BIGGS, Circuit Judge.
There are two appeals at bar. One is that of Transamerica Corporation (No. 9240), the other is the appeal of the Securities and Exchange Commission (No. 9259). Both are from an order of the United States District Court for the District of Delaware entered September 9, 1946. What
this order was and what it effected is discussed hereinafter. It seems appropriate to deal with both appeals in one opinion.
Transamerica, a Delaware corporation subject to the provisions of Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78n(a), has outstanding approximately 9,935,000 shares of. $2 par value capital stock registered with the Commission and listed on national security exchanges, viz., the New York Stock Exchange, the Los Angeles Stock Exchange and the San Francisco Stock Exchange. Transamerica’s shares are held by approximately 151,000 persons.
On January 2, 1946, Gilbert, the owner of record of seventeen shares of Trans-america’s stock, wrote the management, submitting four
proposals which he desired to present for action by shareholders at the next annual stockholders’ meeting to be held on April 25, 1946. The first, second and fourth of these proposals were as follows :
(1) To have independent public auditors of the books of Transamerica elected by the stockholders, beginning with the annual meeting of 1947, a representative of the auditing firm last chosen to attend the annual meeting each year.
(2) To amend By-Law 47 in order to eliminate therefrom the requirement that notice of any proposed alteration or amendment of the by-laws be contained in the notice of meeting.
(4) To require an account or a report of the proceedings at the annual meeting to be sent to all stockholders.
It appears that proposal (1) was in the form of a by-law amendment; Gilbert, the Commission and the corporation all so regarding it. Gilbert identified the second proposal also as a by-law amendment. The fourth proposal was designated by Gilbert as “a straight resolution.” The Commission demanded of Transamerica that it accede to Gilbert’s proposals. The corporation refused the Commission’s demands.
The Commission therefore filed a complaint in the court below to enjoin Trans-america and its officers, inter alia, from making use of any proxy solicited by it for use at the annual meeting, from making use of the mails or any instrumentality of interstate commerce to solicit proxies or from making use of any soliciting material without complying with the Commission’s demands, and for other relief which need not be detailed here.
The court below, finding its jurisdiction based on Sections 14(a), 23(a), as amended by § 8, Act of May 27, 1936, and Section 21(e), as amended, and Section 27, as amended, of the Securities Exchange Act of 1934,15 U.S.C.A. §§ 78n(a), 78w(a), 78u(e), and 78aa,
to enforce compliance with the
proxy rules of the Commission, concluded that the primary question in respect to Gilbert’s proposals was whether they constituted proper subjects for action by stockholders at the annual meeting and stated that the question must be answered “not by federal but by Delaware law”. See D.C., 67 F.Supp. 326, 329. No substantial question of fact being in dispute, the learned trial judge disposed of the case on the Commission’s motion for summary judgment under Rule 56, 28 U.S.C.A. following section 723c. He concluded as to proposal (1) that nothing in the General Corporation Law of Delaware or in the charter or bylaws of Transamerica required the corporation to give stockholders notice in the notice of meeting of any by-law amendment which a shareholder desired to submit to an annual meeting of stockholders, but that there was “no special reason why the vote on independent auditors should be required to assume the form of a new by-law.” He held that such a vote is simply a mandate from the stockholders to the directors which may be carried into execution by following its terms. He ordered management to notice and set forth Gilbert’s proposal for independent auditors for a vote of stockholders at the adjourned meeting of the company. As to proposal (2), the court concluded that Transamerica’s management was not compelled to give notice in the notice of meeting of a stockholder’s proposal to change By-Law 47 and hence the management was entitled to rule, notice not being given, the proposal out of order. As to proposal (4) the court concluded that the Commission was not entitled to make good the demand that an account or a report of the proceedings at annual-meetings be sent to all stockholders. He enjoined the corporation from proceeding to hold the annual meeting unless complying with Proxy Rules X-14A-7
and X-14A-2
of the Commission by giving notice in the proxy
of Gilbert’s proposal. Following the hearing and its opinions the court ordered the adjourned meeting to be convened for consideration of the auditor proposal, Gilbert’s proposal (1). Both the Commission and Transamerica have appealed; the Commission, from the failure of the court below to enforce its demands respecting Gilbert’s proposals (2) and (4); Transamer-ica, from the court’s decision to enforce the Commission’s demand as to Gilbert’s proposal (1).
We think it will be of assistance in understanding what is involved if we deal first with the respective major contentions of each of the parties; then treat with the specific proposals involved, some of the contentions of the parties in respect to them and the applicable rulings of the court below. Respecting the major contentions of the parties, it will be observed that the decision in the case at bar must turn in some part on the interpretation to be placed on that portion of Proxy Rule X-14A-7 which provides that if a qualified security holder has given the managementreasonable notice that he intends to present for action at a meeting of security holders “a proposal which is a proper subject for action by security holders” the management shall set forth the proposal and provide means by which the security holders can vote on the proposal as provided in Proxy Rule X-14A-2. Much of the briefs of the parties and most of the argument have been devoted to a discussion of what is “a proper subject” for action by the stockholders of Transamerica. Speaking broadly, it is the position of the Commission that “a proper subject” for stockholder action is one in which the stockholders may properly be interested under the law of Delaware. Transamerica takes the position that a stockholder may interest himself with propriety only in a subject in respect to which he is entitled to vote at a stockholders’ meeting when every requirement of Delaware law and of the provisions of the charter and by-laws, including notice, has been fulfilled. Putting Transamerica’s position in its full technical abundance, as we understand it, it says that since Section 5 (8)
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BIGGS, Circuit Judge.
There are two appeals at bar. One is that of Transamerica Corporation (No. 9240), the other is the appeal of the Securities and Exchange Commission (No. 9259). Both are from an order of the United States District Court for the District of Delaware entered September 9, 1946. What
this order was and what it effected is discussed hereinafter. It seems appropriate to deal with both appeals in one opinion.
Transamerica, a Delaware corporation subject to the provisions of Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78n(a), has outstanding approximately 9,935,000 shares of. $2 par value capital stock registered with the Commission and listed on national security exchanges, viz., the New York Stock Exchange, the Los Angeles Stock Exchange and the San Francisco Stock Exchange. Transamerica’s shares are held by approximately 151,000 persons.
On January 2, 1946, Gilbert, the owner of record of seventeen shares of Trans-america’s stock, wrote the management, submitting four
proposals which he desired to present for action by shareholders at the next annual stockholders’ meeting to be held on April 25, 1946. The first, second and fourth of these proposals were as follows :
(1) To have independent public auditors of the books of Transamerica elected by the stockholders, beginning with the annual meeting of 1947, a representative of the auditing firm last chosen to attend the annual meeting each year.
(2) To amend By-Law 47 in order to eliminate therefrom the requirement that notice of any proposed alteration or amendment of the by-laws be contained in the notice of meeting.
(4) To require an account or a report of the proceedings at the annual meeting to be sent to all stockholders.
It appears that proposal (1) was in the form of a by-law amendment; Gilbert, the Commission and the corporation all so regarding it. Gilbert identified the second proposal also as a by-law amendment. The fourth proposal was designated by Gilbert as “a straight resolution.” The Commission demanded of Transamerica that it accede to Gilbert’s proposals. The corporation refused the Commission’s demands.
The Commission therefore filed a complaint in the court below to enjoin Trans-america and its officers, inter alia, from making use of any proxy solicited by it for use at the annual meeting, from making use of the mails or any instrumentality of interstate commerce to solicit proxies or from making use of any soliciting material without complying with the Commission’s demands, and for other relief which need not be detailed here.
The court below, finding its jurisdiction based on Sections 14(a), 23(a), as amended by § 8, Act of May 27, 1936, and Section 21(e), as amended, and Section 27, as amended, of the Securities Exchange Act of 1934,15 U.S.C.A. §§ 78n(a), 78w(a), 78u(e), and 78aa,
to enforce compliance with the
proxy rules of the Commission, concluded that the primary question in respect to Gilbert’s proposals was whether they constituted proper subjects for action by stockholders at the annual meeting and stated that the question must be answered “not by federal but by Delaware law”. See D.C., 67 F.Supp. 326, 329. No substantial question of fact being in dispute, the learned trial judge disposed of the case on the Commission’s motion for summary judgment under Rule 56, 28 U.S.C.A. following section 723c. He concluded as to proposal (1) that nothing in the General Corporation Law of Delaware or in the charter or bylaws of Transamerica required the corporation to give stockholders notice in the notice of meeting of any by-law amendment which a shareholder desired to submit to an annual meeting of stockholders, but that there was “no special reason why the vote on independent auditors should be required to assume the form of a new by-law.” He held that such a vote is simply a mandate from the stockholders to the directors which may be carried into execution by following its terms. He ordered management to notice and set forth Gilbert’s proposal for independent auditors for a vote of stockholders at the adjourned meeting of the company. As to proposal (2), the court concluded that Transamerica’s management was not compelled to give notice in the notice of meeting of a stockholder’s proposal to change By-Law 47 and hence the management was entitled to rule, notice not being given, the proposal out of order. As to proposal (4) the court concluded that the Commission was not entitled to make good the demand that an account or a report of the proceedings at annual-meetings be sent to all stockholders. He enjoined the corporation from proceeding to hold the annual meeting unless complying with Proxy Rules X-14A-7
and X-14A-2
of the Commission by giving notice in the proxy
of Gilbert’s proposal. Following the hearing and its opinions the court ordered the adjourned meeting to be convened for consideration of the auditor proposal, Gilbert’s proposal (1). Both the Commission and Transamerica have appealed; the Commission, from the failure of the court below to enforce its demands respecting Gilbert’s proposals (2) and (4); Transamer-ica, from the court’s decision to enforce the Commission’s demand as to Gilbert’s proposal (1).
We think it will be of assistance in understanding what is involved if we deal first with the respective major contentions of each of the parties; then treat with the specific proposals involved, some of the contentions of the parties in respect to them and the applicable rulings of the court below. Respecting the major contentions of the parties, it will be observed that the decision in the case at bar must turn in some part on the interpretation to be placed on that portion of Proxy Rule X-14A-7 which provides that if a qualified security holder has given the managementreasonable notice that he intends to present for action at a meeting of security holders “a proposal which is a proper subject for action by security holders” the management shall set forth the proposal and provide means by which the security holders can vote on the proposal as provided in Proxy Rule X-14A-2. Much of the briefs of the parties and most of the argument have been devoted to a discussion of what is “a proper subject” for action by the stockholders of Transamerica. Speaking broadly, it is the position of the Commission that “a proper subject” for stockholder action is one in which the stockholders may properly be interested under the law of Delaware. Transamerica takes the position that a stockholder may interest himself with propriety only in a subject in respect to which he is entitled to vote at a stockholders’ meeting when every requirement of Delaware law and of the provisions of the charter and by-laws, including notice, has been fulfilled. Putting Transamerica’s position in its full technical abundance, as we understand it, it says that since Section 5 (8)
of the Delaware Corporation Law provides that a certificate of incorporation may set forth provisions which limit, regulate and define the powers and functions of the directors and stockholders, and since Article XII
of Transamerica’s charter states that all the powers of the corporation shall be vested in the board of directors,
the power to control corporate acts rests in the board of directors and not in the stockholders; in
other words that the incorporators by the notice requirement of By-Law 47
curbed the power of the stockholders to vote on any by-law amendment of which notice was not included in the notice of meeting and in effect vested in Transamerica’s board of directors the power to decide whether any proposed by-law amendment should be voted on at an annual meeting of stockholders. In short, management insists that it is entitled to use the notice requirement of ByLaw 47 as a block or strainer to prevent any proposal to amend the by-laws, which it may deem unsuitable, from reaching a vote at an annual meeting of stockholders.
We will now treat specifically with Gilbert’s three proposals, with some of the contentions of the parties in regard to them and with the rulings of the court below. Transamerica contends, as we have indicated, that since Article XIII of Trans-america’s charter vests in the Board of Directors all powers of corporate management, not prohibited to them by the law of Delaware, this comprehensive grant renders the question of auditors not a proper subject for action by Transamerica’s stockholders.^ The court below took the view, in our opinion, fully supportable, that the stockholders as the beneficial owners of the enterprise may prefer to consider the selection of independent auditors to review “what is no more than the trust relationship which exists between the directors and stockholders.” See D.C., 67 F.Supp. at page 334. Assuredly, it is no less than this. It is necessary to go no further in order to sustain the Commission’s contention that the auditing of the books of a corporation is a proper subject for stockholder con
sideration and action. Surely the audit of a corporation’s books may not be considered to be peculiarly within the discretion of the directors. A corporation is run for the benefit of its stockholders and not for that of its managers.
Stockholders are entitled to employ watchmen to eye the guardians of their enterprise, the directors. Section 9
of the Delaware Corporation Law does not militate against this view nor is it important whether Gilbert’s proposal be considered as a proposal to amend the by-laws or, as the court below considered it, “a mandate from the stockholders to the directors” to be carried into execution by following its terms. Setting to one side the notice provision of By-Law 47, to be dealt with hereinafter, the employment of independent auditors to be selected by the stockholders beyond any question is a proper subject for action by the stockholders.
As to (2), the proposal to amend ByLaw 47 in order to eliminate the requirement that notice be given in the notice of any meeting of any proposed alteration or amendment of the by-laws, the court below decided in favor of Transamerica and against the Commission. As the learned District Judge pointed out, as Transamerica has contended and as has been stated herein, By-Law 47 provides that the by-laws may be altered or amended by an affirmative vote of a majority of the stock issued and outstanding and entitled to vote at any regular or special meeting of stockholders if notice of the proposed alteration or amendment is contained in the notice of the meeting. See note 9, supra. The court below took the view that because notice was not given by management, management was entitled to rule out of order any proposal to amend this By-law. But Gilbert had made his intention plain. He did not intend to deny notice to the stockholders for notice would have been given if Transamerica obeyed the Commission’s direction and its proxy rules. Gilbert stated to Transamer-ica that the proposed by-law amendment was “to be introduced only if the management again resorts to what I consider the extremely undemocratic method of trying to avoid a vote, for approval or rejection, of the other resolutions, by ruling them out of order.”
That the law of Delaware will permit stockholders of a Delaware corporation to act validly on a stockholder’s proposal to amend by-laws is clear beyond any doubt. Section 12 of the General Corporation Law of Delaware
provides that “The original by-laws of a corporation may be adopted by the incorporators. Thereafter, the power to make, alter or repeal by-laws shall be in the stockholders, but any corporation may, in the certificate of incorporation, confer that power upon the directors.” Transamerica’s charter imposes no impediment for Article X of the charter provides: “In furtherance and not in limitation of the powers conferred by statute, the board of directors is expressly authorized: (a) To make and alter the by-laws of this corporation, without any action on the part of the stockholders; but the by-laws made by the directors and the power so conferred may be altered or repealed by the stockholders.” In short if it were not for the block interposed by the notice provisions of By-Law 47, it would be clear that Gilbert’s second proposal would be a proper subject for stockholder action.
As to (4), the proposal to require a report of the proceeding of the annual meeting to-be sent to all stockholders, we can perceive no logical basis for coneluding that it is not a proper subject for action by the security holders. The security holders numbered approximately 151,000 persons holding approximately 9,935,000 shares of stock. Certainly it is proper for the stockholders to desire and to receive a report as to what transpired at the annual meeting of their company. True it may cost Transamerica $20,000 annually, but accurate information as to what transpires respecting the corporation is an absolute necessity if stockholders are to act for their joint interest.
If stockholders cannot act together, they cannot act effectively.
The propriety of proposal (4) seems to us to be scarcely arguable and we conclude that no further discussion is necessary, any question of notice under By-Law 47 aside.
The conclusions reached by the court below in respect to Gilbert’s proposals (2) and (4) may be supported only by applying the notice provision of By-Law 47 in all its strictness. Admittedly, so long as the notice provision of By-Law 47 remains in effect unless management sees fit to include notice of a by-law amendment proposed by a stockholder in the notice of meeting the proposed amendment can never come before the stockholders’ meeting with complete correctness. The same would be true even if one per centum of the stockholders backed the proposed amendment. But Transamerica’s position is overnice and is untenable. In our opinion Gilbert’s proposals are proper subjects for stockholder action within the purview of Proxy Rule X-14A-7 since all are subjects in respect to which stockholders have the right to act under the General Corporation Law of Delaware.
But assuming arguendo that this was not so, we think that we have demonstrated that Gilbert’s proposals are within the reach of security-holder action were it not for the insulation afforded management by the notice provision of By-Law 47. If this minor provision may be employed as Transamerica seeks to employ it, it will serve to cirpumvent the intent of Congress in enacting the Securities Exchange Act of 1934. It was the intent of Congress to require fair opportunity for the operation of corporate suffrage. The control of great corporations by a very few persons was the abuse at which Congress struck in enacting Section 14(a).
We entertain no doubt that Proxy Rule X-14A-7 represents a proper exercise of the authority conferred by Congress on the Commission under Section 14(a). This seems to us to end the matter. The power conferred upon the Commission by Congress cannot be frustrated by a corporate by-law.
Other arguments made by Transamerica need not be discussed in this opinion.
We entertain no doubt that the court below possesses the authority to make any order necessary to enforce liabilities or duties created by the Act or rules promulgated pursuant thereto. Cf. Deckert v. Independence Shares Corporation, 311 U.S. 282, 61 S.Ct. 229, 85 L.Ed. 189, and Aldred Inv. Trust v. Securities and Exchange Comm., 1 Cir., 151 F.2d 254, 261, certiorari denied 326 U.S. 795, 66 S.Ct. 486, 90 L.Ed. 483.
The judgment of the court below will be modified to compel re-solicitation on Gilbert’s proposals (2) and (4). The court below has already ordered re-solicitation on Gilbert’s proposal (1). If further re-solicitation of proposal (1) be necessary by reason of lapse of time the court below will be authorized to order such re-solicitation. It will be directed to enjoin violation of the Act and the rules by Transamerica in respect to proposals (2) and (4). In all other respects the judgment will be affirmed.