## Facts

- Minority shareholders of Electric Auto-Lite Co. brought a derivative and class action challenging a merger in which Auto-Lite was merged into Mergenthaler Linotype Co.
- Mergenthaler owned a majority of Auto-Lite’s stock and controlled Auto-Lite; a third company held a substantial stake in Mergenthaler and, through it, influenced control.
- The merger required shareholder authorization solicited through a proxy statement.
- The proxy statement recommended the merger as the board’s judgment but did not disclose that all 11 Auto-Lite directors were Mergenthaler nominees subject to its control and domination.
- The district court held the omission material under § 14(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9 and found that minority votes were necessary to approve the merger.
- The court of appeals agreed the proxy was materially deficient but required causation to be tested by the merger’s fairness.
- The Supreme Court reviewed the causation standard and the role of merger fairness in a private § 14(a) action.

## Issues

1. In a private action under § 14(a) and Rule 14a-9, is causation established by showing a material proxy misstatement or omission that was used to obtain required shareholder authorization for a merger, without proving the misstatement actually changed votes?
2. Can the substantive fairness of the merger defeat liability for a materially misleading proxy solicitation?

## Decision

- The Court held that the fairness of the merger is not a defense to liability for materially misleading proxy solicitation under § 14(a).
- The Court held that causation is satisfied when the proxy solicitation containing a material misstatement or omission was an “essential link” in accomplishing the transaction, meaning the shareholder authorization was required and the solicitation was necessary to obtain it.
- The Court rejected any requirement that plaintiffs prove individualized reliance or that the misstatement was outcome-determinative for particular shareholders.
- The Court remanded for further proceedings on appropriate relief.

## Legal Principles

- § 14(a) and Rule 14a-9 protect informed shareholder voting; proxy solicitations must not contain material misstatements or omissions.
- In a § 14(a) private action, causation for liability is established when a materially misleading proxy solicitation was an essential link to the challenged corporate action because shareholder approval was required and obtained through the solicitation.
- The substantive fairness of a merger does not excuse materially deceptive proxy disclosures and does not defeat § 14(a) liability.
- Remedies in § 14(a) actions are flexible and should be shaped to effectuate the statutory purpose, potentially including equitable and monetary relief depending on the circumstances.

## Conclusion

The Court held that a materially misleading proxy statement used to secure required shareholder approval satisfies § 14(a) causation because it is an essential link in the transaction, and that merger fairness cannot be used to avoid liability; the case was remanded to determine an appropriate remedy.


Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970)