## Facts

- Plaintiffs were shareholders of J. P. Morgan Chase & Company (J.P. Morgan).
- Defendants included J.P. Morgan’s CEO, William B. Harrison Jr., and other J.P. Morgan directors who approved and solicited proxies for J.P. Morgan’s merger with Bank One Corporation.
- J.P. Morgan and Bank One issued a proxy statement soliciting shareholder votes in favor of the merger and describing the merger agreement as fair.
- Plaintiffs alleged the proxy statement omitted material facts about merger negotiations concerning top management of the combined company.
- According to plaintiffs, Bank One (through its CEO, James Dimon) demanded that Harrison step down as CEO, and proposed that the companies could merge for no premium if Dimon became CEO immediately upon closing.
- Plaintiffs alleged J.P. Morgan’s directors rejected the no-premium/Dimon-as-CEO proposal and instead agreed to pay a multibillion-dollar premium for Bank One stock in order to keep Harrison as CEO.
- Plaintiffs sued under § 14(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9, alleging the proxy was misleading by omission, and also asserted § 20(a) control-person liability against the individual defendants.
- Defendants moved to dismiss, arguing (among other things) that the complaint did not plead fraud-like conduct with sufficient specificity and that federal proxy rules did not require disclosure of the board’s negotiating positions.

## Issues

1. Whether shareholders stated a claim under Exchange Act § 14(a) and Rule 14a-9 based on the alleged omission of (a) a purported no-premium proposal tied to CEO succession and (b) the alleged decision to pay a premium to retain the incumbent CEO.
2. Whether such allegations had to be pleaded with heightened particularity, and whether the complaint was sufficiently specific as to the challenged omissions and why they mattered.
3. Whether defendants were entitled to dismissal on the theory that negotiating positions and rejected proposals are categorically outside required proxy disclosures.
4. Whether the § 20(a) control-person claim could proceed based on the pleaded § 14(a) theory.

## Decision

- The court denied the motion to dismiss, holding that plaintiffs adequately pleaded a proxy-omission claim under § 14(a) and Rule 14a-9 based on the alleged undisclosed negotiation facts tied to CEO retention and merger price.
- The court declined to adopt a rule that information about negotiating positions and rejected proposals can never be material or actionable in a proxy statement.
- Because the § 14(a) claim survived at the pleading stage, the related § 20(a) control-person claim against the individual defendants also was not dismissed.

## Legal Principles

- Section 14(a) and Rule 14a-9 prohibit soliciting shareholder votes with a proxy statement that contains materially false or misleading statements, including materially misleading omissions.
- A duty to disclose arises when omission of a fact would make what is said in the proxy materially misleading; the federal proxy rules do not impose a general duty to disclose every detail of internal deliberations, but they can require disclosure of facts that significantly affect the transaction described.
- Materiality turns on whether there is a substantial likelihood that a reasonable shareholder would view the omitted information as significantly altering the total mix of information available when deciding how to vote.
- Information about merger negotiations is not automatically immaterial; alleged facts showing a claimed tradeoff between merger price and management’s continued role may be material to shareholders evaluating fairness and value.
- When a § 14(a) violation is adequately pleaded, a § 20(a) claim may proceed against individuals alleged to have controlled the issuer’s proxy solicitation and its contents.

## Conclusion

In *Blau v. Harrison*, the court allowed shareholders’ § 14(a) and Rule 14a-9 suit to proceed where the merger proxy allegedly failed to disclose that J.P. Morgan rejected a no-premium proposal conditioned on installing Bank One’s CEO and instead paid a multibillion-dollar premium to keep J.P. Morgan’s CEO, holding these allegations were sufficiently pleaded and potentially material to the shareholder vote.


Blau v. Harrison, 2006 U.S. Dist. LEXIS 19795 (2006)