Dropping Knowledge: What is Proxy Fraud?

March 26, 2011

Companies need to obtain a shareholder vote to elect directors and for various other corporate transactions (like reorganizations/mergers).  These votes must be cast at the annual meeting.  It is impossible to collect all the votes in person, companies send proxy statements to obtain votes for shareholders.  Because of the potential for abuse with the proxy process, part of the 1934 Securities Act outlawed misleading statements in proxies.  Specifically, SEC Rule 14a-9 (the rule promulgated under the ’34 Act) states:

No solicitation . . . containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.

That’s a lot of words.  But, basically, companies can’t make misstatements or omit material information in proxy statements.  And, unlike the “normal” securities fraud, these statements or omissions just have to be misleading, a fraudulent state of mind is unnecessary for liability.

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