## Facts

- General Outdoor Advertising Co. (GOA) was a major outdoor advertising company with subsidiaries in Canada and Mexico.
- Gamble-Skogmo, Inc. acquired a controlling stake in GOA (over 50% of GOA common stock) and then pursued a merger that eliminated GOA’s minority shareholders.
- To obtain shareholder approval, GOA distributed a proxy statement describing Gamble-Skogmo’s expectations of profits from disposition of GOA advertising plants not yet sold as of the merger date.
- Minority shareholders alleged the proxy was misleading because it did not fully disclose (1) the value of GOA’s remaining advertising assets and (2) Gamble-Skogmo’s concrete plan and near-term intention to liquidate those assets at substantial profit.
- After the merger, Gamble-Skogmo sold or disposed of GOA’s remaining advertising assets and realized significant profits.
- Minority shareholders filed a class action alleging violations of § 14(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9, seeking monetary relief tied to Gamble-Skogmo’s gains from the asset dispositions.
- The district court found the proxy statement violated § 14(a) and Rule 14a-9 and awarded substantial relief; both sides appealed aspects of liability and damages.

## Issues

1. Whether the proxy statement soliciting votes for the merger contained material misstatements or omissions under § 14(a) and Rule 14a-9 concerning plans to sell GOA assets and their value.
2. Whether private damages liability under § 14(a) and Rule 14a-9 requires scienter or may be based on negligence.
3. How causation is shown in a § 14(a) proxy case when a controlling shareholder could approve the transaction regardless of minority votes.
4. What measure of monetary relief is appropriate for a § 14(a)/Rule 14a-9 violation, including whether damages may include unrealized appreciation of assets not sold post-merger.

## Decision

- The Second Circuit affirmed the finding that the proxy statement was materially misleading under § 14(a) and Rule 14a-9 because it did not adequately convey the nature and extent of the controlling shareholder’s liquidation plans and the value implications for shareholders.
- The court held negligence is sufficient to establish liability under § 14(a) and Rule 14a-9 in a private damages action; scienter is not required.
- The court accepted a proxy-specific causation approach: material misstatements that taint the shareholder vote can satisfy causation even where the controller had enough votes to approve the merger.
- The court approved damages measured by profits actually realized by Gamble-Skogmo from post-merger sales of GOA assets attributable to the transaction.
- The court rejected recovery for unrealized appreciation of assets still held after the merger as too speculative and remanded for recalculation consistent with that limitation.

## Legal Principles

- A proxy statement violates § 14(a) and Rule 14a-9 if, viewed through the reasonable shareholder standard, it omits or misstates information a reasonable shareholder would consider important in deciding how to vote.
- For private damages under § 14(a) and Rule 14a-9, negligence may establish liability; proof of intent to deceive is not a prerequisite.
- Causation in § 14(a) litigation may be established when materially misleading proxy solicitation is an essential link in the corporate action’s approval process, even if a controlling shareholder could have carried the vote.
- Monetary relief for Rule 14a-9 violations may include restitutionary recovery tied to realized gains obtained through a transaction approved via a misleading proxy, but may not extend to speculative amounts based on unrealized appreciation or hypothetical outcomes.

## Conclusion

The Second Circuit sustained liability for materially misleading merger proxy disclosures under § 14(a) and Rule 14a-9, ruled that negligence suffices for private damages, and confined monetary recovery to profits actually realized from post-merger asset dispositions while excluding speculative claims for unrealized appreciation.


Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281 (2d Cir. 1973)