"Just the facts, Ma'am," is as much a precept of securities law as it was of Joe Friday's police investigations. The law says that proxy statements asking stockholders to vote on key proposals for a corporation have to give all the relevant facts, but need not disclose anything about the personal motivations of the executives recommending voting for -- or against -- the proposal.
The line in real life is not as clear as it seemed on television, however. And a recent 2-to-1 decision by the U.S. Court of Appeals in New York may have smeared even more the distinction between facts and motivations. The ruling is particularly important because the New York court is considered a leader in securities cases.
The dispute stems from the 1981 sale of Loehmann's Inc., a chain of discount designer women's clothing stores, to AEA Investors Inc. The heirs of the company's founders, Charles and Anita Loehmann, actively sought a buyout deal because they were short of liquid assets to pay the large estate taxes after Anita Loehmann's death in 1980. The proxy statement asking public holders of the company to accept the AEA offer, however, said nothing about the estate tax bill.
When a disgruntled stockholder sued, the trial judge threw out the suit. The ruling pointed out that estate taxes can be deferred when the deceased person owned at least 20 percent of an ongoing business and that holding made up more than 35 percent of the gross value of the estate.
The Loehmann's stock fits both criteria, meaning that the family could defer paying any of the taxes for five years, although annual interest payments would be due, and could then stretch the tax payments over 10 more years. That means that Anita Loehmann's heirs had no pressing need for cash, the judge reasoned.
The family might have decided it would be better off settling the tax bill immediately, but the District Court judge found no legal reason to share that with outside stockholders.
The appellate court majority, however, said that leaving out details of the estate tax dilemma might well be misleading. They ordered a full trial on the claims.
"A proxy statement need not disclose the underlying motivations of a director or major shareholder so long as all the objective material facts relating to the transaction are disclosed," Judge Richard J. Cardamone acknowledged in the Nov. 1 ruling in Mendell v. Greenberg. But he held that the fact of the estate tax obligation might well be material.
Dissenting judge Ellsworth A. VanGraafeiland argued that the only reason the fact might be material "is that it might have been a motivating factor in the Loehmann family's decision to sell."
Therefore, he says, what the majority is really decreeing is that motivation may have to be included in the material given stockholders in proxy statements.
In other cases, courts ruled that:
Greenmail payments cannot be deducted on corporate tax returns. The U.S. Claims Court admitted the it may be an essential expense for a business to buy off potential raiders by redeeming their stock at a premium over the going market price. But the Tax Code says that no payments a corporation makes for stock redemption are deductible business expenses, regardless of the reasons for the buyback.
Stokely-VanCamp v. U.S., Nov. 2. Quelling worker fears about on-the-job radiation is more important than keeping employees' secrets. A divided Mississippi Supreme Court ruled that a worker at the Grand Gulf Nuclear Power Station had no legitimate grounds for suing the construction company for which she worked for invasion of privacy. Her supervisor had told colleagues that the woman had had a partial hysterectomy.
The Justices said that making public what would normally be private information was OK because it was necessary for co-workers to know why the woman had become ill on the job two months after the operation. Otherwise, the majority explained, rumors that she was suffering from radiation poisoning would continue to sweep through the plant.
Young v. Jackson, Nov. 7. Banks may be in trouble if officials steer customers to particular advisers or suppliers. The Bank Holding Company Act makes it illegal for a bank to tie the granting of a loan to a requirement that the borrower do business with another of its clients.
Now, in a decision that the dissenter argues goes beyond the intention of Congress, the U.S. Court of Appeals in New Orleans says that ban applies even to cases where the bank did not require use of the particular vendor. Even a strong suggestion that a particular firm be selected is unlawful, the ruling says, even if there is no coercion and the borrower understands that he can reject the suggestion and still get the loan.
Dibidale v. American Bank, Nov. 6. In figuring electoral districts, non-voters carry the same weight as voters. If the one-man-one-vote rule applies to the total population, voters in districts with a lot of children and noncitizens get more power. If it applies to the total number of eligible voters, residents of the more populous districts would have a harder time getting the attention of their representative.
By a 2-to-1 vote, the U.S. Court of Appeals in San Francisco decreed that everyone should be counted, reasoning that was the intent of those who wrote the Constitution, when only a small percentage of the population of some states had the vote.
Garza v. Los Angeles, Nov. 2.
Moskowitz is a Washington editor with Business Week newsletters.