## Facts

- Nationwide Corporation sought shareholder approval for a merger that would eliminate the public minority interest by combining Nationwide with its corporate parent in a going-private, freeze-out transaction.
- Going-private transactions of this kind were governed by § 13(e) of the Securities Exchange Act of 1934 and SEC Rule 13e-3, which impose transaction-specific disclosure duties when an issuer or its affiliates take a company private.
- Nationwide distributed proxy materials to solicit the votes of Howing Company and other minority shareholders in connection with the proposed merger.
- Howing, on behalf of itself and a class of similarly situated minority shareholders, sued Nationwide alleging that the proxy materials failed to satisfy Rule 13e-3’s disclosure requirements.
- Nationwide moved to dismiss, arguing that under the Supreme Court’s decision in *Virginia Bankshares, Inc. v. Sandberg*, minority shareholders who lack enough voting power to affect the outcome of a vote cannot establish actionable causation based on alleged misstatements or omissions in a proxy solicitation.
- Howing argued that *Virginia Bankshares* should not control because:
  - *Virginia Bankshares* arose under § 14(a) and Rule 14a-9, not § 13(e) and Rule 13e-3 with their going-private disclosure regime; and
  - unlike the shareholders in *Virginia Bankshares*, the minority shareholders here had state-law remedies, including appraisal rights, and misleading disclosures could have interfered with the ability to make informed use of those remedies.

## Issues

1. Whether *Virginia Bankshares* bars, as a matter of law, a minority shareholder’s § 13(e)/Rule 13e-3 disclosure claims arising from a freeze-out merger when the minority’s votes were not needed to approve the transaction.
2. Whether alleged misstatements or omissions in going-private proxy materials can satisfy causation where the disclosures plausibly affected minority shareholders’ ability to pursue available state-law remedies such as appraisal.

## Decision

- The court rejected the argument that *Virginia Bankshares* automatically forecloses causation for minority shareholders bringing claims based on § 13(e) and Rule 13e-3.
- The court held that a minority shareholder may attempt to prove causation for Rule 13e-3 disclosure violations even if the minority could not block the merger by voting, where the alleged disclosure failures could have affected shareholders’ decisions and available remedial choices.
- The court recognized that the existence of state-law appraisal rights and related remedies can provide a non-speculative causal pathway: deficient proxy disclosures may cause shareholders to forgo, delay, or mishandle appraisal demands or other protections, resulting in economic loss.
- The case was permitted to proceed rather than being dismissed solely on the ground that the minority’s votes were not outcome-determinative.

## Legal Principles

- § 13(e) and SEC Rule 13e-3 impose specific disclosure obligations in going-private transactions, reflecting the risk of overreaching when a controller cashes out minority shareholders.
- *Virginia Bankshares* limits proxy-based causation theories that rest only on the idea that minority votes were solicited even though they could not change the vote outcome; it does not eliminate all causation theories for minority shareholders in every context.
- In a Rule 13e-3 case, causation may be shown where misleading or incomplete disclosures plausibly affected the shareholder’s economic position by influencing decisions other than the vote itself, including the informed exercise of state-law appraisal rights or related remedies.
- At the pleading stage, it is enough to allege a concrete, non-hypothetical connection between the challenged disclosures and a loss-producing decision (for example, being misled into not seeking appraisal or not taking steps required to preserve appraisal).

## Conclusion

The court held that *Virginia Bankshares* did not categorically bar minority shareholders from pursuing § 13(e)/Rule 13e-3 claims arising from a freeze-out merger merely because the minority lacked voting power to stop the deal; where misleading going-private disclosures could have affected shareholders’ ability to make informed use of state-law remedies such as appraisal, minority shareholders could attempt to prove causation and proceed with their claims.


Howing Co. v. Nationwide Corp., 927 F.2d 700 (1992)