Takeaway
In short, this case shows that a court will not intervene in a proxy contest merely because incumbent management uses disclosed corporate resources; absent fraud, coercion, illegality, unfairness, or irreparable harm, stockholders—not the court—decide who will manage the corporation.
Six substantial MGM stockholders, led by director Philip Levin, challenged incumbent management during a contest for control of MGM’s board. Levin’s group and the O’Brien management group each planned to nominate directors and solicit proxies for MGM’s February 23, 1967 annual meeting. The plaintiffs owned about 11 percent of MGM’s outstanding common stock and alleged that management was improperly using MGM’s money, offices, employees, goodwill, business relationships, lawyers, public-relations firm, and proxy solicitors to win the contest.
The plaintiffs did not claim that management’s proxy materials contained false or fraudulent statements, that management had engaged in corruption, or that the directors sought personal profit from the challenged conduct. They sought a preliminary injunction barring the challenged solicitation practices and barring management from voting proxies obtained through them, as well as $2.5 million in damages for MGM.
The action began in New York Supreme Court and was removed to federal court by MGM and several defendants. No party sought remand. Judge Ryan considered the plaintiffs’ application for temporary relief pending a final determination and denied it.
Issue #1
Whether management’s disclosed use of MGM funds and ordinary corporate resources to solicit proxies justified preliminary injunctive relief.
Holding
No. The plaintiffs did not show that management’s overall proxy-solicitation practices were illegal, unfair, or likely to cause irreparable harm.
Reasoning
The court emphasized that the choice between competing management groups belonged to MGM’s uncommitted stockholders, not to the court. Judicial intervention in a proxy contest could itself improperly influence stockholders’ voting decisions, so an injunction was appropriate only if illegal or unfair methods of communication required it.
MGM’s January 6 proxy statement disclosed that MGM would pay management’s solicitation costs, reimburse certain holders’ reasonable expenses, employ Georgeson & Co. and Kissel-Blake, use regular employees without extra compensation, and spend an estimated $125,000 apart from ordinary election-related costs and regular salaries. The court found neither the disclosed amounts nor the disclosed method of operation excessive, unfair, or unlawful.
The court found no violation of a federal statute or SEC proxy rule. It also noted that the Levin group was using comparable solicitation methods and projected even greater expenses, although Levin and affiliated entities initially planned to pay those expenses personally. The absence of alleged false statements, fraud, corruption, or self-dealing further undermined the request for extraordinary interim relief.
Because the plaintiffs failed to establish a right to an injunction and did not show irreparable harm, the court denied their motion for preliminary relief.
Issue #2
Whether MGM management could use corporate employees and branch managers to assist in proxy solicitation.
Holding
Yes. The limited, customary use of employees and branch managers was not shown to be unreasonable, coercive, or unlawful.
Reasoning
Management represented without contradiction that fewer than 150 employees had agreed to telephone stockholders on their own time. The court rejected the plaintiffs’ unsupported assertion that 9,000 employees were soliciting proxies and treated the actual scale of employee participation as limited and moderate.
MGM had followed substantially the same practice for roughly fifteen years. Management also sent its branch managers and Canadian head office materials containing annual reports and information already supplied to stockholders, asking for their assistance in solicitation.
There was no allegation that employees faced threats, reprisals, or other coercion if they declined to help. Nor was there any claim that the materials supplied to employees contained false or misleading information intended to deceive stockholders. On this record, ordinary employee loyalty and voluntary support for management did not warrant an injunction.
Issue #3
Whether MGM’s employment of multiple professional proxy-solicitation firms at corporate expense should be enjoined.
Holding
No. The use of two disclosed firms, with distinct solicitation functions and nonexcessive fees, did not support injunctive relief.
Reasoning
MGM disclosed that Georgeson & Co. would solicit stockholders directly for a $15,000 fee and that Kissel-Blake would concentrate on brokerage solicitations for a $5,000 fee. The court found those fees reasonable and the division of responsibilities unobjectionable.
Management also stated without contradiction that MGM had hired both firms every year since 1956 for stockholder meetings. That longstanding practice supported the conclusion that the firms’ retention was a regular corporate method of conducting proxy solicitations rather than an improper diversion of corporate assets.
The court likewise saw no basis to enjoin MGM’s use of Dudley King & Co. as a consultant on corporate and stockholder-relations matters. It also could not forbid an independent management supporter, who was not a party to the action, from hiring another proxy firm at his own expense.
Issue #4
Whether favorable proxy-related advertisements by persons who had business relationships with MGM violated the Securities Exchange Act of 1934.
Holding
No. Unsolicited advertisements by actors, directors, writers, and exhibitors supporting management were not shown to violate the Act.
Reasoning
The plaintiffs objected to paid advertisements in which persons connected to MGM’s business expressed confidence in incumbent management. Management responded that these statements were spontaneous, unsolicited, and paid for entirely by the speakers, without a direct or indirect promise of reimbursement from MGM.
The plaintiffs offered no proof to dispute that account. In the absence of evidence that MGM bought, directed, or secretly compensated for the endorsements, the court saw no unlawful use of MGM’s business relationships.
The court concluded that management was not required to disavow favorable public comments it regarded as deserved. Such independently financed expressions of support did not establish a Securities Exchange Act violation or justify preliminary relief.
Issue #5
Whether MGM’s continued employment of a public-relations firm during the proxy contest was improper.
Holding
No. The public-relations engagement was a preexisting and reasonable corporate arrangement, not a basis for an injunction.
Reasoning
MGM had retained Thomas J. Deegan Company, a recognized public-relations firm, under a contract entered on April 28, 1966. The engagement preceded the present proxy contest and was subject to a thirty-day cancellation provision.
The court found that a company of MGM’s size and prominence could reasonably retain a public-relations firm. Because the contract was neither unusual nor shown to be a proxy-contest device improperly imposed on the corporation, its continuation did not warrant injunctive relief.
Issue #6
Whether MGM could use corporate funds to retain Louis Nizer’s law firm and proxy associates in connection with the contest.
Holding
Yes. MGM could retain counsel at corporate expense where the firm had an established relationship with MGM and the engagement was reasonably connected to matters important to stockholders.
Reasoning
The affidavits showed that Nizer’s firm had represented MGM for many years in various litigated matters. The plaintiffs did not challenge the firm’s competence, and management regarded its continued involvement as justified by the importance of the proxy-contest-related matters to MGM and its stockholders.
The court held that the retention of outside counsel did not itself establish an improper use of corporate funds. If the fees later proved excessive, stockholders could object to the amount, but a possible future objection to fees did not justify an immediate injunction.