## Facts

- Minority shareholders brought a derivative and class action alleging a merger proxy statement was materially misleading under § 14(a) of the Securities Exchange Act and SEC Rule 14a-9.
- Mergenthaler acquired a majority of Electric Auto-Lite’s stock (about 54.2% by March 1962) and controlled Auto-Lite’s board through its nominees.
- In 1963, Auto-Lite and Mergenthaler merged into a new corporation (Eltra); Auto-Lite’s board recommended the merger and solicited shareholder approval via a mailed proxy statement.
- The proxy statement omitted that Auto-Lite’s directors were controlled by Mergenthaler, an omission previously determined to be materially misleading.
- The merger required a two-thirds vote; minority proxies representing roughly 13% of the minority shares were needed, making the proxy solicitation an essential link to consummation.
- The companies’ stocks were widely traded; the merger consideration gave former Auto-Lite shareholders Eltra preferred stock (with a higher initial dividend and conversion rights) and gave former Mergenthaler shareholders Eltra common stock; both Eltra securities traded widely after the merger.
- On remand after earlier appellate proceedings establishing the proxy violation, the district court performed a valuation analysis, found the merger unfair to Auto-Lite’s minority shareholders, and awarded over $1 million in damages for undercompensation.
- Both sides appealed, disputing the fairness finding and the availability of post-remand litigation expenses.

## Issues

1. Whether the district court correctly found, as a matter of valuation and fact, that the merger terms were unfair to Auto-Lite’s minority shareholders, supporting a damages award.
2. Whether plaintiffs could recover litigation expenses incurred after the earlier Supreme Court decision where later proceedings allegedly produced no additional substantial benefit.

## Decision

- The Seventh Circuit reversed the district court’s damages judgment, holding the merger terms were fair to Auto-Lite’s minority shareholders.
- The court held that reliable market prices in an active market were the most probative evidence of value and that the merger exchange ratio closely tracked the ratio implied by pre-merger market prices.
- The court concluded that non-market valuation measures (e.g., earnings and book value) did not justify a finding of undercompensation on this record when they conflicted with robust market data.
- The court rejected the claim that merger-related combination benefits were improperly captured by former Mergenthaler shareholders, finding insufficient evidence that former Auto-Lite holders were disadvantaged.
- The court denied recovery of post-remand litigation expenses, reasoning that the post-remand proceedings conferred no additional substantial benefit once the damages award was reversed.

## Legal Principles

- After § 14(a) and Rule 14a-9 liability is established, monetary relief requires proof of economic loss; transactional “fairness” may be relevant to remedy even if it is not a defense to liability.
- In assessing whether merger consideration was fair for damages purposes, market price evidence from an active and reliable market generally warrants substantial weight.
- Other valuation indicia (such as earnings and book value) may be considered but are less persuasive when they materially conflict with reliable market pricing.
- Fee or expense shifting in representative shareholder litigation depends on whether the litigation conferred a substantial benefit; costs for proceedings that yield no additional benefit may be denied.

## Conclusion

The Seventh Circuit accepted that the proxy statement omission established § 14(a) liability but held the record did not support a finding of undercompensation; giving primacy to reliable market-price evidence, it reversed the damages award and denied post-remand expenses because the later litigation produced no additional substantial benefit.


Mills v. Electric Auto-Lite Co., 552 F.2d 1239 (7th Cir. 1977)