Virginia Bankshares, Inc. v. Sandberg

Virginia Bankshares, Inc. v. Sandberg
501 U.S. 1083 (1991)

FABI was the parent corporation to VBI. FABI also owned 85% of another corporation called American Bank of Virginia. FABI merged VBI with American Bank.

This was a "freeze-out" merger. The shareholders who owned the other 15% of American Bank got cashed out.
FABI hired an independent appraiser who figured that the American Bank shares were worth $42 each.

FABI submitted the merger proposal to a vote at the shareholders' meeting. When they sent out the proxy solicitation, they urged the shareholders to approve the merger because if was a "fair price" and a "high value."
Most of the minority shareholders voted to approve the merger and cash out, but some did not. Sandberg voted against the merger, and then sued to block it.

Sandberg argued that some of the directors had not thought that the merger terms were fair, but voted for it anyway so they could stay on the Board.

Sandberg argued that was a violation of the Securities Exchange Act of 1934 Rule 14a-9 which prohibits the solicitation of proxies by means of materially false or misleading statements.

Sandberg also argued that the directors had breached their fiduciary duty to minority shareholders.
VBI argued that the terms used in the proxy solicitation weren't 'facts' they were just 'opinions' so Rule 14a-9 did not apply.

The US Supreme Court found that terms like "fair price" and "high value" have a factual basis and can be materially misleading.

Basically, it doesn't matter if the statements are couched in terms of 'opinions' and not 'facts', if the directors make a statement that is false, and that falsity is somehow material to the transaction, then it is potentially a violation of Rule 14a-9.

However, the Court found that the link between the statements in the proxy solicitation and the merger process is too speculative and too procedurally intractable to find an implied private right of action.
The Court found that since VBI owned 80% of the shares, it really didn't matter how the minority voters voted. Since it didn't matter how the vote turned out, any statements the directors made couldn't possible be considered material to the merger. It was going to happen regardless.

In a concurrence, it was suggested that directors can reduce their exposure to liability if they make clear they are expressing opinions and not facts when they send out a proxy solicitation.