## Facts

- A Cisco Systems, Inc. shareholder brought a derivative action challenging disclosures in a proxy statement soliciting votes on an amendment to Cisco’s outside-director option program.
- The amendment increased the initial stock option grant to new outside directors from 20,000 to 30,000 shares and increased the annual grant to continuing outside directors from 10,000 to 15,000 shares.
- Cisco’s proxy statement disclosed the cash retainer paid to outside directors ($32,000 annually) and described the option grants and key terms, but did not quantify the options’ present-value “cost” using the Black-Scholes option pricing model.
- The shareholder alleged the proxy was materially misleading because it omitted (1) Black-Scholes valuations showing substantially higher compensation and (2) alleged adverse federal estate, gift, and generation-skipping transfer tax consequences for recipients of the options.
- The district court dismissed the complaint under Rule 12(b)(6) for failure to state a claim under § 14(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9.

## Issues

1. Whether omission of Black-Scholes option valuations from the proxy statement was a material omission actionable under § 14(a) and Rule 14a-9.
2. Whether omission of alleged adverse federal tax consequences of the option grants was a material omission actionable under § 14(a) and Rule 14a-9.
3. Whether materiality could be resolved as a matter of law at the pleading stage on these allegations.

## Decision

- The Ninth Circuit affirmed the Rule 12(b)(6) dismissal.
- The court held that the proxy’s failure to include Black-Scholes valuations was not material under § 14(a) and Rule 14a-9.
- The court held that the proxy’s failure to discuss alleged adverse federal tax consequences was not material.
- Because the alleged omissions were not materially misleading in context, the complaint failed to state a § 14(a) claim.

## Legal Principles

- Under § 14(a) and Rule 14a-9, an omission is actionable only if there is a substantial likelihood that a reasonable shareholder would consider the omitted fact important in deciding how to vote, such that it would significantly alter the total mix of available information.
- Proxy rules do not impose a general duty to include a specific quantitative valuation methodology (such as Black-Scholes) for option grants absent a legal requirement or facts showing that omission makes disclosed information misleading.
- Proxy materials generally need not provide detailed, recipient-specific tax analyses absent a showing that the omission would materially affect a reasonable shareholder’s voting decision.
- Materiality may be decided as a matter of law at the pleading stage when the alleged omission is so unimportant to a reasonable investor that reasonable minds could not differ.

## Conclusion

The Ninth Circuit held that Cisco’s proxy disclosures about outside-director option grants were sufficient under § 14(a) and Rule 14a-9 and that the challenged omissions—Black-Scholes option values and alleged adverse tax consequences—were immaterial as a matter of law, warranting dismissal for failure to state a claim.


Seinfeld v. Bartz, 322 F.3d 693 (9th Cir. 2003)