## Facts

- Datascope Corporation, a Delaware corporation headquartered in New Jersey, adopted a Management Incentive Plan (MIP) in 1997 intended to provide performance-based executive bonuses.
- In December 1999, Datascope’s compensation committee adopted a supplement setting performance goals for bonuses during a period ending July 2000.
- In May 2000, the committee amended the arrangement to increase CEO Lawrence Saper’s potential bonus by more than $1 million (from roughly $2.225 million to about $3.285 million if goals were met).
- In October 2000, the board solicited shareholder approval via a proxy statement, representing that approval was sought so bonuses would qualify as tax-deductible under Internal Revenue Code § 162(m), and stating that a bonus might still be paid even if approval were denied (potentially non-deductible).
- The proxy allegedly failed to disclose material terms of the prior MIP and the 1999 supplement and did not clearly disclose the magnitude of the increase in Saper’s potential bonus.
- Shareholders approved the plan as presented.
- Shareholder David B. Shaev brought a derivative action alleging violations of Exchange Act § 14(a) and SEC Rule 14a-9 based on materially false or misleading proxy disclosures; he also asserted a Delaware excessive-compensation claim. He did not make a pre-suit board demand, alleging demand futility.
- The district court dismissed the federal proxy claim under Rule 12(b)(6) and declined supplemental jurisdiction over the state claim; Shaev appealed.

## Issues

1. Whether the complaint plausibly alleged materially false or misleading statements or omissions in the proxy statement in violation of Exchange Act § 14(a) and Rule 14a-9, including omissions about the MIP’s prior terms, the 1999 supplement, and the bonus increase.
2. Whether statements about the bonus’s tax deductibility under I.R.C. § 162(m) were plausibly misleading and material.
3. Whether the complaint sufficiently pled transaction causation and corporate economic loss for a derivative § 14(a) claim at the motion-to-dismiss stage.
4. Whether dismissal of the federal claim justified declining supplemental jurisdiction over the related state-law claim.

## Decision

- The Third Circuit vacated the dismissal of the § 14(a)/Rule 14a-9 claim and remanded.
- The court held the complaint plausibly alleged material omissions and misleading statements, including “cryptic” and incomplete disclosure of compensation-plan terms and the size of the bonus increase.
- The court held the complaint plausibly alleged that the proxy’s representation about § 162(m) deductibility could be misleading given the alleged structure and administration of the bonus.
- The court held the allegations were sufficient at the pleading stage as to materiality, transaction causation (the proxy vote as an essential link), and corporate loss.
- Because the federal claim was reinstated, the court also vacated the dismissal of the state-law claim that had been dismissed on jurisdictional grounds.

## Legal Principles

- Rule 14a-9 prohibits proxy solicitations that contain materially false or misleading statements or omit material facts necessary to make statements not misleading.
- A proxy misstatement or omission is material if there is a substantial likelihood that a reasonable shareholder would view it as important in deciding how to vote, such that it would significantly alter the total mix of available information.
- Shareholders generally are not charged with knowledge of material information not included in the proxy statement; incomplete cross-references may be insufficient to satisfy disclosure duties.
- At the Rule 12(b)(6) stage, a § 14(a) plaintiff may proceed on plausible allegations that the proxy solicitation was an essential link in the transaction and that the corporation suffered economic harm flowing from the approved action.

## Conclusion

The Third Circuit held that a shareholder plausibly stated a derivative § 14(a)/Rule 14a-9 claim where a proxy allegedly obscured key compensation-plan terms, concealed a substantial increase in the CEO’s potential bonus, and misstated or implied tax deductibility under § 162(m), and it remanded for further proceedings while reviving supplemental jurisdiction over the related state claim.


Shaev v. Saper, 320 F.3d 373 (3d Cir. 2003)