Long Island Lighting Co. v. Barbash , 779 F.2d 793 ( 1985 )

CARDAMONE, Circuit Judge:

A Long Island utility furnishing that area with power has scheduled a stockholders meeting for Thursday December 12, 1985. It has been embroiled in public controversy over its construction of the Shore-ham Nuclear Power Plant and adverse publicity intensified recently because of extended loss of service to customers arising from damages to the transmission system caused by Hurricane Gloria.

In this setting, the company, believing that several groups had begun to solicit proxies during October in anticipation of the upcoming stockholders meeting, brought suit to enjoin them. The district court judge first slowed the matter by adjourning the case until the fall election was over, and then speeded it up by directing discovery to be completed in one day. Such handling only demonstrates again that in the law it is wise — even when expeditious action is required — to make haste slowly.

Long Island Lighting Company (LILCO) brings this expedited appeal from a November 8, 1985 order of the United States District Court for the Eastern District of New York (Weinstein, Ch.J.) that granted summary judgment dismissing LILCO’s complaint against the Steering Committee of Citizens to Replace LILCO (the Citizens Committee), John W. Matthews and Island Insulation Corp. LILCO brought this action to enjoin defendants’ alleged violations of § 14(a) of the Securities Exchange Act of 1934 and Rules 14a-9, 17 C.F.R. § 240.-14a-9 and 14a-ll, 17 C.F.R. 240.14a-ll, promulgated under that statute, that govern proxy solicitations. The complaint alleges that defendants have committed such violations by publishing a false and misleading advertisement in connection with a special meeting of LILCO’s shareholders scheduled for the purpose of electing a new LILCO Board of Directors. For the reasons explained below, this matter is remanded to the district court.

I

Plaintiff LILCO is a New York electric company serving Nassau and Suffolk Counties on Long Island, New York. Its common and preferred stocks are registered in accordance with Section 12(b) of the Securities Exchange Act and are traded on the New York Stock Exchange. Defendant John W. Matthews was an unsuccessful candidate for Nassau County Executive in the election held November 5,1985. During the campaign he strongly opposed LILCO and its operation of the Shoreham Nuclear Power Plant. As an owner of 100 shares of LILCO’s preferred stock and a manager of an additional 100 shares of common stock held by his company, Island Insulation Corp., Matthews initiated a proxy contest for the purpose of electing a majority of LILCO’s Board of Directors. The stated purpose of the other defendants, the Citizens Committee, is to replace LILCO with a municipally owned utility company. The Citizens Committee was formed prior to this litigation, in order to challenge LILCO’s construction of the Shoreham atomic energy plant, its service and its rates.

LILCO filed its complaint on October 21, 1985 alleging that defendants published a materially false and misleading advertisement in Newsday, a Long Island newspaper, and ran false and misleading radio advertisements throughout the New York area. The ads criticized LILCO’s management and encouraged citizens to replace LILCO with a state-run company. The complaint sought an injunction against further alleged solicitation of LILCO shareholders until the claimed false and misleading statements had been corrected and a Schedule 14B had been filed. The district court granted LILCO an expedited hearing on its appeal from Magistrate Scheindlin’s decision denying expedited discovery and also set for hearing defendants’ motions to dismiss the complaint pursuant to Fed.R. Civ.P. 12(b)(6).

On October 30, 1985 Chief Judge Wein-stein adjourned the hearing until November 6 in order to prevent interference with Matthews’ political campaign. The district court directed the defendants to bring the requested documents to the hearing on that date and told Matthews and others whom LILCO wished to depose to be available for such discovery. At the November 6 hearing the district judge directed LILCO’s counsel to question Matthews under oath and overruled counsel’s objections that he was unprepared to examine Matthews and that he had no prior opportunity to review the defendants’ documents. The trial court also refused LILCO’s request to question other defendants and told counsel that it must limit its questions to the alleged “conspiracy” between Matthews and the other defendants. Two days after this hearing the district court issued its Preliminary Memorandum Dismissing Complaint. Treating defendant’s motion to dismiss as one for summary judgment, the district court granted summary judgment in favor of defendants on the ground that the proxy rules did not apply to the advertisements. This appeal followed.

II

LILCO argues first, that in view of the necessity in every case to determine whether a communication constitutes a “solicitation” under the proxy rates, the district court abused its discretion by limiting LIL-CO’s opportunity for discovery. Second, LILCO asserts that the district court erroneously held that communications to shareholders through genera] and indirect publications can in no circumstances constitute “solicitations” under the proxy rules. Finally, LILCO contests the district court’s view that this construction of the proxy rules is necessary to render them compatible with the First Amendment.

A. Undue Limitation of Discovery

Although a district court has considerable latitude in determining the scope of discovery, it abuses its discretion when the discovery is so limited as to affect a party’s substantial rights. Goldman v. Checker Taxi Company, 325 F.2d 853, 856 (7th Cir.1963); see Roelding v. Anderson, 103 U.S.App.D.C. 237, 257 F.2d 615, 619 (1958). Here the district court abused its discretion when it cut off discovery by suddenly ordering LILCO to examine Matthews under oath — without notice or an opportunity to review the documents that had just been produced. Further, the district court improperly circumscribed counsel’s questions solely to conversations between Matthews and the other defendants when it denied counsel’s requests to question anyone other than Matthews. Under these circumstances, LILCO was denied a meaningful opportunity to establish that the subject advertisement was a solicitation within the meaning of 14(a). See Sargent v. Genesco, Inc., 492 F.2d 750, 768 (5th Cir.1978).

Grants of summary judgment on an incomplete record are generally disfavored, and this is particularly true where we conclude that the district court’s discretion over the fact-finding process has been tainted by an erroneous view of the law. See, e.g., Schlesinger Investment Partnership v. Fluor Corp., 671 F.2d 739 (2d Cir.1982) (reversing grant of summary judgment where discovery incomplete); Landmark Land Co. v. Sprague, 701 F.2d 1065 (2d Cir.1983) (same). Therefore, LILCO is entitled to further discovery for the purpose of attempting to establish that the defendants’ advertisement was, in the language of Rule 14a-l, 17 C.F.R. § 240.14a-l(f)(l)(iii), a “communication to security holders under circumstances calculated to result in the procurement, withholding or revocation of a proxy.”

B. Rules Governing Proxy Solicitation

In our view the district court further erred in holding that the proxy rules cannot cover communications appearing in publications of general circulation and that are indirectly addressed to shareholders. Regulation 14(a) of the Securities Exchange Act governs the solicitation of proxies with respect to the securities of publicly held companies, with enumerated exceptions set forth in the rules. 17 C.F.R. § 240.14a-l et seq. Proxy rules promulgated by the Securities Exchange Commission (SEC) regulate as proxy solicitations:

(1) any request for a proxy whether or not accompanied by or included in a form of proxy;

(2) any request to execute or not to execute, or to revoke, a proxy; or

(3) the furnishing of a form of proxy or other communications to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.

Rule 14a-l, 17 C.F.R. § 240.14a-l.

These rules apply not only to direct requests to furnish, revoke or withhold proxies, but also to communications which may indirectly accomplish such a result or constitute a step in a chain of communications designed ultimately to accomplish such a result. Securities and Exchange Commission v. Okin, 132 F.2d 784, 786 (2d Cir.1943) (letter to shareholders was within the scope of the proxy rules where it was alleged that it was “a step in a campaign whose purpose it was to get [defendant] elected an officer of the company; it was to pave the way for an out-and-out solicitation later.”)

The question in every case is whether the challenged communication, seen in the totality of circumstances, is “reasonably calculated” to influence the shareholders’ votes. See id.; Trans. World Corp. v. Odyssey Partners, 561 F.Supp. 1311, 1320 (S.D.N.Y.1983). Determination of the purpose of the communication depends upon the nature of the communication and the circumstances under which it was distributed. Brown v. Chicago, Rock Island & Pacific R.R., 328 F.2d 122 (7th Cir.1964). In Studebaker Corporation v. Gittlin, 360 F.2d 692, 694 (2d Cir.1966), the defendant solicited authorizations from shareholders to obtain a shareholder list in the course of a proxy fight. Because the authorizations were sought only for the purpose of seeking future proxies, the court held that the authorizations were also covered by the proxy rules. Id. at 696.

Deciding whether a communication is a proxy solicitation does not depend upon whether it is “targeted directly” at shareholders. See Rule 14a-6(g), 17 C.F.R. § 240.14a-6(g) (requiring that solicitations in the form of “speeches, press releases, and television scripts” be filed with the SEC). As the SEC correctly notes in its amicus brief, it would “permit easy evasion of the proxy rules” to exempt all general and indirect communications to shareholders, and this is true whether or not the communication purports to address matters of “public interest.” See Medical Comm, for Human Rights v. SEC, 432 F.2d 659 (D.C.Cir.1970) (applying proxy rules to shareholder’s proposal to prohibit company from manufacturing napalm during the Vietnam War). The SEC’s authority to regulate proxy solicitations has traditionally extended into matters of public interest.

C. First Amendment Concerns

The extent to which the activities of the defendants amount to a solicitation of the proxies of shareholders of LILCO may determine whether or not their actions are protected by the First Amendment. Therefore, it is unnecessary to express an opinion on any claim of privilege under the First Amendment until there has been a determination of the “solicitation” issue as a result of further proceedings in the district court.

Ill

Because discovery here was so abbreviated and the district court’s determination was predicated on a mistaken notion of what constitutes a proxy solicitation and on the relationship between the proxy rules and the First Amendment, the case must be remanded to the district court. LILCO represented during oral argument before us that — if given the opportunity — its discovery could be swiftly completed. We suggest that on remand the district court limit LILCO’s discovery to an appropriate period. Even this expedited schedule will obviously conflict with the scheduled stockholders meeting of December 12. LILCO advised the Court by letter dated November 22, 1985 that after reasonable discovery it also wanted an opportunity to move for a preliminary injunction. Thus, in light of its request the meeting should probably be postponed and, if necessary, stayed by order of the district court. Finally, this panel retains jurisdiction over this matter to the extent that after the district court has had an opportunity to conduct its proceedings and rule on the merits, we will address the issues raised on appeal.

In consideration of the time constraints, the mandate of the Court shall issue forthwith.