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 Manufacturing.
    • Auto-Lite’s directors send out a proxy statement recommending approval, and the Auto-Lite shareholders voted in favor of it.
  • Several Auto-Lite 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 statements.
      • 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 and remanded.
    • 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.
      • Otherwise, even “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 transaction.
      • 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 transaction.
  • 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)).