## Facts

- GAF Corporation, a publicly held manufacturing company, faced a contested 1983 shareholder election for its board of directors.
- Samuel J. Heyman, a substantial minority shareholder, led an insurgent group that nominated an alternative slate and urged significant restructuring to increase shareholder value.
- GAF’s incumbent management opposed the insurgents and circulated competing proxy materials defending its strategy and criticizing the insurgents’ plans.
- Shareholders voted decisively to replace the incumbent directors with Heyman’s insurgent slate.
- About a year earlier, Heyman’s sister sued Heyman and their mother in New Jersey over alleged misconduct in a private fiduciary setting (trustee/attorney-in-fact), including allegations of withholding information and converting assets.
- That family suit was stayed and sealed shortly after filing by consent of the parties; it did not involve GAF or its business.
- The insurgents’ proxy materials did not disclose the existence or allegations of the sealed family lawsuit.
- After the election, GAF sued under § 14(a) and SEC Rule 14a-9, alleging the omission rendered the proxy solicitation misleading.

## Issues

1. Whether failure to disclose a stayed, sealed intrafamily lawsuit alleging private fiduciary misconduct was a material omission in a proxy contest under § 14(a) and Rule 14a-9.
2. Whether federal proxy disclosure duties require disclosure of personal, non-corporate litigation allegations about a director candidate when the dispute does not involve the issuer.

## Decision

- The Second Circuit reversed the district court.
- The court held that the nondisclosure of the sealed family lawsuit was not material in the context of the proxy contest.
- Because there was no material omission, there was no § 14(a) or Rule 14a-9 violation.
- The injunction preventing the insurgent slate from taking office, and the order for resolicitation and a new election, were vacated.

## Legal Principles

- A proxy solicitation violates § 14(a) and Rule 14a-9 only if it contains a materially false or misleading statement or omits a material fact necessary to make what is stated not misleading.
- An omitted fact is material if there is a substantial likelihood a reasonable shareholder would view it as significantly altering the total mix of information available when voting.
- Materiality is context-dependent; courts assess what a reasonable shareholder would consider important in the particular contest and with respect to the issuer’s affairs.
- Proxy rules do not impose a general duty on candidates to disclose every derogatory or unadjudicated allegation from personal matters unrelated to the corporation.
- Courts should not set aside the results of a shareholder election absent a clear, material disclosure violation.

## Conclusion

The Second Circuit concluded that a stayed and sealed intrafamily lawsuit concerning alleged private fiduciary misconduct, unrelated to the company’s business, would not have significantly altered a reasonable shareholder’s voting calculus in the proxy contest; therefore, its omission from proxy materials was not material, and the order nullifying the election and requiring a new vote could not stand.


GAF Corp. v. Heyman, 724 F.2d 727 (2d Cir. 1983)