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Skaflestad v. Huna Totem Corp. (8/29/2003) sp-5732
Skaflestad v. Huna Totem Corp. (8/29/2003) sp-5732
Notice: This opinion is subject to correction before
publication in the Pacific Reporter. Readers are
requested to bring errors to the attention of the Clerk
of the Appellate Courts, 303 K Street, Anchorage,
Alaska 99501, phone (907) 264-0608, fax (907) 264-0878,
e-mail corrections@appellate.courts.state.ak.us.
THE SUPREME COURT OF THE STATE OF ALASKA
ALF R. SKAFLESTAD and )
KARLENE GREENEWALD, ) Supreme Court No. S-10353
for themselves and for all others )
who are similarly situated, ) Superior Court No.
) 1JU-00-0463 CI
Appellants, )
)
v. )
) O P I N I O N
HUNA TOTEM CORPORATION, )
and HUNA TOTEM CORPORATION ) [No. 5732 - August 29, 2003]
SHAREHOLDER SETTLEMENT )
TRUST, )
)
Appellees. )
)
Appeal from the Superior Court of the State
of Alaska, First Judicial District, Juneau,
Patricia A. Collins, Judge.
Appearances: Fred W. Triem, Petersburg, for
Appellants. Bruce E. Gagnon, Atkinson, Conway
& Gagnon, for Appellee Huna Totem Corporation
Shareholder Settlement Trust. Daniel G.
Bruce, Baxter Bruce & Sullivan, P.C., Juneau,
and Barbra Zan Nault, Bankston, Gronning,
O'Hara, Sedor, Mills, Givens & Heaphey, P.C.,
Anchorage, for Appellee Huna Totem
Corporation.
Before: Fabe, Chief Justice, Eastaugh,
Bryner, and Carpeneti, Justices. [Matthews,
Justice, not participating.]
BRYNER, Justice.
I. INTRODUCTION
In keeping with a recommendation by Huna Totem
Corporation's board of directors, the company's shareholders
voted to put a large sum of available funds into a settlement
trust. Certain shareholders later filed a class action, alleging
that proxy information Huna Totem sent them in creating the trust
was materially misleading because it failed to disclose that,
once established, the trust could not be modified or terminated
by shareholders unless two-thirds of its trustees recommended the
action. After a bench trial, the superior court entered judgment
for Huna Totem, finding that, although some of its proxy
information was incomplete and ambiguous, the totality of the
information was not materially misleading. Because the superior
court applied the correct test of materiality and the evidence
supports its ruling, we affirm the judgment in Huna Totem's
favor.
II. FACTS AND PROCEEDINGS
Huna Totem Corporation is an Alaska Native village
corporation organized under the Alaska Native Claims Settlement
Act (ANCSA).1 In 1993 Huna Totem entered into a tax settlement
with the IRS that left the corporation with more than $35 million
in unrestricted cash in 1994. In debating what to do with these
funds, Huna Totem's board of directors grew interested in the
idea of establishing a settlement trust, and eventually the board
proposed that its shareholders dedicate the settlement funds to a
settlement trust.2
In May 1994 the board sent shareholders an introductory
"Shareholder Information Packet" describing the recent IRS
settlement and introducing the idea of a settlement trust. This
packet described the proposed trust in general terms, emphasizing
that the information it contained was "not by any means a
complete discussion of all of the important aspects of the
Trust." In addressing how the trust could be modified or changed
once adopted, the packet said only that "[a]t periodic intervals
- initially five years after the Trust is established, and then
once every ten years thereafter - the beneficiaries could, by
vote of a two thirds of all units, choose to distribute some or
all of the accumulated income and principal, or to terminate the
Trust entirely." The preliminary packet promised that
"[s]hareholders will be hearing and learning more about the Trust
in the upcoming months, and will receive additional, detailed
information."
In keeping with this promise, two months later, in July
1994, Huna Totem sent its shareholders a formal proxy
solicitation that covered the proposed trust's review and
termination provisions in far greater detail. The solicitation
explained that, once established, the trust could be amended or
ended by shareholders only if the action was recommended by the
trust's board of trustees:
The accumulated income and Settlement Trust
principal generally would not be available to
be distributed, except that five years after
the Settlement Trust is established, and then
once every ten years thereafter - upon a
recommendation of two-thirds of the trustees,
ratified by a two-thirds vote of the unit
holders, some or all of the accumulated
income and principal could be distributed or
the Settlement Trust could be terminated
entirely.
This explanation mirrored the provisions of the proposed
settlement trust itself, the full text of which accompanied the
July 1994 proxy solicitation as an appendix.
After the corporation mailed the proxy solicitation in
late July 1994, members of its board conducted a series of
shareholder workshops to discuss the proposed trust.
Shareholders then overwhelmingly approved the trust proposal at a
special meeting in September 1994, and the trust was established.
The five-year review began in January 2000. Huna Totem
solicited shareholder comments and held public meetings in
several cities. The corporation also hired a research company to
survey shareholders' opinions on the trust; this "survey showed
that a substantial majority of unit holders favored continuation
of the Trust, although many wanted some distribution of the trust
corpus." In March 2000 the trustees voted to recommend a
"relatively small" partial liquidation of the trust.
Shareholders were then sent an information packet and a ballot to
vote on this recommendation. They voted to ratify the trustees'
recommendation by a six-to-one ratio. The settlement trust
subsequently paid shareholders distributions of $50 per share,
totaling roughly $4.4 million; the rest of the trust assets,
about $40 million by then, remained in the settlement trust,
subject to further review in ten years.
Soon after the board of trustees issued its five-year
recommendation, several dissatisfied shareholders filed the class
action at issue here, seeking to terminate and invalidate the
settlement trust in its entirety because, they alleged, the
information provided to shareholders by Huna Totem before the
trust was adopted materially misled them concerning their right
to vote on the issue of termination. In particular, these
shareholders argued that the proxy materials led them to believe
that shareholders would have the unqualified right to vote on the
trust's continued existence without regard to any recommendation
by the trust's board of trustees. The shareholders based their
claims in large part on the preliminary packet of information
provided to shareholders in May 1994, which stated that
shareholders "could" vote to review the trust in five years but
did not explain that the shareholder vote would be contingent on
the trustees' recommendation. According to the class action
shareholders, the confusion generated by these preliminary
communications was perpetuated by oral representations made by
directors who met with shareholders to answer questions after
Huna Totem mailed its formal proxy solicitation in July 1994.
Huna Totem denied these allegations, claiming that its proxy
materials accurately explained the five-year review process.
After a four-day bench trial, Superior Court Judge
Patricia A. Collins ruled in favor of Huna Totem. Although Judge
Collins believed that "the actual Proxy Statement is clear and
unambiguous," she found that the "oral statements by directors
and the `brief' review of the proposed trust included in
shareholder materials distributed prior to the vote were
ambiguous in that they omitted information about the role of the
trustees in the review process and procedure regarding future
shareholder votes to modify or terminate the trust." But noting
that, under Brown v. Ward, Alaska law deems proxy materials to be
materially misleading or false only " `if there is a substantial
likelihood that a reasonable shareholder would consider it
important in deciding how to vote,' "3 the judge found that any
information omitted from Huna Totem's preliminary materials or
the directors' post-solicitation oral communications was not
materially misleading in light of "the total mix of information
available about the review process."4 Furthermore, though
emphasizing that she was "not at all convinced that the alleged
omissions had any impact on the initial vote to create the
trust," Judge Collins alternatively found that the plaintiffs'
proposed remedies - setting aside the trust, an award of nominal
damages, and/or a revote on establishing the trust - would be
barred as inequitable "[b]ecause of the long delay in seeking
court intervention" and the significant harm that would
inevitably result from " `unscrambling' the trust at this late
date."
The plaintiffs/shareholders appeal.
III. DISCUSSION
A. Standard of Review
The two central issues in this case - whether the
superior court applied the wrong legal test in determining
materiality and whether the court erred in failing to find
material misstatements under the correct legal standard -
primarily present questions of law; but the issue of materiality
also implicates issues of fact.5 We review the trial court's
legal determinations using our independent judgment and review
its factual determinations for clear error.6
B. Alaska Securities Law
Alaska corporations created under ANCSA are exempt from
the federal Securities Act of 1933 and Securities Exchange Act of
1934.7 To the extent that the shareholders' claims are not
directly governed by ANCSA, then, they are controlled by Alaska
law rather than federal securities law.8 Nevertheless, as we
held in Brown v. Ward, interpretations of relevant SEC and
federal common law prohibitions against material falsehoods in
proxy statements provide a "useful guide" in interpreting similar
securities issues arising under state law in ANCSA cases.9
The Alaska Securities Act prohibits misrepresentations
of material fact in proxy solicitations:
A person may not, in a document filed with
the administrator or in a proceeding under
this chapter, make or cause to be made an
untrue statement of a material fact or omit
to state a material fact necessary in order
to make the statements made, in the light of
the circumstances under which they are made,
not misleading.[10]
Under this provision, a two-fold analysis applies to
misrepresentation issues in proxy solicitation cases, requiring
courts to ask, first, whether any statements amounted to
misrepresentations and, if so, whether those misrepresentations
are material when considered "in the light of the circumstances
under which they are made."11
The relevant definition of "misrepresentation," as set
forth in 3 AAC 08.315(a), includes both positive statements and
omissions:
[A] statement that, at the time and under the
circumstances in which it is made (1) is
false or misleading with respect to a
material fact; (2) omits a material fact
necessary in order to make a statement made
in the solicitation not false or misleading;
or (3) omits a material fact necessary to
correct a statement, in an earlier
communication regarding the solicitation of a
proxy for the same meeting or subject matter,
which has become false or misleading.
Under these provisions, then, statements or omissions
qualify as misrepresentations when they are "misleading or
false," and "a misleading or false statement `is material if
there is a substantial likelihood that a reasonable shareholder
would consider it important in deciding how to vote.' "12
C. Shareholders' Claims
1. Alleged misapplication of a scienter requirement
The shareholders first assert that the trial court
erred by applying the wrong legal standard to their proxy
solicitation claims. Specifically, they claim, Judge Collins
imposed a scienter requirement and refused to impose liability
because she found that management did not intend to deceive the
shareholders. Huna Totem does not dispute that it would be
improper to require scienter in determining materiality but
insists that Judge Collins applied the correct materiality
standard and did not require scienter. The record supports Huna
Totem's position.
The shareholders base their scienter argument on
several comments in the court's oral and written rulings in which
Judge Collins expressed her view that the legal dispute in the
present case was not the result of "bad people or bad motives."
In her oral decision, for example, Judge Collins prefaced a
remark about the shareholders' request for declaratory and
injunctive relief with the observation that there was an "absence
of fraud and intent to deceive." When discussing the evidence
concerning false and misleading proxy materials in her subsequent
written findings, Judge Collins made the same point, stressing
that, "[a]s stated in [the] oral findings, the court is convinced
that there was no intent by the directors of Huna Totem
Corporation to mislead shareholders about the Settlement Trust."
But as Huna Totem correctly points out, the challenged
comments concerning the corporation's lack of intent or bad faith
did not address Judge Collins's application of the Brown v. Ward
materiality test. Rather, when read against the background of
the decision as a whole, these comments reflect little more than
the court's desire to mend the relationship between Huna Totem
and its shareholders, which the court described as having
degenerated into "finger pointing" and "name calling" during the
trial. Indeed, in her oral findings, Judge Collins expressly
described her remarks on scienter as comments preliminary to her
decision:
Before I enter my oral findings, . . . I
think it's important that I make some
preliminary observations about the case and
about the persons involved in the case. Many
disputes come before the court where the
parties . . . attempt to portray the opposing
party as bad people with bad motives. This
case is no different. Those kinds of
allegations have been made. I am convinced
that this case does not involve bad people or
bad motives[.]
And although the court returned to this theme at
several points in its oral and written findings, it directed its
comments not to the issue of materiality, but to the "tenor of
argument and discussion between the [parties]." In contrast,
when addressing the issue of materiality, Judge Collins described
and applied Brown v. Ward's objective "reasonable shareholder"
test with pinpoint accuracy, never mentioning or hinting at any
consideration of motives or scienter.
The
shareholde
rs
nonetheles
s insist
that "the
court
directly
link[ed]"
its
decision
against
them to
their
failure to
prove
scienter.
In support
of this
claim,
they point
to "one
particular
sentence"
toward the
end of the
oral
findings,
in which
Judge
Collins
observed:
"Given the
absence of
fraud and
intent to
deceive
and the
other
factors
I've
mentioned
here
today, I
believe it
would be
unfair and
unjust to
grant the
declarator
y and
injunctive
relief
sought by
the
plaintiffs
." But
the
shareholde
rs
overstate
the
significan
ce of this
reference
to
scienter.
For it had
nothing to
do with
the
superior
court's
applicatio
n of Brown
v. Ward's
objective
materialit
y test;
instead,
by its own
terms, the
comment
focused
exclusivel
y on Judge
Collins's
alternativ
e basis
for
ruling: as
we have
described
above, the
judge's
alternativ
e ruling
addressed
the
remedies
requested
in the
lawsuit,
concluding
that they
would be
inappropri
ate even
if the
plaintiffs
had proved
a material
misreprese
ntation.
As Judge
Collins
correctly
recognized
, the
plaintiffs
' request
for
equitable
remedies
necessaril
y raised
equitable
issues on
which
scienter
had direct
bearing.
In
context,
then,
Judge
Collins's
comment
simply
confirms
her
understand
ing and
correct
applicatio
n of Brown
v. Ward's
objective
test of
materialit
y. We
thus find
no merit
in the
shareholde
rs' claims
that Judge
Collins
wrongly
imposed a
scienter
requiremen
t in
deciding
the issue
of
materialit
y.
2. Materiality of Huna Totem's omissions
In addition to claiming that the trial court applied
the wrong legal test of materiality, the shareholders maintain
that the proxy materials are materially false and misleading
under the right standard.
As previously noted,13 after hearing the testimony at
trial and reviewing the various documents shareholders had
received regarding the trust, Judge Collins determined that,
while some of the documents were ambiguous, their ambiguities
were not material. Specifically, Judge Collins found that Huna
Totem's July 1994 proxy solicitation gave shareholders a complete
and accurate picture of the periodic review process: "[T]he proxy
statement and the full text of the settlement trust that was
submitted to the shareholders is neither overly simplified [n]or
unclear." Given the broad distribution and ready availability of
this information, the court concluded, "[t]he total mix of
materials submitted to the Huna Totem shareholders was
essentially accurate if to some degree overly simplified"; and in
the court's view, any ambiguities or omissions in the May 1994
preliminary information packet or in the directors' post-
solicitation oral presentations were immaterial under Brown v.
Ward's objective test, which defines a misleading or false
statement as " `material if there is a substantial likelihood
that a reasonable shareholder would consider it important in
deciding how to vote.' "14
In propounding a contrary view on appeal, the
shareholders concentrate primarily on the incompleteness of the
preliminary information distributed in May 1994, insisting that
the confusion generated by this information sowed a lasting seed
of ambiguity that violated the "clear statement rule" and Huna
Totem's duties of disclosure, completeness and candor; omitted
facts "so obviously important" to individual shareholders as to
be material as a matter of law; and should therefore be resolved
in favor of the shareholders under ordinary rules of contract
interpretation.
But the shareholders' narrow focus on the trial court's
finding of an ambiguity in Huna Totem's preliminary information
impermissibly views that information in isolation, mistakenly
disregarding the need to decide the materiality of a particular
omission in light of the totality of available information. For
as we have already observed, the Alaska Securities Act expressly
requires us to determine the materiality of a statement's
omissions contextually, rather than in isolation, by considering
whether the statement "omit[s] to state a material fact necessary
in order to make the statement[] made, in the light of the
circumstances under which [it is] made, not misleading."15 Or as
Judge Collins more simply phrased it, the pertinent inquiry here
was whether "[t]he total mix of materials submitted to the Huna
Totem shareholders was essentially accurate." (Emphasis added.)
Here, no matter how sketchy the corporation's initial
description of its proposed settlement trust might seem, the
uncontroverted facts establish that Huna Totem's preliminary
packet of information was labeled as a "brief introduction" to
the proposed settlement trust; it expressly warned the
shareholders of its own incompleteness and promised more
information to follow. Keeping this promise, Huna Totem
delivered the proxy solicitation itself - the most crucial
document - which provided each shareholder a complete and
accurate summary of the proposed trust's review process, as well
as a copy of the entire settlement trust document.
Applying Brown v. Ward's objective test to the total
mix of available information, as the securities act requires, we
conclude, as Judge Collins did, that a reasonable shareholder
considering the information actually provided would not have been
likely to find the information omitted from Huna Totem's
preliminary packet and post-solicitation oral communications to
be important in deciding how to vote.16 We thus affirm the
superior court's materiality ruling.17
3. Appropriateness of shareholders' proposed remedies
Finally, the shareholders argue that Judge Collins
erred in her alternative ruling rejecting as inequitable their
proposed remedies of declaratory relief, injunctive relief, and
nominal damages. Because the superior court issued its
alternative ruling on the assumption that Huna Totem's proxy
materials might ultimately be found to be materially misleading -
an eventuality that has not materialized - we need not consider
the superior court's alternative ground for decision.
IV. CONCLUSION
We AFFIRM the superior court's judgment.
_______________________________
1 43 U.S.C. 1601-1629h (1986 & Supp. 2003).
2 Under Congress' 1987 amendments to ANCSA, "Native
Corporations are allowed to convey assets to a `settlement trust'
to `promote the health, education, and welfare of its
beneficiaries and preserve the heritage and culture of the
Natives.' " Hanson v. Kake Tribal Corp., 939 P.2d 1320, 1332
(Alaska 1997) (Fabe, J., dissenting) (quoting 43 U.S.C.
1629e(b)(1) (Supp. 1994). Settlement trusts offer significant
tax advantages and insulate assets from creditors' claims.
3 Brown v. Ward, 593 P.2d 247, 251 (Alaska 1979) (quoting TSC
Indus., Inc., v. Northway, Inc., 426 U.S. 438, 449 (1976)).
4 Judge Collins's core findings on ambiguity and materiality
are as follows:
7. While the actual Proxy Statement is
clear and unambiguous, oral statements by
directors and the "brief" review of the
proposed trust included in shareholder
materials distributed prior to the vote were
ambiguous in that they omitted information
about the role of the trustees in the review
process and procedure regarding future
shareholder votes to modify or terminate the
trust. Thus, the plaintiffs have established
an omission in proxy materials including oral
statements and the shareholder information
packet.
8. While a close question, the above
omissions and/or ambiguity in the oral
representations and brief review of the
proposed Settlement Trust do not, however,
meet the materiality standard of Brown v.
Ward. Specifically, under an objective
standard, a reasonable shareholder
considering future review of a trust for
purposes of modifying or terminating the
trust would reasonably anticipate some
process or procedure would apply both to the
review process and to the vote. While the
"brief review" of the trust in the April
mailing and oral representations likely did
not detail the process for future review, it
is difficult to conclude that such an
omission would cause an objectively
reasonable shareholder to assume no process
would be followed and/or that a "free for
all" vote on modification or termination
would occur.
9. While, again, a close question, this
court cannot find[] on the particular facts
of this case that there is a substantial
likelihood that a reasonable shareholder
would have considered it important that the
five-year review process would entail review
and recommendation regarding trust changes by
the duly-elected trustees to precede any
shareholder vote on modification or
termination, particularly in light of the
total mix of information available about the
review process. Using an objective standard,
a reasonable shareholder who thought the
precise mechanism for review was important
would likely have read the Proxy Statement
and/or proposed Settlement Trust Agreement,
both of which detailed the role of trustees
in the review process and both of which were
provided to shareholders.
(Footnote omitted.)
5 19 P.3d 597, 600-01 (Alaska 2001) ("We defer to the trial co
urt's factual findings unless clearly erroneous and review de no
vo any questions of law.") .See 43 U.S.C. 5 1625 (1986 & Sup
p. 2003).See
6 See N.A. v. State, 19 P.3d 597, 600-01 (Alaska 2001) ("We
defer to the trial court's factual findings unless clearly
erroneous and review de novo any questions of law.") .
7 See 43 U.S.C. 1625 (1986 & Supp. 2003).
8 See Brown v. Ward, 593 P.2d 247, 249 (Alaska 1979).
9 Id. at 250 ("Since the SEC fraud rule and the common law
both prohibit material falsehoods, authorities construing the SEC
rule are a useful guide in determining when a misstatement is
material under Alaska common law.").
10 AS 45.55.160.
11 Id.
12 Brown, 593 P.2d at 251 (quoting TSC Indus., Inc. v.
Northway, Inc., 426 U.S. 438, 449 (1976)).
13 See note 4, above.
14 Brown, 593 P.2d at 251 (quoting TSC Indus., 426 U.S. at
449).
15 AS 45.55.160 (emphasis added).
16 See Brown, 593 P.2d at 251 (quoting TSC Indus., 426 U.S. at
449).
17 Pointing to a pattern of similar descriptions - some
accurate, many incomplete - in various communications occurring
between the time of the settlement trust's approval in 1994 and
the first five-year review in 2000, the shareholders maintain
that the continuing ambiguity and inconsistency of these
statements relates back to the earlier communications, somehow
confirming their originally misleading character. The
shareholders further maintain that each of these post-1994
repetitions of the 1994 promise of a shareholder vote amounted to
a new contract, creating a new cause of action. Moreover, the
shareholders seem to argue, by violating various common law rules
implicit in Brown v. Ward - a corporation's duty of disclosure,
its duty of completeness, its duty of candor, and its duty of
good faith and fair dealing - Huna Totem's original and
subsequent materials became independently actionable. But these
common law duties are largely incorporated in Alaska's statutory
standards governing material misrepresentations. Thus, the
common law claims depend on the shareholders' initial premise
that Huna Totem's May 1994 preliminary statement was materially
misleading; they add little to the statutory claims and fail to
survive our rejection of the shareholders' arguments on scienter
and materiality.
