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Kohn v. American Metal Climax Inc.

decided: March 31, 1972; As Amended April 17, 1972.

HAROLD E. KOHN, TRUSTEE, ET AL.
v.
AMERICAN METAL CLIMAX, INC., ET AL., APPELLANTS IN 19175, 19537, 71-1099. APPEAL OF ROAN SELECTION TRUST, LIMITED, IN 19176, 19538, 71-1100. APPEAL OF HAROLD E. KOHN, TRUSTEE, ET AL., IN 71-1101



Further Briefing Completed on October 14, 1971.

Seitz, Chief Judge, and Adams and Max Rosenn, Circuit Judges. Adams, Circuit Judge (concurring and dissenting).

Author: Seitz

Opinion OF THE COURT

SEITZ, Chief Judge.

These are consolidated appeals from orders of the United States District Court for the Eastern District of Pennsylvania.

The case arises out of the amalgamation of defendants Roan Selection Trust Limited (RST), a Zambian corporation, into American Metal Climax, Inc. (AMAX), a New York corporation, which prior to the consummation of the amalgamation owned 42.3% of the outstanding stock of RST.

The facts as found by the district court indicate that on August 11, 1969, the President of the Republic of Zambia issued the "Matero Declaration" which expressed the Government's intention to acquire a controlling equity interest in operating copper properties within Zambia. At that time RST was a corporation organized under the laws of Zambia and had its principal place of business in that country. Its operations involved primarily the production, smelting and refining of Zambian copper.

After issuance of the declaration, between August 11, 1969, and November 17, 1969, RST negotiated the sale of a 51% interest in its operating assets to the Zambian Government. The chief concern of the corporation in the negotiations was to secure from the Government the right to transfer the corporate domicile and externalize the corporation's non-operating assets. In this manner a significant part of RST's total worth would be free from Zambian exchange controls.

On November 17, 1969, the board of directors of RST approved, in principle, an agreement among RST, the Government of Zambia, and a Zambian dominated corporation called the Industrial Development Corporation of Zambia (INDECO). The agreement provided, inter alia, that:

(a) the mining operations of RST would be merged into a company to be formed under the name Roan Consolidated Mining, Ltd. (RCM) in which INDECO would own 51% and RST would own 36.75%. The remaining 12.25% would be held by other companies known as the Anglo-American Group. These firms maintained a substantial minority interest in certain RST subsidiaries;

(b) INDECO would issue negotiable bonds, guaranteed by the Zambian Government, in the amount of $151 million and RST would be entitled to receive 36.75% of the total issue;

(c) RST, or a company nominated by it, would manage the operations of RCM and act as sales agent for a period of not less than ten years during which period RST or its nominee would receive 1 1/2% of RCM's gross sales revenues and 2% of its profits net of mineral taxes but before income taxes;

(d) the holder of the management contract would maintain a holding of not less than 20% of RCM's outstanding stock;

(e) RCM would pay quarterly dividends, not subject to any restrictive limitation and equal to the net income of RCM after provision for a reserve for exploration and development in an amount approved by the entire RCM board; and

(f) all assets of RST, except those nationalized by Zambia, might be transferred to a new corporation outside Zambia and would consist principally of cash approximating $60 million; a 30% interest in Botswana RST, Ltd. (a Botswanian corporation the assets of which were primarily majority interests in two Botswanian mining companies); Ametalco (a group of corporations wholly owned by RST International Metals Ltd. which, in turn, was a wholly owned subsidiary of RST); the INDECO bonds; and RST's interest in RCM.

Seeking alternative means by which to externalize the RST assets not nationalized by the Zambian Government, the RST board eventually began negotiations with AMAX, a New York corporation. On March 5, 1970, a committee of the RST board approved in principle an agreement to effect the externalization through an amalgamation of RST with AMAX. The agreement provided, inter alia, for:

(1) the consolidation of RST's Zambian operating assets into RCM, 51% of which would be sold to INDECO in exchange for INDECO bonds;

(2) the pro rata distribution to all RST shareholders of (a) the INDECO bonds thus acquired; (b) RST's shareholdings in Botswana RST Ltd.; and (c) RST shareholdings in RCM, except for the 20% interest required to be held by RST or its nominee under the management provision of the Zambian agreement; and

(3) the acquisition of the remainder of RST by AMAX, for which non-AMAX shareholders of RST would be paid approximately $76 million principal amount of 8% AMAX subordinated debentures with common stock warrants attached and $6.3 million in cash.

On April 8, 1970, plaintiff Kohn, as trustee of American Depositary Receipts representing 2000 shares of RST, filed a complaint against the defendants derivatively on behalf of RST and also as representative of all non-AMAX shareholders of RST. Seeking to enjoin the proposed amalgamation, he alleged the following in his complaint:

(1) defendants had violated the disclosure provisions of section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j, and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder;

(2) the proposed amalgamation would violate section 7 of the Clayton Act, 15 U.S.C. § 18; and

(3) the terms of the amalgamation evidenced a fraud on non-AMAX shareholders of RST, were unfair to these shareholders' interests in the corporation, and demonstrated a breach of fiduciary duty by AMAX, as a controlling RST shareholder.

The approval of both the High Court of Zambia and the RST shareholders was necessary before the amalgamation could be effected. On July 8, 1970, the district court enjoined the distribution of proxy material to RST shareholders, unless defendants included therewith a letter prepared by plaintiff Kohn setting forth his bases for claiming that the proposed amalgamation was unfair. The Court's order specifically provided that inclusion of Kohn's letter was "without prejudice to plaintiffs' claims that [the proxy material] was in substance materially misleading or otherwise violative of Section 10(b) and . . . Rule 10b-5. . . ." This condition was met and the shareholders were sent an Explanatory Statement with Appendices setting forth the details of the RST-AMAX reorganization.

The proxy materials which the shareholders received presented the amalgamation agreement and the Zambian nationalization in the form of one resolution. Thus, there was no opportunity to approve the transfer of RST assets from within Zambia without also endorsing the agreement negotiated between RST and AMAX. At the meeting held August 6, 1970, RST shareholders voted on the resolution. The vote was 85.5% in favor and 14.5% opposed. After this vote was taken the non-AMAX shareholders of RST were polled again as a distinct voting group. The tally of this vote was 66% in favor and 34% opposed.

The way was now clear for presenting the proposed plan of externalization to the High Court of Zambia for its approval. But on August 12, 1970, the district court preliminarily enjoined this presentation, finding that the plaintiff Kohn had demonstrated a strong probability that upon final hearing he would be granted relief and that effectuation of the amalgamation would only complicate the formulation of an appropriate remedy. The following day, however, this court stayed the effect of the district court's order on the condition that defendant AMAX deposit with the court $10 million as security for any injury plaintiffs might suffer. The stay also required that the non-liquid assets of RST be frozen and neither transferred nor assigned until further order of the court.

Thereafter, on August 14, 1970, the High Court of Zambia approved the reduction of capital necessary to complete the amalgamation. This approval was registered on August 15, 1970, and had the effect of cancelling and rendering void all issued shares of RST other than those held by AMAX and its nominees. On August 31, 1970, this court amended its previous order to permit the transfer of RST's externalized assets to RST International, Inc., a Delaware subsidiary of AMAX.

There followed a lengthy trial and, on November 25, 1970, the district court filed its Findings of Fact, Opinion, Conclusions of Law, and Order. The court essentially found that: (1) the High Court of Zambia's confirmation of the reduction of capital did not bar the plaintiffs' claims challenging the amalgamation; (2) the amalgamation was unfair to the non-AMAX shareholders of RST; (3) certain directors of RST, and AMAX as a controlling shareholder of RST, breached their fiduciary duty owed to non-AMAX shareholders of RST; (4) the Explanatory Statement and Appendices sent to RST shareholders was deliberately misleading and thereby violated Section 10(b) of the Securities Exchange Act as well as Rule 10b-5; and (5) plaintiffs failed to prove any violation of the Clayton Act. Plaintiffs were granted injunctive relief and the defendants were ordered to offer plaintiffs as a class, in accordance with each class member's interest in RST as of March 5, 1970, a pro rata share in RST International, Inc.

Defendants AMAX and RST immediately appealed the district court's order of November 25, 1970. Shortly thereafter, on December 3, 1970, plaintiffs filed a motion in the district court requesting that the November 25th order be amended and supplemented. Our court, on motion remanded the record to the district court to permit it to rule on plaintiffs' motion. Thereafter, beginning on January 15, 1971, the district court entered three supplementary orders.

It stayed its earlier order in part, directed the distribution of certain dividend arrearages and accumulated interest and ordered supplemental hearings on the propriety of additional or alternative relief to that specified in the previous order. Kohn v. American Metal Climax, Inc., 322 F. Supp. 1331 (E.D.Pa.1971). Appeals by both sides followed.

APPEALABILITY

This court raised sua sponte the question of whether it has jurisdiction to entertain these appeals. On November 25, 1970, after the close of the trial in this case, the district court ordered rescission of the reorganization in the form of a tender offer to RST's former shareholders. It left open "until after any appeal from its decision the details of implementation." Both RST and AMAX appealed (Nos. 19537 & 19538).*fn1 Then, while expressly retaining jurisdiction, this court remanded the case to permit the district court to rule on plaintiffs' pending Motion to Amend and Supplement the Judgment. The district court sustained the motion and by order dated January 15, 1971 amended its order of November 25th to provide, inter alia, for "supplementary proceedings to determine whether any further or different relief [was] appropriate," (emphasis added). 322 F. Supp. at 1366, 1369. Defendants appealed this order also and plaintiffs cross-appealed (Nos. 71-1099, -1100 and -1101).

We think these appeals lie pursuant to 28 U.S.C. § 1292(a) (1), which authorizes appeals from interlocutory orders "granting, continuing, modifying, refusing or dissolving injunctions. . ." The order of November 25, 1970, was at least in part such an order. It provided, inter alia:

(1) that AMAX offer to non-AMAX shareholders of defendant RST a pro rata share in RST, International;

(2) that AMAX be enjoined from causing its agent to mail the transmittal letter to the RST shareholders; and

(3) that AMAX be enjoined from withdrawing from the Court the $10 million in security theretofore deposited.

The January, 1971 orders continued several of these injunctive provisions (e. g., those that enjoin withdrawal of the $10 million in the escrow account). In addition, these orders originated several injunctive provisions, namely: those relating to the payment of dividends on several classes of securities and to the undertaking of the effort and expense of investigating alternatives to the plan proposed before the Zambian government.

These provisions are injunctions within the meaning of section 1292 (a) (1). Cf. Sims v. Greene, 160 F.2d 512 (3d Cir. 1947). See also Dilworth v. Riner, 343 F.2d 226 (5th Cir. 1965). Given jurisdiction over these aspects of the district court's orders we can review the merits of the entire case as it now rests. See Smith v. Vulcan Iron Works, 165 U.S. 518, 525, 17 S. Ct. 407, 41 L. Ed. 810 (1897). See also Highland Avenue & Belt Rr. Co. v. Columbian Equip. Co., 168 U.S. 627, 630, 18 S. Ct. 240, 42 L. Ed. 605 (1898). As stated by the Smith Court, in construing the statute which section 1292(a) (1) succeeded, this provision authorizes, "according to its grammatical construction and natural meaning, an appeal to be taken from the whole of such interlocutory order or decree, and not from that part of it only which grants or continues an injunction." 165 U.S. at 525, 17 S. Ct. at 410. Accord Allstate Insurance Co. v. McNeill, 382 F.2d 84, 87-88 (4th Cir. 1967) (construing 28 U.S.C. 1292(a) (1)). See also Wright, Federal Courts 400 (1963).

We conclude that the orders of November 25, 1970 as amended by the January orders are appealable. We proceed to consider the district court's holding that in several respects RST's proxy materials violated Rule 10b-5.

10b-5 VIOLATIONS

A. CREATING THE FALSE IMPRESSION THAT THE AMAXRST AMALGAMATION WAS A NECESSARY CONSEQUENCE OF THE NATIONALIZATION

The district court held that RST's proxy materials inaccurately portrayed the proposed amalgamation between AMAX and RST. In reaching its decision the court relied principally on the misleading manner in which the nationalization and amalgamation plans were presented. It found that the proxy materials, particularly the descriptive language contained in the initial pages of the Explanatory Statement, were designed to create the false impression that the amalgamation, on the basis of the terms specified by the explanatory materials, was an inevitable consequence of Zambian nationalization. Thus, fraud was found.

Obviously, if nationalization appeared unavoidably imminent and the proxy materials were interpreted as meaning that the proposed amalgamation was the sole method of externalization presently acceptable to the Zambian government, the RST shareholders predictably would not question the absence of alternative proposals for externalization which might be more advantageous to non-AMAX interests. In concluding that such was the intended design of the proxy presentation, the district court based its conclusion primarily on the following passages from the introductory pages of the Explanatory Statement:

"This Explanatory Statement describes the proposal of the RST Board that the shareholders of RST approve this sale to Zimco (the nationalization) as part of their approval of a reorganization of the structure of the RST Group . . . (emphasis supplied)

At an early stage of this consideration, Amax raised with RST the possibility of an amalgamation of part of the RST Group into Amax, with a distribution of other RST assets and AMAX securities to the other RST shareholders, as a means of effecting a reorganization to meet the foregoing considerations . . .

Approval is being sought from RST shareholders of the foregoing proposal as a whole. Under the law of Zambia, this proposal, since it involves a reduction of capital of RST, cannot become effective unless confirmed by the High Court for Zambia after it has been approved by the shareholders of RST by a special resolution.

Accordingly, this distribution will enable such RST shareholders to the maximum extent permitted to continue an interest in the Zambian mining operations directly and subject to generally the same tax laws and treaty considerations as pertain to their present RST shares . . . while receiving the other assets being distributed to them free of Zambian exchange control restrictions; and to the extent RST shareholders obtain AMAX common stock by exercising the AMAX Warrants being distributed, they will secure through AMAX an interest in such portion of RCM as AMAX may own.

The Board believes it has a duty to point out to shareholders that, if the Resolutions are not approved by the shareholders, the Board of RST must continue to work with representatives of Zambia for the acquisition by Zambia of 51% interest in the Zambian mining, smelting and refining operations of its subsidiaries in accordance with the announced policy of Zambia to acquire such an interest. The Board believes that the results of such a course would be substantially less in the interests of shareholders than the present proposal."

Defendants contend that certain parts of the materials, other than those quoted above, accurately point out that amalgamation and nationalization were independent. We have reviewed the materials and do not agree with this contention. Indeed, an examination of the proxy materials suggests that its authors made a studied effort to avoid stating explicitly that either amalgamation and nationalization were absolutely independent or they were absolutely interdependent. Of course, it is the defendants' position that regardless of this observation it was not necessary for the materials to state specifically that the two transactions were independent, since "manifestly and obviously the Zambian government would have no conceivable reason to require that RST distribute assets to its shareholders, amalgamate with AMAX, or exercise its contractual right to remove its assets from Zambian jurisdiction." The point is, however, that the proxy materials made such a "manifest and obvious" impression unreasonable since they suggested to the reader that amalgamation and nationalization were required to be a unitary package. The fact that defendants can demonstrate that the Zambian government had no reason to require that RST distribute assets to the shareholders is not sufficient to overcome the effect of the language employed in the proxy materials. We therefore agree with the district court that the language of the Explanatory Statement impermissibly suggests that nationalization and amalgamation were interdependent and, under the circumstances, was a material misrepresentation.

B. LINKING AMALGAMATION AND NATIONALIZATION IN A UNITARY PROPOSAL TO THE SHAREHOLDERS

Amalgamation and nationalization were presented for a shareholder vote as a unitary proposal. Shareholders could not approve one while rejecting the other. The choice was to accept both or to reject both. The district court found that this unitary presentation, without the proponents thereof giving reasons therefor, was a manipulative scheme to coerce shareholder approval of the amalgamation. It concluded that this linking reinforced the false impression that the two actions were interdependent.

The defendants contend that compelling business reasons dictated that the proposals be presented in unitary form. The foundation for these compelling reasons was that if the shareholders approved the nationalization agreement but rejected the amalgamation, Zambia then would have nationalized RST's property without RST having taken advantage of its bargained-for right to externalize its non-nationalized assets. In other words, if nationalization and externalization did not proceed simultaneously, the RST assets remaining non-nationalized would be subject to substantial political risks.

Defendants' argument fails to explain why RST could not have sought approval of the externalization plan first, followed by nationalization. It also does not explain why alternative externalization plans could not have been presented simultaneously with the plan for nationalization. In any event, we agree with the district court that it was a material violation not to have disclosed to the shareholders the alleged compelling business reasons for presenting the proposals in one package.

C. THE IMPLICATION THAT SHAREHOLDER APPROVAL WAS PREREQUISITE TO NATIONALIZATION

We have serious doubt as to the correctness of this ruling by the district court. However, because this issue is closely connected with the violation found concerning the linking of the amalgamation and nationalization proposals and because of our agreement with some of the lower court's findings of other violations of Rule 10b-5, we do not decide whether the district court correctly decided that defendants' proxy materials violated the Rule by implying that shareholder approval was prerequisite to nationalization.

D. FAILURE TO DISCLOSE THAT EXTERNALIZATION WAS DISCRETIONARY AND NEED NOT HAVE BEEN SIMULTANEOUS WITH NATIONALIZATION

The district court also found that RST should have disclosed in the proxy materials that externalization of assets was discretionary under the agreement with Zambia and, if approved, need not have been simultaneous with nationalization. The court held that failure to disclose this fact violated Rule 10b-5 because it contributed to creating the false impression that amalgamation was required to be concomitant with nationalization. We agree.

E. FAILURE TO DISCLOSE ALTERNATIVE PLANS FOR EXTERNALIZATION

The district court found the failure of the proxy materials to disclose that RST had considered plans for externalization other than the proposed amalgamation of RST and AMAX to be a material omission. Likewise, it found the failure of the materials to note that, in fact, one such alternative involving RST's becoming an international mining house had been approved by the RST Board before the AMAX transaction was negotiated also to be violative of the Rule. Because the underlying findings of the district court are somewhat inconsistent and because we have sustained several other findings of Rule 10b-5 violations, we do not decide whether failure to disclose alternatives was a material omission in the proxy.

F. FAILURE OF THE PROXY MATERIALS TO ADEQUATELY DISCLOSE THE BASIS UPON WHICH RST'S ASSETS WERE EVALUATED

The district court held that a "clear presentation of the values assigned the RST assets . . . and the basis upon which the evaluations were made were crucial to an informed shareholder vote, and the omission of these facts from the explanatory materials was material." The court suggested that the proxy materials intentionally contained no presentation of RST's asset values because these assets were substantially undervalued by the terms of the AMAX-RST negotiations.

Ordinarily the SEC and the courts discourage presentations of future earnings, appraised asset valuations and other hypothetical data in proxy materials. See Union Pac. R. v. Chicago & Nw. Ry., 226 F. Supp. 400, 408-09 (N.D.Ill.1964). But see Gerstle v. Gamble-Skogmo, Inc., 298 F. Supp. 66 (EDNY 1969) (presentation of book value misleading when substantially less than fair market value). We think this general rule should apply here. No truly reliable estimates of value ever materialized. The figures which the district court concluded should have been disclosed were all advanced by the parties during negotiations only and as part of their bargaining strategies. Under such circumstances we think the district court was not warranted in concluding that the omission from the proxy materials of the RST asset valuations was material.

G. INADEQUATE DISCLOSURE OF THE UNIQUE BENEFITS AMAX WAS TO OBTAIN INCIDENT TO THE AMALGAMATION

The district court found that the benefits AMAX was to obtain as a result of the amalgamation were inadequately disclosed to the RST shareholders. In view of the close ties between AMAX and RST we agree that such disclosure would have been particularly important. The benefits accruing to AMAX included: (1) an increase of $7 million in annual income; (2) an improvement of $134 million in cash-flow during the period 1970 to 1975; (3) an improvement of $91 million in the corporation's balance of payments; and (4) the acquisition of high-yielding assets. We think the district court was justified in concluding that the piecemeal presentation of these benefits scattered throughout the proxy materials and the appendices was inadequate disclosure under the securities laws.

Defendants contend that although their own presentation may indeed have been piecemeal, the shareholders were fully apprised of the benefits accruing to AMAX by means of the letter of plaintiff Kohn which was included in the proxy materials sent pursuant to court order and which urged the shareholders to vote against the proposal. It is true that proxies need not contain information contained in other solicitation material as long as the proxies clearly refer to such other material. See Rule 14a-5, 17 C.F.R. § 240.14a-5(c). But a reading of Rule 14a-5 in its entirety reveals that its sole purpose is to control the manner of presentation of data within proxies. It is aimed at reducing repetition within materials sent to stockholders. It does not authorize opposing sides in proxy contests to use one another's materials by reference. Consequently, any otherwise material violation of the disclosure rules is not obviated by referring to materials of an opposing soliciting party. The result is the same even if the issue is considered apart from Rule 14a-5. If McConnell v. Lucht, 320 F. Supp. 1162 (SDNY 1970), can be read to the contrary, we disagree with it.

Indeed, of decisive importance here, Kohn's letter set forth his attack on the fairness of the amalgamation. He did not purport to set forth the other material misrepresentations in the proxy statement. His position on this point was preserved in the court's order.

H. STATEMENT THAT RST SHAREHOLDERS WOULD, BY VOTING FOR THE PROPOSAL, OBTAIN THE MAXIMUM POSSIBLE INTEREST IN ZAMBIAN MINING OPERATIONS

The district court found misleading the language in the proxy materials to the effect that the proposal allowed the RST shareholders to continue their direct interest in Zambian mining operations "to the maximum extent permitted." The Statement claimed:

Accordingly, this distribution will enable such RST shareholders to the maximum extent permitted to continue an interest in the Zambian mining operations directly and subject to generally the same tax laws and treaty considerations as pertain to their present RST shares . . . while receiving the other assets being distributed to them free of Zambian exchange control restrictions; and to the extent RST shareholders obtain AMAX common stock by exercising the AMAX Warrants being distributed, they will secure through AMAX an interest in such portion of RCM as AMAX may then own.

The court found this statement misleading because of its implication that the shareholders by adopting amalgamation would receive the maximum interest allowable in the RCM shares and other assets.

On analysis it becomes clear that as to the RCM shares the shareholders did in fact receive the maximum interest it was permissible to distribute. Had there been no amalgamation with AMAX, it is not true that RST shareholders could have obtained a higher percentage of RCM stock. Under the Agreement with Zambia, 51% of the RCM stock was owned by Zambia and 12 1/4% belonged to the Anglo-American Corporation Group which owned a minority interest in several RST subsidiaries. The remaining 36 3/4% was to be divided between AMAX and the other RST shareholders. However, under the terms of the Zambian Agreement, the holder of the management contract had to retain a 20% interest in RCM. Thus, only 16 3/4% remained available for distribution to the RST shareholders and they received this percentage pursuant to the amalgamation proposal. The disproportionate amount of RCM shares received by AMAX was due to the 20% clause in the Zambian nationalization agreement and not due to the amalgamation. Breach of the 20% clause would have precipitated forfeiture of the management contract and eventuated an unfortunate loss of a potentially profitable asset. We conclude that the Explanatory Statement was not misleading as to the proportion of RCM stock available for distribution to the non-AMAX shareholders of RST and hold that the district court's finding to the contrary was clearly erroneous.

The court below also found that the presentation of the proposal concealed the fact that "if there were no amalgamation . . . the stockholders of RST would have been entitled to their own pro rata interest in all of the assets acquired by AMAX, including the disproportionate interest in . . . the management contract, the Ametalco group, and their interest in the miscellaneous assets." The Statement does not refer to other assets split disproportionately between AMAX and the other RST shareholders, however. Rather, it refers generically to "mining operations." The management contract, the Ametalco group, and the miscellaneous assets, specified by the district court as misleadingly treated in this part of the Explanatory Statement, were not actually "mining operations." We therefore conclude, contrary to the district court, that the quoted excerpt from the Statement accurately described the situation with respect to the RCM shares and that no improper implication existed concerning the other assets pointed to by the court below.

I. CONFLICTS OF INTEREST OF RST DIRECTORS AND BANKING ADVISERS

The district court found that the interests of individual RST directors in the amalgamation proposal were insufficiently disclosed in the proxy materials. While we recognize the necessity for shareholders to be informed of the extensive conflicts of interest here present, we cannot agree with the district court's conclusion that such were not adequately disclosed.

Directly after the paragraph of the Explanatory Statement which sets forth the recommendation of the RST Board this heading appears in boldfaced type: "6. Interests of Directors, Advising Bankers and Others." The text of this section and the parts of the Statement Appendices referred to therein fully document all the relevant conflicts of interest. We think this presentation satisfied the equal prominence rule.

The recommendation of the RST Board also is in boldfaced type. Appearing in Item 5 of the Statement, it urges shareholders to approve the proposal. The third paragraph of Item 5 states that, except for six directors who abstained from voting due to their positions with AMAX, the RST Board was unanimous in its approval of the amalgamation proposal. The paragraph immediately following then states that Item 6 and Appendix O describe the "interests in the proposal of directors of RST and others and provide information concerning the directors of RST who are also directors or officers of AMAX or its largest shareholder, Selection Trust Limited. . . ." Item 6 initially refers the reader to Appendix O. It then proceeds to disclose AMAX's 42.3% ownership of RST and the interrelationship between AMAX and RST resulting from the fact that certain named individuals were officers and/or directors of both companies. Item 6 also sets forth the shareholdings of various individuals in AMAX and RST. Appendix O contains comprehensive information about the interrelationship of RST directors with AMAX and Selection Trust Limited. It also lists the shareholdings of these individuals in AMAX and RST.

The fact, relied upon by the district court, that the RST Board recommendation appears in boldfaced type whereas only part of the disclosures of conflicting interests so appears does not in our view, violate the equal prominence rule. Nor is the rule violated because some of the interest disclosures were made only in the Appendices. Reasonable latitude in this area is important if nit-picking is not to become the name of the game.

The district court considered it particularly important that the identities of the four participants in the AMAX-RST negotiations be disclosed. Prain and Vuillequez, RST officers, were negotiators for RST and were also interested in AMAX either as directors or through stock ownership. Donahue and MacGregor, AMAX officers, were negotiators for AMAX. They also were directors of RST. Undeniably, disclosure of these dual loyalties might have dramatized more clearly the conflicts of interest existing here. However, considering the Explanatory Statement in its entirety, we think the district court's finding on this point exacts undue disclosure in this particular case. The exhaustive explicatio of RST directors' conflicts of interest sufficed to alert the shareholders of possible bias affecting the AMAX-RST negotiations.

The district court also found that the possible allegiances of N. M. Rothschild & Sons with AMAX and RST were insufficiently disclosed. The firm was the financial adviser of RST during the amalgamation discussions. Its opinion approving the final proposal appears boldfaced at the outset of the Explanatory Statement. Item 6 of the Statement notes that Rothschild had performed sundry services for AMAX in earlier transactions and that the consideration paid had approximated $46,000. The reader also is referred to Appendix O where the Rothschild shareholdings are disclosed. It is revealed that the firm held almost 53,000 shares of RST stock and none of AMAX. We think these disclosures adequately document the Rothschild firm's interests in AMAX and RST and conclude that the district court's finding to the contrary was clearly erroneous.

J. FAILURE TO DISCLOSE THAT RST'S BANKING ADVISERS DID NOT MAKE AN INDEPENDENT SURVEY OF RST'S ASSETS

The district court found that insufficient emphasis was given by the proxy materials to the fact that the endorsement of RST's investment advisers was not based on an independent survey of the assets and operations of RST. The bankers' approval of the proposed amalgamation relied solely on data supplied by the RST management. This fact is disclosed in Appendix Q. However, no reference is made to this appendicized disclosure at the outset of the Explanatory Statement where the investment advisers' approval of the amalgamation proposal appears. Considering that disclosure of the basis for the advisers' recommendation was of signal importance, we find no error in district court's conclusion that the failure to direct the readers to the disclosures made in Appendix Q constituted a material omission violative of Rule 10b-5.

K. THE FAILURE TO DISCLOSE THE ROLE OF THE LAW FIRM, SULLIVAN & CROMWELL

Sullivan & Cromwell is a New York law firm which the district court found had "placed itself in a clear position of conflict of interest" by "advis[ing] RST in its negotiations with the Zambian Government and continu[ing] to represent both AMAX and RST even after the amalgamation was proposed." 322 F. Supp. at 1362. The firm had represented both RST and AMAX for over thirty-five years preceding this litigation. The court felt that it was a material omission from the proxy statement not to disclose the capacity in which the firm acted during the nationalization and amalgamation negotiations. As expressed in the district court's opinion, "it would be important for shareholders, in evaluating the advice of RST directors to vote in favor of the amalgamation, to know that through December, 1969 RST was being advised by lawyers who were also advising AMAX" Id.

We do not think the record supports the court's finding that Sullivan & Cromwell's activities created a conflict of interest which the defendants were obligated to disclose. Defendants admit that representation by Sullivan & Cromwell of both AMAX and RST continued until late December, 1969. They admit also that this was during the period when amalgamation with AMAX was a possible alternative under consideration by the RST management. Defendants contend, however, that at no time during this period were the interests of AMAX opposed to those of the other RST shareholders. Rather, the conflict first arose when AMAX and RST commenced to negotiate amalgamation of RST with AMAX as a means of externalization. Defendants say that when this occurred Sullivan & Cromwell immediately advised RST that it could not represent it in such negotiations and that, pursuant to Sullivan & Cromwell's recommendation, RST retained new counsel for purposes of the amalgamation bargaining. In fact the district court found that from the outset of the RST-AMAX negotiations RST was represented by the New York firm of Winthrop, Stimson, Putnam & Roberts, as well as by English counsel.

From a review of the record we find that three dates emerge as pivotal in analyzing the district court's conclusion that a conflict of interest existed as to Sullivan & Cromwell's representation. The first is December 11, 1969, the date on which MacGregor on behalf of AMAX proposed amalgamation to RST. Next is December 22, 1969, when the RST Board gave final approval to the Zambian-RST Agreement. Finally, there is January 9, 1970, the date of the first amalgamation negotiating session between RST and AMAX.

No evidence in the record permits an inference that after December 22, 1969, when the Zambian negotiations had ended, Sullivan & Cromwell advised RST to any extent concerning alternative means of externalization. Thus, the only period which need be considered is that from December 11, 1969, through December 22, 1969. During this time the Zambian negotiations still were not concluded. Consequently, the interests of RST and AMAX in these negotiations properly could be represented jointly by one counsel without any suggestion of a conflict of interest. Nothing in the record demonstrates that during this time Sullivan & Cromwell attempted dual representation of AMAX and RST concerning the amalgamation proposal. We do not consider the firm's efforts to advise RST generally concerning the several alternatives for externalization then being discussed as evidencing such a conflict.

We therefore conclude that the district court's finding that there was a material omission arising from the failure of the proxy materials to disclose the role of Sullivan & Cromwell was based on a clearly erroneous factual premise that the firm was in a conflict of interest position with respect to the negotiation of the terms of the amalgamation.

Conclusion

We have affirmed several findings of the district court that the proxy material violated 10b-5. It is equally clear that the district court found that such misrepresentations were material. We agree because we are satisfied that the proxy violations related to subject matter "[which] might have been considered important by a reasonable shareholder who was in the process of deciding how to vote." Mills v. Electric Auto-Lite, 396 U.S. 375, 384, 90 S. Ct. 616, 621, 24 L. Ed. 2d 593 (1970). Although Mills involved section 14, we are satisfied that the quoted materiality test is equally applicable to an alleged 10b-5 violation. Finally, we do not believe it is a defense to a finding of material violations of 10b-5 to say that some stockholders "discovered" the misrepresentations before the vote and thus were not misled, and therefore, since they were the class representatives, the entire class is precluded from obtaining any remedy. Compare Crane Co. v. Westinghouse, 419 F.2d 787, 797 (2nd Cir. 1969). We think those alleging a violation of Rule 10b-5 have an obligation to show a fraudulent and material misrepresentation and that, to the extent a reliance factor is required, in the present context it is encompassed by the finding that the misrepresentation was material.

We come finally to a consideration of defendants' attack on the remedy granted by the district court. By one of its supplementary orders entered in January 1971 the district court determined that those minority stockholders who elected to take under the terms of the amalgamation were also entitled to damages to compensate them for the loss resulting from the undervaluation of certain assets involved. Defendants insist that the district court was foreclosed by the Zambian decree from inquiring into the fairness of the amalgamation.

It is not entirely clear whether the district court's finding of unfairness was based on a finding of a violation of Rule 10b-5 or of some other corporate fiduciary law. Insofar as the Rule violations are concerned we are convinced that the district court was not free to ignore the Zambian decree. The decree involved the conduct of a Zambian corporation. It was entered by judicial action pursuant to statutory authority after a hearing on due notice. In these circumstances the district court could not look behind the decree even at the behest of American security holders. Canada Southern Ry. v. Gebhard, 109 U.S. 527, 3 S. Ct. 363, 27 L. Ed. 1020 (1883). If the district court's finding of unfairness can be said, doubtfully, to be based on some state corporate fiduciary law we think the same basic considerations we have mentioned require that comity be afforded the Zambian decree.

Consequently, we conclude that the district court was in error to the extent it determined that damages should be awarded on the basis of its finding that the amalgamation was unfair.

Our consideration of the effect to be given the Zambian decree does not end the matter. We say this because the district court found and we have affirmed its findings as to several material violations of Rule 10b-5. Those findings do not relate to the terms of the merger and thus do not impinge upon our ruling giving effect to the fairness finding of the Zambian decree. Rather the findings go to the adequacy of the disclosure. Thus, they may have influenced the stockholder vote regardless of the fairness of the amalgamation. In these circumstances we think the court is obligated to provide a remedy. Otherwise the Congressional policy implicit in federal securities regulation in this country would be seriously frustrated. Mills v. Electric Auto-Lite, 396 U.S. 375, 90 S. Ct. 616, 24 L. Ed. 2d 593 (1970).

The district court ordered that defendants should offer plaintiffs' class the right to exchange what they received for a proportionate interest in RST International. The district court reasoned that since rescission was not feasible the most appropriate and equitable way to implement the finding of a violation of Rule 10b-5 was to grant the minority stockholders of RST equity participation in RST International, the receptacle for most of the assets of RST Limited. We think this exchange was a reasonable means of remedying the proxy rule violations in a case where rescission was not practical.

The plaintiffs argued to the district court that the exchange offer remedy would subject those accepting it to a loss of Zambian tax credits to which they were entitled on their old holdings. The court ordered supplementary hearings to determine the legality and feasability of a so-called twinning plan, presumably designed to give them securities which might avoid the loss of the tax credit. It ordered further hearings to determine, alternatively, whether monetary relief should be granted for the loss of the tax credit by those accepting the exchange offer.

Even on this record we think the twinning proposal is so far removed from business reality that its approval could not withstand review. We therefore reverse the order of the district court to the extent it directs further proceedings as to its feasibility. Nor do we think the district court was free to grant damages for loss of the Zambian tax credit to the members of plaintiffs' class who elected to accept defendants' exchange offer. We say this because the impetus for the reorganization was the desire to externalize assets. Given this pervasive business reason, it is evident that once twinning is determined inappropriate there could be no retention of the tax credit. It was therefore not a proper element of damage even by way of implementing the exchange offer.

We conclude that it was error for the district court to order further proceedings on these matters.

Since we have concluded that the district court was not warranted in ordering additional proceedings looking to the possibility of granting further relief to the class, it is unnecessary for us to reach defendants' argument that the district court's action in ordering further hearings violated the stipulation that a jury trial was waived on the condition that there be a "single unitary final hearing."

Appeals Nos. 19,175 and 19,176 will be dismissed as moot. The orders from which the other four appeals were taken (Nos. 19,537, 71-1099, 19,538, 71-1100) will be affirmed as modified in this opinion. In view of our disposition of defendants' appeals, plaintiff's appeal (No. 71-1101) will be dismissed.

APPENDIX

ELEMENT OF CULPABILITY IN 10b-5 AND RELATED CASES*fn*

Decision on Pleadings or

Name of Case & Citation Nature of Cause of Action Merits

Troutman v. United Criminal prosecution Judgment of

States, for use of mails conviction af-

in furtherance of a firmed.

scheme to defraud

100 F.2d 628 and for violation of

(10th Cir. 1938) § 17 of 1933 Act

by misrepresentation.

Rice v. United States, Criminal prosecution Judgment of

for use of mails conviction af-

to defraud by violating firmed.

§ 17 of 1933

149 F.2d 601 Act by misrepresenting

(10th Cir. 1945) the projected

size of the venture,

its financial

strength, income and

dividend his-

tory, etc.

Kardon v. National Private action for Motion to dismiss

damages arising out complaint

Gypsum Co., of sale of stock to denied.

persons in control

69 F. Supp. 512 of corporation who

(E.D.Pa. 1946) made false or mis-

leading statements.

Fischman v. Raytheon Private action for Dismissal of

Mfg. Co., damages arising complaint re-

out of untrue statements versed.

in a prospec-

188 F.2d 783 tus or registration

statement. (2nd Cir. 1951)

Matheson v. Armbrust, Individual shareholder's Judgment for

action to can- plaintiff af-

cel sale of stock to him firmed.

and for dam-

284 F.2d 670 ages, where sale was

(9th Cir. 1960) prompted by

gross misstatements

concerning the

financial condition

and earnings of

the company.

Ellis v. Carter, Private action for Motion to dismiss

damages arising complaint.

from a joint venture

to acquire con-

291 F.2d 270 trol of a corporation,

(9th Cir. 1961) wherein defend-

ants misrepresented

that if plaintiff

purchased shares

at prices higher

than market value,

he would thereby

obtain a voice in

management

Royal Air Properties, Private action for Judgment entered

Inc. v. Smith, damages arising for defen-

out of purchase of dant.

stock in corpora-

312 F.2d 210 tion building

(9th Cir. 1962) apartments based on

misleading prospectus

which omitted

reference to certain

costs and debts

of the corporation.

Kohler v. Kohler Co., Private action for Judgment for

damages arising defendant af-

from sale of stock to firmed.

close corporation

319 F.2d 634 based on

(7th Cir. 1963) misrepresentations and

omissions.

SEC v. Capital Government injunctive Appeal from

Gains Research action under denial of pre-

Bureau, Inc., Investment Advisors liminary

Act of 1940 to injunction after

compel registered hearing

advisor to disclose

375 U.S. 180, 84 S. Ct. to customers his

275, 11 L. Ed. 2d 237 practice of buying

(1963) securities,

recommending purchases

by clients, and

then selling at a profit

when clients'

purchases caused in-

crease in price

United States v. Criminal prosecution Appeal from

Benjamin, of accountant criminal convic-

for violation of tion.

Securities Act of 1933,

328 F.2d 854 (2nd involving false

Cir.) cert. denied, descriptions of assets

377 U.S. 953, of corporation.

84 S. Ct. 1631,

12 L. Ed. 2d 497 (1964)

Trussell v. United Private action by Motion to dismiss

Underwriters, Ltd., purchasers of stock complaint

against sellers for granted in part.

damages, where

228 F. Supp. 757 sellers affirmatively

(D. Colo. 1964) misrepresented

future worth, etc., and

failed to dis-

close adverse factors.

Weber v. C.M.P. Corp., Private action for Motion to dismiss

damages resulting complaint

from sale of stock by granted in part.

242 F. Supp. 321 corporation

(S.D.N.Y. 1965)

Stevens v. Vowell, Private action to recover Judgment for

amount paid plaintiff af-

for purchase of stock firmed.

in corporation

343 F.2d 374 to be formed, where

(10th Cir. 1965) fraud went to

ownership of an

invention as well as

to intent to build

archery lanes.

Parker v. Baltimore Action by reorganization Judgment for

Paint & Chemical trustee of defendant.

Corp., debtor corporation

to rescind sale of

securities, where

purchaser misused

244 F. Supp. 267 its power to bring

(D. Colo. 1965) about a merger and

to deprive seller

of the fruits of the

transaction

A. T. Brod & Co. Action by stockbroker Trial court

v. Perlow, against custo- dismissed com-

mer for failure to plaint because

pay for securities fraud not

375 F.2d 393 ordered by customer spelled out.

(2nd Cir. 1967)

Mutual Shares Corp. v. Shareholders' action Appeal from

Genesco, Inc., for injunctive dismissal af-

relief and damages firmed in part

resulting from and reversed

384 F.2d 540 manipulation of price in part.

(2nd Cir. 1967) by controlling

shareholders to gain

control of corpo-

ration in order to divert

its assets.

Myzel v. Fields, Private action for Judgment for

damages arising plaintiffs af-

from sale of stock in firmed.

close corporation

386 F.2d 718 where corporation

(8th Cir. 1967) cert. did not disclose

denied, increased sales,

390 U.S. 951, 88 S. Ct. increased profits, and

1043, 19 L. Ed. 2d 1143, other critical facts.

(1968)

Pappas v. Moss, Derivative action for Finding of

damages based liability against

on sale of treasury ...


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