Civil Liability Under the Federal Proxy Rules

Although tender offers continue to be the most popular method of acquiring control of a corporation, recent times have seen the increasing use of proxy contests. When a corporate tender offer is followed by a merger or asset acquisition, the proxy rules are also likely to be of considerable importance. Whatever might be said with regard to the adequacy of the disclosure rules under the Williams Act (and much has been said) Professor Loss's observation, made as early as 1951, that "[t]he proxy rules are very likely the most effective disclosure device in the SEC scheme" continues to be a valid appraisal. Indeed, the centrality of the proxy and annual reporting provisions of the Securities Exchange Act of 1934 has now been recognized both by the American Law Institute's ill-fated Proposed Federal Securities Code, and the Securities and Exchange Commission's adoption of its "Integrated Disclosure System," greatly simplifying the disclosure required by the Securities Act of 1933 for corporations which are already filing periodic reports pursuant to the Securities Exchange Act of 1934.

The law relating to proxy disclosure is of an older vintage than that which deals with tender offers, but there are still some issues on which courts continue to differ with respect to proxy regulation. This Article will examine four of these, namely whether, and to what extent, reliance, causation, materiality and scienter are required for actions under the proxy rules.