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Mills v. Electric Auto-Lite Co. | 396 U.S. 375 (1970)
In the 1964 case J. I. Case Company versus Borak, the United States Supreme Court first recognized an implied private cause of action for a materially false or misleading proxy statement under section 14(a) of the Securities Exchange Act of 1934. Six years later, in Mills versus Electric Auto-Lite Company, the Court considered whether a plaintiff must show a causal connection between a materially false or misleading proxy statement and the plaintiff’s injury to establish a cause of action under section 14(a) of the act.
The Electric Auto-Lite Company was a major manufacturer of automobile repair parts, including spark plugs and batteries. However, by the late 1950s, changes in the automobile industry threatened Auto-Lite’s traditional business. It therefore began diversifying into other industries.
At the same time, the Mergenthaler Linotype Company, which produced and distributed typesetting equipment used for newspapers, began purchasing Auto-Lite stock. By 1962, Mergenthaler had acquired about 54 percent of Auto-Lite’s stock. Consequently, Auto-Lite became a subsidiary of Mergenthaler, which obtained control of Auto-Lite’s board of directors.
In 1963, Mergenthaler attempted to merge with Auto-Lite. But for the merger to pass, about 13 percent of Auto-Lite’s minority shareholders had to approve it. Auto-Lite’s board then sent proxy requests to Auto-Lite’s minority shareholders recommending they approve the merger.
Subsequently, a group of Auto-Lite’s minority shareholders, including Elmer Mills, sued Auto-Lite in federal district court, seeking to enjoin the merger. Nonetheless, because the shareholders didn’t seek a temporary restraining order, the voting occurred and the merger passed. Later, the shareholders filed an amended complaint, seeking to set aside the merger. Specifically, they argued that the proxy statement was deceptive and included a material omission under section 14(a) of the act because it didn’t disclose that Mergenthaler controlled Auto-Lite’s board.
Following a motion for summary judgment, the district court agreed, concluding that the proxy statement included a material omission and that a causal connection existed between the violation of the act and the harm to the shareholders. Auto-Lite filed an interlocutory appeal to the Seventh Circuit, which reversed, concluding that, though the statement included a material omission, no causal connection existed between the violation of the act and the harm to the shareholders because the terms of the merger were fair. The United States Supreme Court then granted cert.
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