## Facts

- Mohawk Rubber Company’s board approved a 1983 stock option plan for senior executives on January 4, 1983, and submitted it to shareholders for approval at the annual meeting.
- A proxy statement was distributed to solicit shareholder votes in favor of the plan.
- A shareholder, suing individually, on behalf of a shareholder class, and derivatively for Mohawk, alleged the proxy statement materially misstated or omitted information about dilution, compensation effects, and plan purpose/terms.
- The suit also alleged the plan amounted to corporate waste under Ohio common law and was not validly approved under the plan’s terms and Mohawk’s regulations.
- After class certification and denial of a motion to dismiss, the case proceeded to a bench trial in June 1983; defendants agreed not to further implement the plan pending judgment.

## Issues

1. Whether the proxy statement soliciting approval of the stock option plan was materially false or misleading in violation of Exchange Act § 14(a) and SEC Rule 14a-9, and whether director liability required proof of scienter.
2. Whether the stock option plan constituted corporate waste under Ohio law.
3. Whether the plan was properly approved under the plan’s terms and Mohawk’s corporate regulations.

## Decision

- Judgment for defendants on the § 14(a)/Rule 14a-9 claim because the plaintiff failed to prove a material misstatement or omission in the proxy materials.
- The court found no basis to impose liability on the directors on the record presented, including no showing of improper intent to mislead shareholders as argued by the parties.
- Judgment for defendants on the corporate waste claim because the plan served rational corporate purposes and did not meet the high threshold for waste.
- Judgment for defendants on the requested declaratory relief; the plan was upheld as properly approved under governing corporate documents.

## Legal Principles

- A proxy solicitation violates Rule 14a-9 only if, considering the proxy as a whole and in context, it contains a statement that is false or misleading with respect to a material fact or omits a material fact necessary to make statements not misleading.
- Materiality turns on whether a reasonable shareholder would view the information as significantly altering the total mix of information available when deciding how to vote.
- Corporate waste under Ohio law requires a showing of an exchange so one-sided that no person of ordinary, sound business judgment could conclude the corporation received adequate consideration or corporate benefit.
- Courts generally defer to business judgment on executive incentive compensation absent proof of actionable deception in the solicitation process or a transaction so irrational as to constitute waste.

## Conclusion

The court upheld Mohawk’s 1983 executive stock option plan, concluding the proxy statement did not contain material misrepresentations or omissions actionable under § 14(a) and Rule 14a-9, the plan did not constitute corporate waste, and shareholder approval complied with the company’s governing documents.


Fradkin v. Ernst, 571 F. Supp. 829 (N.D. Ohio 1983)