Fed. Sec. L. Rep. P 98,601 South Coast Services Corp., a California Corporation v. Santa Ana Valley Irrigation Co.

669 F.2d 1265

• Court: Court of Appeals for the Ninth Circuit
• Decided: February 24, 1982
• Docket: 78-1964
• Status: Published

Opinions

POOLE, Circuit Judge:

This lawsuit concerns the adequacy of proxy statements soliciting shareholder approval of the sale of the assets of Santa Ana Valley Irrigation Company (SAVI) to Intercoast Investments, Inc. (Intercoast). Plaintiffs-Appellants, invoking this court’s jurisdiction under 28 U.S.C. § 1291 (1976), appeal from an order of the District Court for the Central District of California denying a claim for injunctive relief for alleged violations of section 14(a) of the Securities Exchange Act of 1934 (the Act), 15 U.S.C. § 78(n) (1976) and Rule 14a-9 of the Securities and Exchange Commission, 17 C.F.R. § 240.14a-9 (1981). Because we find that the proxy materials in question were not materially false or misleading we affirm the judgment of the district court.

FACTS

Appellants are former shareholders and directors of appellee corporation, Santa Ana Valley Irrigation Company (SAVI). SAVI was organized in 1877 to distribute water to irrigate the farms of its member shareholders in what is now the eastern portion of Orange County, California. As urban sprawl displaced farming in southern California, SAVI’s emphasis shifted from irrigation to real estate holding and development. By the end of 1974 all irrigation operations had been phased out.

In 1977, the year this litigation began, SAVI had diverse land holdings totalling approximately 1,134 acres and was a member of various partnerships and joint ventures engaged in land development. There were 9,281.01 shares of stock outstanding: the approximately 1,400 shareholders were mainly retired farmers, churches, school districts and municipalities. There was no established market for SAVI stock, although occasionally in the three years prior to 1977 a few shares were traded for prices ranging from $400 to $700 per share. The board of five directors collectively owned only about 3% of the outstanding stock. The board was self-perpetuating, there having been no shareholder election of directors in forty or fifty years.

In early 1977 discussions regarding the sale of SAVI commenced between S A Vi’s General Manager, Thomas Terry, and one Robert Walker. In March, Terry assisted Walker in acquiring the services of Cedric White, a professional real estate appraiser familiar with the SAVI properties. On April 21, 1977, Terry presented to the board on Walker’s behalf an offer to purchase SAVI’s assets for $700 per share or $5,800,-000 total. The board rejected the offer, at least in part because of a lack of information on which to assess its sufficiency and to make a recommendation to shareholders. Awareness of this inadequacy and anxiety regarding a possible tender offer from Walker spurred the board to seek the services of a professional appraiser. White, the logical choice, refused on the basis of a conflict of interest, since he had already been retained by Walker. White subsequently asked the board for some information to assist him in making his appraisal. The board conditioned the release of the information on receipt of a copy of the appraisal when finished. White told the board that he could not give them a copy since the appraisal was the property of Walker. White continued his efforts without the information from the board.

Inquiries to other appraisers caused the board to conclude that appraisal of all assets by outside appraisers would be too costly and time consuming. The board settled on a plan whereby professional appraiser Robert Harrison was engaged to appraise only Weir Canyon and a portion of Green River, the two parcels considered the most difficult to evaluate, while management and the board estimated the value of the balance of the properties. In June 1977, the SAVI board instructed its accounting firm to prepare a balance sheet of corporate assets including the historical cost and estimated market value of each property (from information to be furnished by the board and Harrison) with the thought that such figures could be given to the shareholders in response to a possible tender offer from Walker.

To arrive at market values for the properties that were not appraised by Harrison, the board members and general manager, Terry, met and discussed their individual estimates of the value of each separate property. No guidelines were established and no method of evaluation was followed. Instead, each director, on the basis of his own experience and knowledge of the properties, suggested a high, medium and low value for each parcel. Some directors did not give their estimates in writing, and underlying assumptions were not discussed. None of the figures discussed was approved by a vote of the board. Instead, the general manager selected in some fashion from the individual estimates a high, medium and low estimated market value for each property and transmitted this to the accountants. The totals for all the properties if sold individually ranged from a low of $8,150,000 to a high of $12,950,000, compared to a cost basis of $3,349,379.

John Graham, SAVI’s accountant, advised the board that, because the estimates were based on speculation and unconfirmed assumptions, the documents he prepared should be restricted to internal use by the board. A cover letter attached to his report contained a disclaimer as to the accuracy or reasonableness of the estimated market values contained therein.

As word circulated that the company was contemplating a sale of all its assets, several potential purchasers surfaced. Shappel Industries expressed strong interest, and, in the course of discussions with SAVI, representatives of Shappel were furnished with a copy of the Harrison appraisals and the board estimates. Meanwhile, Terry had been discussing a possible sale with Inter-coast. The negotiations ripened into an offer from Intercoast on July 13, 1977, to purchase SAVI’s assets at $800 per share, or $7,425,000 total. On July 18, 1977, the board voted to send a letter to Intercoast rejecting the offer but indicating continuing interest and, further, to send it the same valuation information furnished to Shappel.

Two days later a meeting of the SAVI board was called to discuss a one day only offer from Intercoast to purchase SAVI’s assets for $950 per share ($8,994,000 total). As part of the offer, Intercoast agreed to accept SAVI’s tax liabilities and pay all costs relating to shareholder approval. The meeting was interrupted by telephone calls from outside companies, including Cadillac-Fairview and Signal Oil, expressing interest in meeting with the SAVI board to discuss the possibility of a purchase. Most notably, Shappel called director Pankey and mentioned a possible $1,300 per share purchase price if the Weir Canyon property could be developed within three years. None of these companies presented a firm offer to purchase SAVI. After lengthy discussion, the board voted three to two to accept the Intercoast offer. Pankey and Balmer, also appellants in this suit, were the two dissenting directors.

On August 18, 1977, by the same three to two majority, the board voted to approve a final agreement providing for the sale of substantially all of SAVI’s assets to Inter-coast. On that same date, the board unanimously approved a proxy statement soliciting shareholder approval of the sale and authorized the filing of this statement with the Securities and Exchange Commission (S.E.C.). On September 28, 1977, the board approved final proxy materials which were subsequently approved by the S.E.C. on October 6, 1977. On October 7, 1977, the proxy materials were mailed to SAVI’s shareholders.

The textual portion of the proxy statement noted the three to two division in the board and stated that the majority had considered the alternatives of a possible sale to a third party, a series of separate sales over time, and continued operation, and that it had concluded that a sale to a third party would maximize return and minimize risk to the shareholders. The statement also informed the shareholders that the majority considered the Intercoast offer fair and more favorable than other proposals considered by the board while the dissenters believed that the SAVI properties were worth more than Intercoast was offering. The statement explained that both the majority and the dissenters had reached their conclusions on the basis of their general knowledge of SAVI and the value of its assets.

The materials additionally stated that SAVI had no current appraisals on any of its properties except Green River and Weir Canyon. It was explained that the board had not obtained current appraisals of the other properties because of the expense and because current market information concerning them was more readily available. No mention was made of the balance sheet prepared by the accountants showing the board’s valuations of the properties. In another section, the proxy statement set forth a full description of each property, noting factors bearing on development potential. The descriptions of Green River and Weir Canyon were augmented by the Harrison appraisal, and in each instance the appraisal was qualified by a disclaimer stating that an appraisal is only an opinion and that there was no assurance that the appraised value represented the realizable value of the property.

On November 4, 1977, the board sent a supplemental letter to the shareholders partly in response to shareholder inquiries whether the board was aware of any existing appraisal report relating to all of SAVI’s properties. The letter referred to the appraisal report made by White on Walker’s behalf and stated that SAVI was not involved in its preparation and had no rights to it. The letter further disclosed that the board had been advised that the appraisal placed a value on the properties considerably in excess of the purchase price offered by Intercoast and counselled against overly relying upon appraisals. The letter repeated the majority’s recommendation of acceptance and noted the dissenters’ belief that the value of the properties was higher than the offer by Intercoast. The board voted three to two against including its own valuations in the supplemental letter.

At a special meeting of the shareholders on November 15, 1977, the proposed sale was approved by a vote of more than 71% (5,987.6 shares to 1,699.5 shares). On November 18, 1977, the two dissenting directors and twenty-eight shareholders filed a complaint in the district court seeking to enjoin the sale alleging that the shareholders’ vote to sell was based on an inadequate and misleading proxy statement in violation of Section 14(a) of the Act and S.E.C. Rule 14a-9. By stipulation of the parties, the consummation of the sale was delayed until after the consolidated hearing on the preliminary injunction and trial on the merits pursuant to Fed.R.Civ.P. 65 (a)(2). The district court found that plaintiffs had failed to show that any aspect of the proxy material was materially false or misleading. Plaintiffs’ motion to enjoin the sale was denied and the action dismissed. A timely notice of appeal was filed on March 27, 1978. After entry of judgment in SAVI’s favor, the sale to Intercoast was completed and SAVI was liquidated.

STANDARD OF REVIEW

A two-step level of inquiry is appropriate to determine whether denial of the injunctive relief sought was correct. Because the hearing on the preliminary injunction was consolidated with the trial on the merits pursuant to Fed.R.Civ.P. 65(a)(2), the first inquiry is whether the district court’s findings that the proxy statement was not materially false or misleading were clearly erroneous. Fed.R.Civ.P. 52(a).¹ Of course, to the extent it is claimed that the district court misapplied or misinterpreted the law, the findings are freely reviewable. United States v. Smith, 625 F.2d 278, 280 (9th Cir. 1980). Even if it is answered that these findings were clearly erroneous, it is of great significance that the sale in this case has been executed and SAVI no longer exists, and, therefore, a second inquiry is whether the circumstances dictate that the sound discretion of courts of equity should be exercised to grant the type of retrospective relief sought by the appellants. “[NJothing in the statutory policy ‘requires the court to unscramble a corporate transaction merely because a violation occurred.’” Mills v. Electric Auto-Lite Co., 396 U.S. 375, 386, 90 S.Ct. 616, 622, 24 L.Ed.2d 593 (1970). See also Klaus v. Hi-Shear Corporation, 528 F.2d 225, 232 (9th Cir. 1975). We find it unnecessary to reach this second issue, however, because we conclude that the findings of the district court were not clearly erroneous and that the law was correctly applied.

ANALYSIS

In general, section 14(a) of the Williams Act makes it unlawful for any person to solicit proxies in contravention of the rules and regulations of the Securities and Exchange Commission.² Rule 14a-9 of the S.E.C., implementing the Act, provides in relevant part,

No solicitation subject to this regulation shall be made by means of any proxy statement . . . containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading. . . .

17 C.F.R. § 240.14a-9(a) (1981).

Appellants contend that the materials furnished by the board of directors to the SAVI shareholders were false and misleading because they failed to disclose (1) the board’s estimates of the fair market value of the SAVI properties, and (2) the fact that the board had received inquiries from potential purchasers while it was considering Intercoast’s one day offer.

A. Failure to disclose estimates of value.

Appellants argue that disclosure of the board’s estimates of the fair market value of the SAIT properties was required by Rule 14a-9 because the listing in the proxy materials of the historic book value of the properties without current market information was misleading. The district court rejected this argument and held that the failure to disclose the estimates was not a proxy violation, stating,

As a rule the S.E.C. disfavors inclusion of appraisal information in proxy materials because of the inability of the commission to effectively review the accuracy of such estimates of value ánd the tendency of shareholders to place undue reliance upon them. [Citations]. An exception to this rule is recognized when the proposed estimates of value are objective, reasonably certain data, such as commodity prices prevailing in an active market. [Citations]. This Court finds that the board’s appraisals fall in the former category and were properly excluded from the proxy materials.

Appellants claim that the district court erred in its interpretation of the S.E. C.’s position regarding appraisal information and that the S.E.C. in fact favors the disclosure of “current market value appraisal information” in proxy materials. We disagree.

Both the courts and the S.E.C. have consistently discouraged the inclusion of appraised asset valuations in proxy materials. See, e.g., Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1292-94 (2d Cir. 1973); Kohn v. American Metal Climax, Inc., 458 F.2d 255, 265 (3d Cir. 1972); Denison Mines Limited v. Fibreboard Corporation, 388 F.Supp. 812, 819 (D.Del. 1974). In a note accompanying Rule 14a-9, the S.E.C. has listed examples of “what, depending upon particular facts and circumstances, may be misleading within the meaning of this section.” The first example is “[predictions as to specific future market values.” 17 C.F.R. § 240.-14a-9 (1981). Admittedly, this note does not refer specifically to appraisals of current market value. We agree, however, with the Second Circuit that “it is clear that the policy embodied in the note to Rule 14a-9 has consistently been enforced to bar disclosure of asset appraisals as well as future market values... .” Gerstle v. Gamble-Skogmo, Inc., supra, 478 F.2d at 1292.

Appellants dispute this reading of S.E.C. policy and argue that the position of the S.E.C. on the issue of appraisal disclosure is reflected in an amicus brief filed by the S.E.C. staff in Gerstle v. Gamble-Skogmo, Inc., supra. Appellants read the position taken in this brief to approve disclosure of appraisal of current fair market value of assets when a liquidation of those assets is contemplated and their current liquidating value is substantially higher than their historic book value. Under such circumstances, according to appellants, the appraisal must be disclosed if reliable.

We are unpersuaded by appellants’ argument for two reasons. First, Commission policy is properly expressed through publicly available rules and policy statements. See, id. at 1294, n. 13. We have no more reason than did the court in Gerstle to recognize a “substantial modification, if not reversal of the SEC’s position on disclosure of appraisals in proxy statements” on the basis of an amicus brief reflecting staff views which have been neither formally approved by the Commission nor publicly disseminated. Id. at 1294. Indeed, we have even less reason. It was noted in Gerstle that the Commission was in the process of reevaluating its policy and that new rules regarding appraisals appeared to be forthcoming. Id. However, since Gerstle, the Commission has issued certain releases, but no new rules changing its position on disclosure of appraisals.³

Second, even if we were to apply the policy stated in the Gerstle amicus brief, we would still affirm the district court’s ruling that the SAVI board’s valuations were properly excluded from the proxy materials. As noted by the court in Gerstle, the text of the amicus brief stated that “although appraisals generally cannot be disclosed because they may be misleading, existing appraisals of current liquidating value must be disclosed if they have been made by a qualified expert and have a sufficient basis in fact." Id. at 1292 (emphasis added). Here, the district court found that the SAVI board’s valuations were neither based on objective, reasonably certain data nor prepared by a qualified expert.

This conclusion rests on several factors. The first is that the board members, though having considerable experience in real estate in some cases, are not uniformly qualified to value real property. None of the directors are professional appraisers. Second, it is not clear what assumptions were made by each member in assigning a high and low value to each parcel. Without precise information as to the method by which these figures were reached, the board’s estimates are potentially misleading. It is precisely such subjective information that the S.E.C. policy is designed to exclude. Failure to include the board’s valuation figures was, therefore, not a proxy violation.

We cannot say that these findings are clearly erroneous. It is undisputed that the SAVI directors were not professional or expert appraisers. The board members employed no uniform method of valuation in making their estimates. No guidelines or standards were followed for the selection of relevant data nor for the manner in which data were to be weighed and evaluated. There was no agreement as to the basic assumptions underlying the valuation process. Rather, each director, drawing upon his personal knowledge and experience and relying on subjective assumptions, individually arrived at a high, middle and low figure for each property. It appears that these assumptions were not communicated among the board members. One director apparently based his high estimates on a number of contingencies so that his figures did not necessarily reflect his opinion as to the current value of the property. In addition, the board never formally approved the estimates, and some board members did not know what figures had been selected until they saw the accountants’ report. Nor did the board know how the individual figures were compiled, that is, whether the highest and lowest figures were chosen, whether the figures were averaged, or whether some other method was used.⁴

Confronted with similarly subjective “appraisals” in Gerstle, the court stated that “[w]e seriously doubt that this is what the SEC had in mind when it stated [in its amicus brief] that it would allow the work of expert appraisers to be disclosed in proxy statements in some circumstances.” 478 F.2d at 1292, n. 10. Thus, even if we were to accept appellants’ argument that current S.E.C. policy is reflected in the Gerstle amicus brief, that policy would still bar the disclosure of the SAVI board’s valuations in the proxy materials.⁵

B. Failure to disclose inquiries from potential purchasers.

Appellants further contend that the proxy materials were rendered false and misleading by the failure of the SAVI board to disclose that, in addition to the Intercoast offer, it had received inquiries from four other potential purchasers. Appellants argue that this information was necessary to “clarify the import” of the statement in the proxy materials that “[t]he terms of the proposed sale are more favorable than those of other recent proposals considered by SAVI.”⁶

Firm offers from other potential purchasers, if they are more favorable than the offer being endorsed by management, must be disclosed in proxy materials soliciting shareholder approval of a proposed sale of corporate assets. Gerstle v. Gamble-Skogmo, Inc., supra, 478 F.2d at 1294-95. There is no duty to disclose inquiries or indications of interest that do not fall within the category of firm or definite offers. See, e.g., Scott v. Multi-Amp Corporation, 386 F.Supp. 44, 65 (D.N.J.1974). Here, each of the inquiries from potential purchasers, except that from Shappel Industries, consisted of a single telephone call to the SAVI board during its meeting to consider Iñtercoast’s one-day offer. The purpose of the calls was evidently to request a meeting with the SAVI board to discuss the possibility of a purchase. These last minute expressions of interest clearly do not constitute the type of firm or definite offer that must be disclosed.

While the Shappel proposal poses a slightly more difficult question, we nevertheless find that it was too uncertain and illusory to be considered a firm offer. Shappel informed the SAVI board through Pankey that it was interested in purchasing SAVI for $1,300 per share only if the Weir Canyon property could be developed within three years; if this condition could not be met, the price Shappel would be willing to pay would have apparently dropped to where SAVI would no longer be interested. It appears from the record that there was serious question whether the Weir Canyon property could be developed within three years. In addition, Shappel was not bound by the terms of its proposal, and had SAVI refused the Intercoast offer, Shappel could have withdrawn or changed its proposal. Thus, Shappel’s proposal appears to be nothing more than a last minute effort to halt the sale; at best it was but a step in negotiating a purchase, with no assurance whatsoever that such negotiations would bear fruit or, if they did, whether the final terms would have been better than those offered by Intercoast. The failure to disclose the Shappel proposal and the other inquiries did not, therefore, make the proxy materials false or misleading.

CONCLUSION

The district court’s findings of fact were not clearly erroneous and its conclusions of law were correct. The judgment is therefore AFFIRMED.

1 . Normally, when reviewing an order granting or denying a preliminary injunction, the court will inquire only whether the district court has abused its discretion. See Klaus v. Hi-Shear Corporation, 528 F.2d 225, 231 (9th Cir. 1975).

. It shall be unlawful for any person, by the use of the mails or by any means or instrumentality of interstate commerce or of any facility of a national securities exchange or otherwise, in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors, to solicit or to permit the use of his name to solicit any proxy or consent or authorization in respect of any security (other than an exempted security) registered pursuant to section 781 of this title.

2 15 U.S.C. § 78n(a) (1976).

3 . Appellants point out that a 1976 amendment of the note following Rule 14a-9 deleted future earnings from the list of examples of potentially misleading disclosures. See, Securities Act Release No. 5699, Notice of Adoption of an Amendment to Rule 14a-9, etc., [1975-1976 Transfer Binder] CCH Fed.Sec.L.Rep., ¶ 80,461 (1976). We consider this limited amendment to be insufficient to alter the longstanding policy against disclosing appraisal information.

Appellants also point to two recent releases on the subject of disclosure of projections. See, Securities Act Release No. 5992, Guides for Disclosure of Projections of Future Economic Performance, [1978 Transfer Binder] CCH Fed.Sec.L.Rep., ¶ 81,756 (1978); and Securities Act Release No. 5993, Proposed Safe-Harbor Rule for Projections, [1978 Transfer Binder] CCH Fed.Sec.L.Rep., ¶ 81,757 (1978). These releases are not binding on our decision, as the proxy materials in this case predate their formulation.

Even if these releases had been in effect, they would have affected neither the SEC’s position on disclosure of appraisals nor the propriety of withholding the valuations in this case. The 1978 releases deal with net income, and earnings per share. These matters are protected only if disclosed in good faith and if prepared with a reasonable basis. The SEC strongly advocates the disclosure of the assumptions upon which such projections are based. As our later discussion indicates, even if these rules were used as analogous guides, the SAVI board’s appraisal valuations could not have been disclosed, as they were not independently reviewed, were not based on uniform or articulated assumptions, and were not prepared with a reasonable basis.

For the same reasons, the board’s valuations could not have been disclosed even under the SEC’s most recent release, issued after the proxy contest here and after submission of this case, SEC Release No. 34-16833, Fed.Sec.L.Rep. (CCH) ¶ 24,117 (May 23, 1980). The release authorizes disclosure only of appraisals made in good faith and on a reasonable basis in proxy contests in which a principal issue in contention is the liquidation of all or a part of a company’s assets or equity.

4 . Appellants argue that, because the SAVI board treated the estimates as reliable when it disclosed them to potential purchasers during the course of negotiations, the board is now estopped from contending that the estimates were too unreliable to be disclosed to the shareholders. This contention is not supported by case law. See Kohn v. American Metal Climax, Inc., 458 F.2d 255, 265 (3d Cir. 1972). In addition, the determination as to whether the estimates were based on sufficiently objective and reasonably certain data as to allow disclosure does not turn on the subjective views of the board members nor on the other uses to which the estimates were put.

5 . As additional support for their argument that the board’s estimates should have been disclosed, appellants point to the statement in the proxy materials that SAVI had no current appraisals of its properties except for the Green River and Weir Canyon properties that had been appraised by White. Appellants contend that this statement was made misleading by the omission of the board’s estimates. This particular argument was not made in the district court and hence the district court made no explicit findings on the point. However, in light of the district court’s holding that the board members were neither professional appraisers nor uniformly qualified to appraise real property and that the valuation process was highly subjective, we find that the above statement was not false or misleading. An appraisal is defined as “[a] valuation or an estimation of value of property by disinterested persons of suitable qualifications. The process of ascertaining a value of an asset or liability that involves expert opinion. . ..” Black’s Law Dictionary 92 (5th ed. 1979); see also, United States v. Crowley, 522 F.2d 427, 429 (7th Cir. 1975).

6 . This issue was not raised in the district court. Rather, appellants there argued that the reference to “other recent proposals” was misleading because in truth the board had considered only one other proposal, the Walker proposal. Thus, the district court did not make findings on the issue now raised. Appellants have argued to this court that the issue raised on appeal is merely a recharacterization of the issue raised in the district court and that there is sufficient evidence in the record to decide the issue. While we do not condone such practice, we think the issues are closely enough related and the factual record fully enough developed for us to consider the issue on appeal. ■