDER'S SUIT FOR VIOLATIONOF SECTION 14(a) OF SECURITIES EXCHANGE ACT OF 1934.Borak v. J. I. Case Co. (7th Cir. 1963)Plaintiff, the owner of 2,000 shares of J. I. Case Company stock,brought a private suit in the federal district court to have a merger betweenCase and the American Tractor Corporation declared illegal and void. Healso sought to have Case and its directors enjoined from taking any actionto consummate the plan. Injunctive relief was denied on both the originalcomplaint and a subsequent amended complaint. The district court decidedthat only a derivative cause of action arose for violation of section 14(a) ofthe Securities Exchange Act of 19341 on which the amended complaint wasbased and that under this section only declaratory relief could be granted.On appeal, the Seventh Circuit reversed, holding that a private rightof action did exist under section 14(a) and that section 27 of the act 2 gave24. It is interesting to note that the court's decision means Central's potentialshare of the tax saving in the form of dividends would still be $3,060,573.60. It wouldseem the additional investment of $1,000,000, even without the disproportionate alloca-tion agreement, is an extremely lucrative one and makes Central's duty to its stock-holders and to Mahoning, clear.1. It shall be unlawful for any person, by use of the mails or by any means orinstrumentality of interstate commerce or of any facility of any national securitiesexchange or otherwise to solicit or to permit the use of his name to solicit anyproxy or consent or authorization in respect of any security (other than anexempted security) registered on any national securities exchange in contraven-tion of such rules and regulations as the Commission may prescribe as necessaryor appropriate in the public interest or for the protection of investors.Securities and Exchange Act, § 14(a), 48 Stat. 895 (1934), 15 U.S.C. 78n(a) (1958).2. The district courts of the United States . . . and the United States courtsof any Territory or other place subject to the jurisdiction of the United Statesshall have exclusive jurisdiction of violations of this chapter or the rules andregulations thereunder, and of all suits in equity and actions at law brought to330 [VOL. 91Bernstein: Corporations - Proxy Regulations - Federal Courts Can Grant ComplPublished by Villanova University Charles Widger School of Law Digital Repository, 1964RECENT DEVELOPMENTSthe federal courts jurisdiction to award to the plaintiff whatever relief themerits of the controversy required. Borak v. J. I. Case Co., 317 F.2d 838(7th Cir. 1963).The issues in controversy are whether a private cause of action arisesfrom a violation of the proxy rules of the Securities Exchange Act, and ifso, whether a plaintiff is entitled to more than declaratory relief for suchviolation. Prior to 1961 there was an apparent trend toward granting aprivate cause of action for violation of section 14(a) of the act,3 but it wasnot until Dann v. Studebaker-Packard Corp.4 that a federal court statedconclusively that such a private cause of action did exist.The basis of implied liabilities giving rise to this private action is thecommon-law tort doctrine which bases a private action on the violation ofa statute. For this doctrine to be applicable, however, the invaded interestmust be that which the enactment was intended to protect.5 In theordinary case where the statute makes no mention of a civil remedy, "theobvious conclusion is that the legislature either did not have the civil actionin mind at all, or deliberately omitted to provide for it." 6 This, however,cannot be said to prove whether or not there was the intention to create aprivate right in this situation.7 The Securities and Exchange Commissionhas argued, as amicus curiae, that a private right should exist under section10(b) and the proxy rules,8 and it appears that the court's decision inDann was the logical culmination of the trend that had been established inprior cases, and thus upheld the true intent of the statute.9The court in Dann, however, refused to grant all of the relief for whichthe plaintiff asked, holding that since the act regulates proxy solicitationsprior to the corporate election under section 14(a), the federal court hadno power to grant retroactive relief.'0 "The obvious purpose of section14(a)," as the court in the instant case argues, "is the protection of theright of shareholders to a full and fair disclosure of all material factswhich affect corporate election by proxy. For the achievement of thatpurpose, the jurisdiction conferred by section 27 must be broad enough toeffectively protect that right."" If the court's statement of the purpose ofthe section is correct, it's conclusion as to construction would seem to beenforce any liability or duty created by this chapter or the rules and regulationsthereunder .... (Emphasis added.)Securities and Exchange Act, § 27, 48 Stat. 902 (1934), as amended, § 127, 63 Stat.107 (1949), 15 U.S.C. 78aa (1958).3. For a more complete history of the law in this area prior to Dann v. Stude-baker-Packard Corp., 288 F.2d 201 (6th Cir. 1961), see Loss, The SEC Proxy Riflesin the Courts, 73 HARv. L. Rtv. 1041, 1045-58 (1960) ; 62 COLUm. L. REv. 375 (1962);75 HARV. L. REV. 637 (1962) ; 7 VILL. L. Rzv. 125 (1961).4. Dann v. Studebaker-Packard Corp., supra note 3.5. Loss, supra note 3' at 1044.6. PROSSER, TORTS 153 (2d ed. 1955).7. Loss, supra note 3, at 1054.8. Phillips v. United Corp., 5 S.E.C. 758, 764 (1948), appeal dismissed sub noin.Phillips v. SEC, 171 F.2d 180 (2d Cir. 1948).9. 7 VILL. L. Riv. 125, 128 (1961).10. Dann v. Studebaker-Packard Corp., 288 F.2d 201 (6th Cir. 1961).11. Borak v. J. I. Case Co., 317 F.2d 838, 848 (7th Cir. 1963), cert. grantedsub nom., J. I. Case Co. v. Borak, 375 U.S. 901, 84 S.Ct. 195 (1963) (No. 402).WINTER 1964]2Villanova Law Review, Vol. 9, Iss. 2 [1964], Art. 12https://digitalcommons.law.villanova.edu/vlr/vol9/iss2/12VILLANOVA LAW REVIEWwell founded, and it's divergence from the limitation of Dann justified.Construing a similar grant under the Securities Act of 1933,12 theSupreme Court gave added force to this court's determination when itheld that jurisdiction to "enforce" included the power to utilize any remedyto which the parties would normally be entitled.13 Injunction here wouldseem to be within the bounds of that principle.The Supreme Court in Bell v. Hood,14 held that the federal courtshave the power, under a general grant of jurisdiction, to enforce a federalstatute and to grant all of the relief which may be commensurate with theeffective enforcement of the statute and the protection of rights therebycreated, notwithstanding the failure of the statute to specify the remedieswhich may be employed. Section 27 has often been construed in conjunctionwith section 10(b) as enabling courts to award damages and retrospectiverelief.15 By a parity of reasoning the same result is demanded here.If the federal courts refuse to grant any relief other than a declaratoryjudgment, a plaintiff must necessarily look to the state courts for furthersatisfaction. It is possible that the state court could refuse to assumejurisdiction ;16 a cause of action might not lie since there may have beenno violation of state law, no common-law tort action, or violation ofcontractual right. Even if an action does lie in the state courts the resultwould nevertheless be cumbersome. The plaintiff would be forced toprosecute two suits at added expense and inconvenience. If there were noaction in the state court, he would find himself possessing what might bea valueless declaratory judgment.Simply stated the problem is this: federal law has prohibited certainacts which have injured the plaintiff. To declare these acts illegal, leavingall other relief to be given by the state courts, is only half a remedy. Thesituation could not be more ripe for the federal court to evoke the principlesof judicial economy and provide the plaintiff with full and adequate relief.If the court does not grant the complete relief requested, consideration ofstate law will be necessary to determine the proper remedy for violationof a federal right. It hardly seems in line with these principles of economyfor the federal court to follow this procedure and increase not only theexpense of justice to the plaintiff, but also the amount of pending litigationin the courts. 17 The action should be considered to be purely federal in12. Securities Act, § 22(a), 48 Stat. 86 (1933), 15 U.S.C. 77v(a) (1958).13. Deckert v. Independence Shares Corp., 311 U.S. 282, 61 S.Ct. 229 (1940)accord, SEC v. Fiscal Fund, Inc., 48 F. Supp. 712 (D. Del. 1943).14. 327 U.S. 678, 684, 66 S.Ct. 773, 777 (1946).15. E.g., Ellis v. Carter, 291 F.2d 270 (9th Cir. 1961); Hooper v. MountainStates Sec. Corp., 282 F.2d 195 (5th Cir. 1960), cert. denied, 365 U.S. 814, 81 S.Ct.695 (1961) ; Smith v. Bear, 237 F.2d 79 (2d Cir. 1956) ; Kohler v. Kohler Co.,208 F. Supp. 808 (E.D. Wis. 1962).16. See Investment Associates, Inc. v. Standard Power & Light Corp., 29 Del.Ch. 225, 48 A.2d 501 (Ch. 1946), aff'd, 29 Del. Ch. 593, 51 A.2d 572 (Sup. Ct. 1947).17. See Hurn v. Oursler, 289 U.S. 238, 53 S.Ct. 586 (1933) ; cf. Bank of theUnited States v. Planters' Bank, 22 U.S. 904 (1824). See generally 3 Loss, S4CURIriiSREGUIATION 2031-32 (1961).[VOL. 93Bernstein: Corporations - Proxy Regulations - Federal Courts Can Grant ComplPublished by Villanova University Charles Widger School of Law Digital Repository, 1964RECENT DEVELOPMENTS,its governing law, as would be an injunctive action brought by the Com-mission itself under the proxy rules.If the Dann case was correct in it's holding that the same causes ofaction are open to a private individual as are open to the Commission 18it would seem logically to follow, as at least one authority has stated, thatsimilar remedies should be granted regardless of who brings the action. 19It has been held that the trial court "possesses the authority to make anyorder necessary to enforce liabilities or duties created by the Act orrules.... 20 Once the violation of the federal right is established, Bell v.Hood,21 makes it clear that the federal courts may use any available remedyto vindicate that right. To render complete justice, a federal court shouldbring into play the full scope of its equity powers, go beyond the immediateclaim on which its jurisdiction is predicated and give whatever relief theexigencies of the case may demand.22Though complete justice to a plaintiff would alone seem to justify theresult reached by the court here, federal policy must also be considered.Under section 27 the federal courts have been granted exclusive jurisdictionover violations of the proxy sections of the act. One of the purposes ofthis grant must certainly have been to maintain uniformity in the enforce-ment of the act, that is, to insure that all plaintiffs and all defendants insimilar situations were accorded the same treatment. The standards ofrelief for similar causes of actions in the various states would no doubtvary considerably. Thus to grant only declaratory relief, leaving additionalremedies to the state courts and state law, would destroy the desireduniformity. To construe the act so narrowly may leave the plaintiff in onestate with a federal right without an adequate remedy and another plaintiffin a different state with a full remedy. This could well serve to weaken theact and, in effect, defeat Congress' apparent purpose in giving the federalcourts exclusive jurisdiction under section 27. They would have exclusivejurisdiction, but could do little justice with it. The state courts would, inall practical considerations, be the only ones capable of granting totalrelief, and this would in practice, if not in theory, actually usurp the powergranted to the federal courts by Congress under the act. Therefore, itappears that the court in this case has wisely taken the step toward completejustice that Dann refused to take. Its decision, if followed, will unques-tionably serve to strengthen the act and accomplish the purposes forwhich it was established.Jack J. Bernstein18. Dann v. Studebaker-Packard Corp., 288 F.2d 201 (6th Cir. 1961).19. Loss, supra note 3, at 1068.20. SEC v. Transamerica Corp., 163 F.2d 511, 518 (3d Cir. 1947), cert. denied,332 U.S. 847, 68 S.Ct. 351 (1948).21. 327 U.S. 678, 66 S.Ct. 773 (1946).22. Porter v. Warner Holding Co., 327 U.S. 395, 401-03, 66 S.Ct. 1086, 1090-91(1946); see Mitchell v. Robert De Mario Jewelry, Inc., 361 U.S. 288, 80 S.Ct. 332(1960).WINTER 1964]4Villanova Law Review, Vol. 9, Iss. 2 [1964], Art. 12https://digitalcommons.law.villanova.edu/vlr/vol9/iss2/12

Corporations - Proxy Regulations - Federal Courts Can Grant Complete Relief in Shareholder\u27s Suit for Violation of Section 14(a) of Securities Exchange Act of 1934

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Corporations - Proxy Regulations - Federal Courts Can Grant Complete Relief in Shareholder\u27s Suit for Violation of Section 14(a) of Securities Exchange Act of 1934

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