Mills v. Electric Auto-Lite Co.
396 U.S. 375

PROCEDURE: Certiorari was granted to review a judgment of the United States Court of Appeals for the Seventh Circuit in a suit brought by petitioners to enjoin a merger based upon a materially misleading proxy solicitation, which failed to inform petitioners about a conflict of interest with their directors and the merging company, in violation of § 14(a) of the Securities Exchange Act of 1934.


FACTS: The plaintiffs held shares in Electric Auto-Lite Company (D) before its merger with Mergenthaler Linotype Co. The day before the shareholders' meeting, at which the merger vote was to occur, the plaintiffs filed suit seeking an injunction prohibiting Electric Auto-Lite (D) from casting any votes it obtained through misleading proxy statements. The plaintiffs failed to ask for a temporary restraining order, so the vote proceeded and the shareholders approved the merger. The plaintiffs brought this
action to have the merger set aside, alleging that the proxy statement was misleading and in violation of § 14 of the Securities Exchange Act (the Act). The plaintiffs argued that Mergenthaler owned enough Electric Auto-Lite (D) shares that it had control of the company two years before the merger. The board's merger recommendation failed to inform the shareholders that Mergenthaler had nominated all 11 directors. The plaintiffs argued that this omission gave rise to a derivative cause of action and a breach of fiduciary duty claim.

ISSUE: If a proxy fails to disclose a relationship between the target company and the surviving company, must the plaintiff also show that the omitted facts changed the vote's outcome in order to state a cause of action for a violation of the Securities Exchange Act?

RULE: Sufficient causal relationship existed between proxy statement that was materially false or misleading and corporate merger accomplished through use of such statement to establish cause of action based on violation of Securities Exchange Act, where substantial number of votes obtained by proxy from minority stockholders was necessary and indispensable to approval of merger


HOLDING: Petitioners were granted certiorari to review the issue of causation for a private right of action. The Court vacated judgment for petitioners and remanded the case, because the conflict of interest was a materially misleading aspect of the proxy solicitation. The Court held that where there was a finding of materiality, petitioners made a sufficient showing of causal relationship between the violation and injury to seek redress, so long as it was proven that the proxy solicitation itself, rather than the particular defect in the solicitation materials, was an essential link in accomplishment of the transaction. The Court vacated judgment in favor of petitioner shareholders and remanded the case for further proceedings.