Full opinion text
OPINION LATCHUM, Chief Judge. National Home Products, Inc., a Delaware corporation formerly known as Scot-ten, Dillon Company (“Scotten, Dillon”), brings this action for a declaratory judgment determining liability for $29,940.50 in expenses incurred in connection with a proxy solicitation conducted for the Reconvened 1970 Annual Shareholders Meeting by a majority of the Scotten, Dillon board of directors as lawfully constituted on July 22, 1970. The Reconvened 1970 Annual Shareholders Meeting was held on October 27, 1971. Two proposals, voted upon by the shareholders in person and by proxy, were adopted: (1) the expansion of the board of directors from seven to nine members, and (2) the election of Andrew N. Grass, Jr., Robert M. Schroder, Charles A. Baratelli, and Robert A. Goldschmidt to the board. Plaintiff claims that all of the defendants are liable for these proxy solicitation expenses because they promoted the issuance and the dissemination of a proxy statement that violated Section 14(a) of the Securities Exchange Act of 1934 and Rules 14a-3, 14a-4, 14a-9 and 14a-ll promulgated thereunder. Liability is also sought to be imposed upon defendants Gray, Hill, Schroder, C. B. Richard, Ellis & Co. and Grass under Rule 14a-9 for their failure to comply with Section 13(d) of the Securities Exchange Act of 1934 and companion regulations. Subject matter jurisdiction and venue of this action exist by virtue of 15 U.S.C. § 78aa. The case was tried to the Court without a jury from April 28 through May 2. 1975. I. THE FACTS A. The Background This action by Scotten, Dillon grows out of this Court’s decision and orders entered in Dillon v. Berg, 326 F.Supp. 1214 (D.Del. 1971), aff’d 453 F.2d 876 (C.A.3, 1971). Dillon v. Berg was brought in the late summer of 1970 by Len Dillon (“Dillon”), Harold Gray (“Gray”) and Fred R. Davis (“Davis”), the so-called “Gray faction” of Scot-ten, Dillon’s board, against F. Steven Berg (“Berg”), William Lerner (“Lerner”) and Ernest Summers (“Summers”), the so-called “Berg faction” of the board. The underlying purpose of the original suit instituted by the Gray faction was to oust the Berg faction from control of Scotten, Dillon in order to obtain majority control of the board for themselves. In that action this Court held that the August 20, 1970 Scot-ten, Dillon annual shareholders meeting was invalid and set aside the election of two directors because of proxy rule violations. The Court then ordered that a Reconvened 1970 Annual Shareholders Meeting be held and proxies be resolicited for the election of directors. Although both factions turned their attention to setting in motion the process of reconvening the 1970 Annual Shareholders Meeting, it is clear that Gray, Davis and Grass, their attorney, spearheaded this effort. Because each of them exerted a predominate influence on the proxy solicitation here under attack, a brief word about them is in order at this point. Harold Gray was first elected to the Scot-ten, Dillon board of directors on December 9, 1968. (Tr. 491). He is an attorney in Palm Beach, Florida (Tr. 476) who presently devotes the greater part of his time to counseling Willis H. DuPont in legal matters. (Tr. 477-482). Another of Gray’s clients is Phyllis Joan Mandery Briggs Hill (“Hill”). Since 1965 he has functioned in a dual capacity as Hill’s attorney and investment adviser. (Tr. 315-316, 343, 495). About the time Gray became a director of Scotten, Dillon he persuaded Hill to invest extensively in its stock. (Tr. 498-499). As a result, between December 1968 and April 1969 she purchased a total of 29,150 shares of Scotten, Dillon common. (DX 44; Tr. 319- 320, 374-375, 238, 246; Docket Item 137 at 9). Then in April 1969 Gray convinced Hill to “sell” him a 10,000 share block known as the “McCusker Block” for $300,000, which sum represented an immediate loss to Hill of $50,000. (Tr. 502, 320- 321, 358). Gray did not pay cash for this block of shares (Tr. 362); rather, his consideration was in the form of a promissory note which he drafted and prepared. (Tr. 363, 550-551; Docket Item 137 at 21). Under the terms of the note as Hill understood them, she obtained a promise from Gray to pay her $300,000 in full upon demand on or before five years. No payments of principal or interest were otherwise required before maturity and it was Hill’s erroneous understanding that even after maturity she had to demand payment of the principal for the note to become due. (Tr. 370, 366, 367, 368; Docket Item 137 at 22). Hill was aware that Gray was not personally liable on the note (Tr. 364) and that her only security was the 10,000 shares of the McCusker Block. Hill also knew that she, instead of Gray, under the terms of the note would be assuming the risk of any future decline in their market value. (Tr. 369). Gray did not review the terms of this transaction with Hill in advance nor did Hill review them with any other attorney. (Tr. 363). On April 24, 1969 Hill signed an agreement memorializing the transaction with Gray (DX 39) and the next day wrote C. B. Richard, Ellis & Co. directing it to transfer record ownership of the McCusker Block to Gray. (DX 42). By July 15, 1969 Gray had received the stock certificate representing the McCusker Block (Tr. 328) which he then forwarded along with his stock power to Hill. (DX 60). Over a year later Gray represented to this Court under oath in Dillon v. Berg that he was the unqualified beneficial owner of 10,100 shares of Scotten, Dillon (PX 1, par. 4; see also PX 2, par. 1) even though in the interim he had advanced no money to Hill for the so-called purchase of the 10,000 McCusker Block shares. And as of June 1971 the same held true. Gray, captain of the victorious plaintiffs in Dillon v. Berg, “owned” 10,000 of his 10,100 shares by virtue of the unwitting beneficence of his client Mrs. Hill, not by virtue of any investment of his personal money or by incurring a personal liability. Fred R. Davis, a Reading, Pennsylvania businessman (Tr. 95-96), was elected to the Scotten, Dillon board on August 26, 1968 (Tr. 132; PX 12 at 1). He initially invested in Scotten, Dillon by purchasing 1,100 shares of common stock during the summer of 1968. (Tr. 121,101,103,104-105). Davis was also the record owner of an additional 2,000 shares of Scotten, Dillon common stock which his friend William Knauer bought in mid-1968. (Tr. 105-106). Knauer was first financial vice president of Helme Products, Inc. (Tr. 380) whose wholly-owned subsidiary, the Bloch Brothers Tobacco Co. (Tr. 386) was and is a major competitor of Scotten, Dillon [National Home Products, Inc.]. (Tr. 388; Pre-trial order (c) (Items 1 & 21)). When Knauer purchased his 2,000 shares about the same time Davis bought his own 1,100 shares, he asked Davis to register the 2,000 shares in Davis’ name. Davis did so and then executed a stock power in Knauer’s name and handed over twenty 100 share certificates to Knauer. (Tr. 105; Docket Item 72 at 54-56). In Dillon v. Berg, Davis was represented to the Court as the beneficial owner of 3,100 shares of Scotten, Dillon common stock. (PX 1, par 4; PX 2, par. 1). Andrew N. Grass, Jr. was a partner in Windels, Merritt & Ingraham of New York City. (Pre-trial Order (c)(15)). Somewhat experienced in the nuances of federal securities law by reason of an eight year stint with the New York Regional Office of the SEC (Tr. 182), he first met Gray in 1965 when the Windels firm was general counsel for C. B. Richard & Co. (Tr. 184), a New York brokerage firm into which D. H. Ellis (of which Gray was a limited partner) later merged. (Tr. 184). In the spring of 1970 Gray contacted Grass about Scotten, Dillon. (Tr. 186). Later, in the fall of 1970, Grass agreed to become a nominee for the Scot-ten, Dillon board if the plaintiffs in Dillon v. Berg, prevailed in nullifying the outcome of the 1970 annual shareholders meeting. (Tr. 257; Docket Item 151 at 91-92). B. Gray Faction Strategy for the Reconvened 1970 Meeting Shortly after the Court’s opinion in Dillon v. Berg of May 6, 1971, Gray, Davis and Grass began in earnest to formulate their strategy for reconvening the 1970 Annual Shareholders Meeting. On one occasion Davis contacted Ralph Power (“Power”). The Court in Dillon v. Berg had found that Power had been illegally removed from the Scotten, Dillon board in July 1970 and he was held to be the seventh director of the legally constituted board on July 22, 1970. The directors who would have to meet to vote on the arrangements of the Court ordered reconvened meeting were Berg, Lerner and George K. Bissell (“Bissell”) of the Berg faction, Gray, Davis and Dillon of the Gray faction and Power. Thus, Power was in the position of holding the swing vote between the two factions. The purpose of Davis contacting Power was to inform him of the Court’s order and to discuss the economic prospects of Scot-ten, Dillon’s tobacco processing subsidiary, the Wisconsin Tobacco Company. (Docket Item 62 at 141). Power had been elected president of Scotten, Dillon in 1968, on the same day that Davis had joined the Scotten, Dillon board. (PX 12 at 1, 2). In the ensuing year the two negotiated with Bloch Brothers on behalf of Scotten, Dillon in order to subcontract the job of packaging Scotten, Dillon brand chewing tobacco in foil pouches. (Docket Item 122 at 92-93). Although such a contract was entered into in January 1969 (PX 56) it was later can-celled by Scotten, Dillon in the spring of 1970, about the time Power’s relations with Berg began to sour. (See 326 F.Supp. at 1220; Docket Item 122 at 113; Tr. 134, 415-416; DX 51, 52, 53, 54). On December 9, 1970 the board of directors, then controlled by the Berg faction because of its victory at the 1970 Annual Shareholders Meeting held on August 22, 1970, voted to dismiss Power and to cancel all contractual arrangements with him, (PX 13), accusing him of being responsible for a huge tobacco inventory loss sustained during the 1970 fiscal year. (PX 13 at 4-9; PX 9 at 9, entry # 3); While Davis and Gray voted for Power’s dismissal, by the spring of 1971 they apparently began to entertain second thoughts about the propriety of having done so. (Docket Item 122 at 157-158,160, 169-172). Humiliated in the north, Power relocated in Tallahassee, Florida, where he became an independent tobacco dealer, although still nursing his claim against Scot-ten, Dillon for what he thought had been a wrongful termination of his employment contract as president of the company. (Docket Item 152 at 3). An informal gathering at the offices of Helme Products, Inc. in Reading, Pennsylvania on June 25, 1971 brought Gray and Power together again. In mid-June Arthur T. McGonigle, president of Helme Products, (Pre-trial Order (c) (21)) extended an invitation through Davis to Gray to discuss Scot-ten, Dillon’s future. (Docket Item 151 at 95-96; Docket Item 122 at 147). Davis told Gray that McGonigle represented about 30,-000 shares of Seotten, Dillon common stock. (Docket Item 151 at 99, 105). Gray in turn invited Grass, his attorney, to attend. (Docket Item 151 at 99; Docket Item 62 at 130-131). As prearranged, on the 25th Gray and Grass met with McGonigle; Power was also present at McGonigle’s request. (Docket Item 152 at 75-76). A variety of topics were apparently discussed, e. g., the possible sale of Seotten, Dillon’s tobacco assets to Helme Products, the establishment of a voting trust by McGonigle, the Gray faction and the Berg faction (Docket Item 62 at 145-147; Docket Item 151 at 100-103), but Gray concluded this meeting by asking McGonigle to forward him the names of “good candidates” for the Seotten, Dillon board. (Docket Item 151 at 144-145). Later the same day, at Davis’ home in Reading, Gray, Grass, Power and Davis discussed Power’s abrupt dismissal in December 1970. Power was advised that any reconsideration of his claim for wrongful termination of his employment contract would have to be undertaken formally by the entire Seotten, Dillon board to be elected at the Reconvened 1970 Annual Shareholders Meeting and that independent counsel might have to be consulted by the board in connection with the reconsideration. Also by the end of this discussion it was “agreed” that Power would become a nominee for the board on the Gray faction slate of directors to be voted upon by the shareholders at the Reconvened 1970 Annual Shareholders Meeting. (Docket Item 62 at 158, 166). The direct effect of the opinion and order in Dillon v. Berg, of course, was simply to void the election of two directors at the annual shareholders meeting held on August 20, 1970. However, sometime before June 1971 Gray, Davis and Dillon, desirous of gaining control of the company from the Berg faction, apparently decided to attempt to increase the number of positions on the board and to fill these new positions with allies. To do so first meant sheparding a resolution past the seven director board as lawfully constituted on July 22, 1970. The above described discussions with Power were designed to acquaint him with this plan. Next, the Gray faction would have to persuade a majority of the shareholders eligible to vote at the Reconvened 1970 Annual Meeting to support its proposal to expand the board and to vote for its nominees. An attractive slate of candidates was indispensable in this regard and so, for example, in the fall of 1970, Robert Schroder, managing partner of C. B. Richard, Ellis & Co., agreed to become a nominee on the Gray faction’s slate. Schroder had long been personally acquainted with Gray (Tr. 486-487) and with Grass. (Docket Item 62 at 40). In turn, Schroder suggested one other nominee for the Gray faction’s slate, Edward Sullivan, a certified public accountant, (Docket Item 151 at 131) and advised Gray as to the suitability of another nominee, A. H. Dugan, Houston, Texas oil financier. (Id. at 135-137). This strategy chosen by the Gray faction also explains Gray’s receptiveness to suggestions for nominees originating from Arthur T. McGonigle, for in Gray’s eyes MeGonigle was a friend of Davis who appeared to represent either directly or in close alliance with business associates a not insubstantial block of Scotten, Dillon shares eligible to vote at the Reconvened 1970 Annual Shareholders Meeting. (Docket Item 151 at 105). Through Davis, McGonigle passed along the names of Robert A. Goldschmidt, a CPA, (Tr. 139-140; Docket Item 151 at 146; Docket Item 122 at 156-157) and John Russell, counsel to Helme Products, Inc. (Docket Item 171 at 5; Docket Item 151 at 142,145; Docket Item 122 at 156-157) as nominees for the board. In late June 1971, Grass met with Russell at the Windels firm’s office. (Docket Item 163 at 597-598). Also in late June, Davis suggested the names of Charles A. Baratelli and Phillip Rowe, Jr., of Reading, Pennsylvania. (Tr. 140,177; Docket Item 162 at 490-493). All told, by the end of June 1971 as many as ten qualified individuals from the realm of industry and finance had been recruited preliminarily to the Gray “team” with the aim of ousting the Berg faction from control of Scotten, Dillon. About this time in consultation with Gray and Davis (Tr. 300; Docket Item 151 at 115, 121-123) Grass prepared resolutions for submission to the meeting of the reconvened Scotten, Dillon board of directors as lawfully constituted on July 22,1970. That meeting was held on July 1, 1971 in Wilmington where, by a vote of four directors in favor (Dillon, Gray, Power and Davis) to three opposed (Berg, Lerner and Bissell), the reconvened board voted “to retain the firm of Windels, Merritt & Ingraham as special counsel to . . [Scotten, Dillon] for the purpose of preparing on behalf of the company proxy and proxy soliciting material . . .” and to recommend to the shareholders at the upcoming Reconvened 1970 Annual Shareholders Meeting that the board be expanded to fifteen members and that nine individuals serve for the following terms: “To serve until the first regular annual meeting following their election and until their successors have been duly elected and qualified: Edward Sullivan A. W. Dugan “To serve until the second regular annual meeting following their election and until their successors have been duly elected and qualified: Fred R. Davis Len J. Dillon Andrew N. Grass, Jr. Robert M. Schroder “To serve until the third regular annual meeting following their election and until their successors have been duly (sic) elected and qualified: Ralph R. Power John Russell Robert A. Goldschmidt.” (PX 14). However, on July 2, 1971 this Court sua sponte held invalid the resolutions recommending an increase in the board’s membership to 15 and nominating 9 individuals to serve on it. (DX 1). The Court stated that the direction in subparagraph 4(d) of its June 10, 1971 order “to establish the number of places on the Board of Directors to be filled” at the Reconvened 1970 Annual Shareholders Meeting meant that the lawful July 1970 board should establish the number of places “as required ... by the by-laws ... in existence before August 21, 1970,” and that since prior to August 21, 1970 there were four vacancies on the board, i. e., two positions up for nomination and two then unfilled positions, at most four individuals could be nominated at the lawful July 1970 board meeting for election at the upcoming Reconvened 1970 Annual Shareholders Meeting. Expressed as the rationale underlying the Court’s sua sponte action was the fact that in issuing the June 10, 1971 order “[the Court] was trying to put the parties back into the same position, the status quo, as nearly as possible, prior to the August 21, 1970 meeting and to do that . . . [the Court] in effect, disenfranchised people who became stockholders after the record date for the 1970 annual meeting — certainly those people are not going to be saddled with an increase of nine additional members when that was not even in the wind at the annual meeting in August of 1970 and I am not going to permit that kind of maneuvering to be done at this late date when the special meeting is in lieu of the 1970 annual meeting.” (DX 1 at 3-4). This disposition of the July 1 meeting of the reconvened lawful July 1970 board was formalized by a memorandum opinion and order dated July 7, 1971. (PX 5). On July 16, 1971 the lawful July 1970 board again met to choose the nominees to be voted upon at the Reconvened 1970 Shareholders Meeting. (PX 15). A resolution was passed by the same four to three vote tally recommending the expansion of the board by two directorships, resulting in the establishment of a nine member board equally divided among three classes, “the first class expiring at the regularly scheduled and convened annual meeting next ensuing; the second class expiring one year thereafter, and the third class expiring two years thereafter.” Those nominated for the third class were Charles A. Baratelli (to fill the position held by Ralph R. Power), Andrew N. Grass, Jr. (to fill the position held by George K. Bissell), and Robert M. Schroder (to fill the then vacant position created by the board of directors on June 19,1969); nominated for the first class was Robert A. Goldschmidt (to fill another vacant position created by the board of directors on June 19,1969). Otherwise, the resolutions passed at the July 1 meeting remained unaltered which meant that Grass and the Windels firm would be drafting the proxy materials to be distributed in conjunction with the upcoming Reconvened 1970 Annual Shareholders Meeting. C. Gray Faction’s Drafts of Proxy Materials Grass submitted the first draft of a proxy statement to the SEC on August 11, 1971. (PX 32). This forty-four page manuscript was captioned “Scotten, Dillon Company,” and pages one through eighteen were devoted to a description of the background to Dillon v. Berg, the plaintiffs’ claims in that case, the Court’s opinion and order, and the two meetings of the reconvened board of directors as lawfully constituted on July 22, 1970. Grass’ synopsis of the opinion in Dillon v. Berg was spiced with quotations that cast an unflattering image of Berg. In a section entitled “The Court's Order,” the draft proxy statement mentioned that Judge Latchum had entered Orders on June 10, 1971 and July 7, 1971, but ascribed to both Orders the contents of only the June 10 Order. Plainly omitted was any explanation of the Gray faction’s abortive attempt to increase the membership of the board to fifteen. Indeed, the ensuing section entitled “Steps Taken to Comply With the Court’s Order” commenced with the statement that “Pursuant to the aforesaid Order of Judge Latchum there was held on July 1, 1971 and July 16, 1971 meetings of the Board of Directors . . . as it was found to exist as at July 22, 1970 . It was further determined that the stockholders be requested to set the number of positions at nine on the Board of Directors.” (emphasis added). An alert reader attempting to coordinate the time frame of the Court’s order with its contents may have wondered why the Court had to provide for two meetings, and considering the previous discussion of Berg, he might well have concluded that the Berg faction had attempted to maneuver around and impede the orderly conduct of the July 1 meeting. The focus of this first draft of the proxy statement then shifted so as to identify those soliciting the proxy and to discuss briefly Scotten, Dillon’s current office holders, directors and major shareholders. A section entitled Persons Making the Solicitation noted that “This solicitation is made by Scotten, Dillon Company at the direction of a majority of the Board of Directors in office on July 22, 1970, as set forth above.” In a section entitled “Remuneration of Directors and Officers” it was disclosed that “The Board of Directors purported to terminate Mr. Power as President in July, 1970, ” and that “The nominees listed above have been informed by Mr. Power that he believes that he has a claim against the Company in respect of the aforesaid termination of the employment contract. The said nominees have advised Mr. Power that if elected they will seek to have the Company review Mr. Power’s relationship with it and to meet with his attorney, if requested, for the purpose of seeking a mutually satisfactory disposition of Mr. Power’s claim.” Pertinent information was provided in paragraph form concerning Fred R. Davis, among others; the draft indicated that Davis owned 3,100 shares of Scotten, Dillon common stock. Two parties commented upon the contents of the first draft of the proxy statement. William Lerner, Scotten, Dillon’s Secretary and Chairman of the Executive Committee, wrote Grass directly on August 20, 1971. (PX 33). In a brief three page letter he suggested that the proxy statement include the full Court’s opinion in Dillon v. Berg rather than the summary contained in the draft and that the proxy statement should indicate the total number of shares outstanding in July 1970 and June 1971 as well as the total number of shares entitled to be voted at the Reconvened 1970 Annual Shareholders Meeting. A lengthier and much more critical exposition (PX 35) was offered by Henry W. Cornell, III, of Berg & Cornell, general counsel to the company. (DX 38D at 191-204). Cornell’s letter, dated August 20, 1971, was addressed to Scotten, Dillon Company, 1702 Main Place Tower, Buffalo, New York and was directed to the attention of Ernest Summers, Executive Vice President, who was not a member of the board of directors as lawfully constituted on July 22, 1970. Carbon copies of the critique were sent to the SEC, to Skadden, Arps, Slate, Meagher & Flom in New York, counsel for Scotten, Dillon Company retained in 1971, and to Potter, Anderson & Corroon, in Wilmington. Cornell’s letter had little, if anything, laudatory to state about Grass’ first draft of the proxy statement. Salient comments are as follows: (1) Cornell objected to the caption “Scot-ten, Dillon Company” on the proxy materials “unless it can be demonstrated that ‘management’ (within the general meaning ascribed to such term under the 1934 Act) is responsible therefor.” He noted that “we are not aware that a majority of the directors of the company have approved or authorized the calling of the [Reconvened 1970 Annual Shareholders] meeting . and that this factor must be communicated, clearly and unambiguously, to stockholders within the scope and intent of Rule 14a-4 and 14a-9.” (2) Cornell characterized the summary of the Dillon v. Berg litigation as “exceeding the perimeter of fair comment for the deliberate purpose of creating an unfavorable impression of present management [Berg] and ignoring the standards of impartiality required under proxy rules.” . (3) Cornell opined that the “persons responsible for preparation” of the first draft of the proxy statement should make a more diligent inquiry as to the identity of 10 percent shareholders of Scotten, Dillon stock because “We have reasons to believe that C. B. Richard, Ellis & Co., directly and through stock holdings of its partners, customers and associates, are the direct and indirect beneficial holders of more than 10 percent of the Company’s outstanding stock; also we believe certain other persons known to persons making the solicitation may be nominees or affiliates of another beneficial holder of more than 10 percent of the Company’s outstanding stock.” (4) Cornell recommended that the proxy statement specify the relationship between Windels, Merritt & Ingraham and C. B. Richard, Ellis & Co. (5) Cornell expressed alarm about the disclosure in the draft proxy statement relative to Ralph Power because nowhere was mention made that the Scotten, Dillon board of directors had voted unanimously on December 9, 1970 to terminate all relationship with Power because of a tobacco inventory loss. In Cornell’s view, the Gray faction nominees’ agreement to reconsider Power’s July 1970 termination as president implicitly, but in a circumlocutory manner nonetheless, entailed an undertaking to hold Power harmless for any aspect of the tobacco inventory loss. Following these specific comments, near the close of the letter, Cornell returned to the matter of the C. B. Richard, Ellis & Co. “group.” It was his suggestion that this “Group” file a Schedule 13(d) in order to comply with Section 13(d) of the Securities Exchange Act of 1934 and that the proxy statement identify the members of the Group and disclose its views concerning and intentions toward Scotten, Dillon business matters. Grass eventually received a copy of Cornell’s letter through the good graces of Potter, Anderson & Corroon, in Wilmington, and responded to same in a letter to the SEC dated September 1,1971. (PX 38). Before he had the opportunity to do so, however, he submitted a second draft of the proxy statement on August 20, 1971. (PX 34). Highlights of the second draft are: (1) . The proxy statement was still captioned “Scotten, Dillon Company.” (2) The lengthy summary of the Dillon v. Berg opinion had not been revised (the unflattering references to Berg had been retained). (3) There was no clarification of what had transpired at the July 1, 1971 and the July 16,. 1971 Board of Directors meetings, nor was there any mention of the Court’s order of July 7, 1971. (4) The section entitled “Persons Making the Solicitation” had been reworded and was now the following: “This solicitation is made by Scotten, Dillon Company pursuant to the Order of the United States District Court for the District of Delaware as set forth above.” (5) A discussion of the proposal to increase the number of directors to nine failed to clarify the events transpiring on July 1, July 7 and July 16, 1971. (6) The discussion of Power’s purported claims against Scotten, Dillon Company and the nominees’ position regarding these claims remained unchanged. (7) Fred Davis was still described as owning 3,100 shares of Scotten, Dillon common stock. (8) A brief biographical sketch of Harold Gray noted that he was the owner of 10,100 shares of Scotten, Dillon common stock and that he was a “practicing attorney in Miami, Florida.” On August 24, 1971, in accordance with its order of June 10,1971 retaining supervisory power over Scotten, Dillon’s corporate affairs until after the Reconvened 1970 Annual Shareholders Meeting was held, this Court issued an order allowing Scotten, Dillon to institute suit against Ralph Power, James E. Buchen and Lynn E. Tryggestad (the former chief executives of Scotten, Dillon’s subsidiary The Wisconsin Tobacco Company) for waste and mismanagement arising out of the loss or disappearance of approximately one million dollars worth of tobacco inventory during the fiscal year 1970. The order was signed following a hearing on the matter at which the Gray faction, through counsel Richards, Layton & Finger, and through Grass was represented. (Docket Item 63 at 370). Lerner wrote Grass on August 25, 1971 (PX 36) in order to comment on the second draft of the proxy statement. Although he emphasized that by writing Grass he was not approving the material and that he was relying on Grass for it to be accurate and complete, he stated that the disclosures with respect to Power were inaccurate and “probably misleading.” Lerner advised Grass that Power had been retained as president of Wisconsin Tobacco Company until the spring of 1970, when the board learned that Power, who had been in charge of the tobacco warehouse, had not ensured the security of the tobacco and had then failed to report its loss or disappearance. Lerner also noted that he was “disturbed to think that the nominees and possibly Messrs. Gray, Davis and Dillon have an understanding with Mr. Power with regard to his alleged claim because of the termination of his employment contract.” Apropos of Gray, Lerner suggested that Gray should be identified as a limited partner of C. B. Richard, Ellis & Co. Finally, Lerner raised the question of whether Windels, Merritt & Ingraham should be identified as C. B. Richard, Ellis & Co.’s general counsel. On August 27, Grass wrote Lerner in response to the latter’s August 25 correspondence. (PX 37). As far as Grass was concerned, “current and correct information concerning the affairs of Scotten, Dillon are known only to the ‘insiders’ including Messrs. Berg, Bissell, Summers and you,” and he referred to two instances where Berg and his faction had wrongfully refused to inform Gray about certain matters. Grass requested that Lerner provide him with a specifically worded and accurate sample proxy disclosure concerning Power and Grass represented that “certainly any . review [of Power’s claims] would now have to take into consideration those matters which were the basis for your motion to Judge Latchum on Tuesday, August 24, 1971. ...” Grass wrote to the SEC on September 1, 1971 (PX 38) providing an item by item detailed explanation of and rebuttal to the points raised in Cornell’s letter of August 20. Grass here states that “in respect of Mr. Power’s employment contract, the draft proxy material merely reflects that some disposition of his contract would have to be made and the nominees would be willing to review his claim. No promise of any kind has been made nor do the nominees believe that they have the authority to make any such promise.” On September 7 Lerner answered Grass’ reply of August 27. (PX 40). He provided a nine line summary of Power’s relations with Scotten, Dillon from July 1970 to December 1970; the summary did not specify the amount of the tobacco loss ($936,000). Also on September 7 the Division of Corporate Finance of the SEC offered comments (PX 41) on the second draft of the proxy statement. (PX 34). There was an opening admonition that the proxy statement and form of proxy “should appropriately state in bold type at the top that the solicitation is by a majority of the July 22, 1970 board. Any reference or implication throughout the rest of the proxy material that proxies are being solicited by management or the company should also be deleted.” (emphasis added). Among information which the Commission desired be added was the designation of the two nominees who would be elected if the proposal to increase the board of directors to nine members failed to garner a majority vote at the Reconvened 1970 Annual Shareholders Meeting. Under the section denoted “Remuneration of Directors and Officers” (pages 29-31 of the second draft of the proxy statement) Grass was directed to expand the discussion of Power’s claims against Scotten, Dillon so as to inform shareholders that Scotten, Dillon “had filed a complaint against Ralph R. Power and others in the United States District Court for the Western District of Wisconsin alleging waste, mismanagement and conversion of certain assets of the corporation.” The SEC requested to be advised of the number of Scotten, Dillon shares owned by partners, other associates, and customers of C. B. Richard, Ellis & Co., and since in its view the Gray faction’s proxy solicitation would be “contested,” the SEC reminded Grass that Schedule 14B’s would have to be filed by each person deemed to be a “participant” in the “election contest.” On September 9,1971, Berg, Morris Himmel, W. Dennis Prouty and Summers formally indicated (PX 42) to the Division of Corporation Finance of the SEC that they intended to contest the Gray faction’s proxy solicitation effort for the upcoming Reconvened 1970 Annual Shareholders Meeting. Gray submitted a third draft of the proxy statement to the SEC on September 13, 1971. (PX 43). This draft incorporated almost verbatim Lerner’s suggested passage describing Ralph Power. In his accompanying letter, Grass noted that “we know of no contest involving this solicitation and at this point do not consider it a contested solicitation.” He provided the following response to the SEC’s inquiry concerning C. B. Richard, Ellis & Co.’s ownership of Scot-ten, Dillon shares: “We have been advised by C. B. Richard, Ellis & Co., that it holds 1,000 shares of the common stock of Scotten, Dillon of record and beneficially; 100 shares for Harold Gray and 700 shares for Robert M. Schroder. Finally, it holds in safekeeping for Mrs. Phyllis Briggs 19,150 shares.” (PX 43 at 4) (emphasis added). On September 20 Berg & Cornell reentered the dialogue between Grass and the SEC. Once again Henry Cornell did not forward Grass a carbon copy of this second letter to the SEC, (PX 44) but now Cornell explicitly represented that Berg & Cornell was “acting on behalf of the directors of Scotten, Dillon Company who intend to oppose the proposals contained in the revised proxy material that had been submitted by Grass on September 13, 1971,” viz., Messrs. Berg, Bean, Bissell, Lerner, Prifti and Summers. Cornell’s primary criticisms are the following: (1) The proxy card should be redesigned in order to allow shareholders to vote for any two of the four Gray faction candidates if the proposal to increase the board to nine members failed to pass. (2) The meeting notice should not contain the subscription “Scotten, Dillon Company.” (3) The “lengthy, verbose and bias[ed] discussion of the background of the [Dillon v. Berg] lawsuit should be modified at a minimum to explain that in November 1970 the management [Scotten, Dillon] discovered a $1 million loss or disappearance of assets, that since then the cooperation of Gray, Dillon and Davis has been half heart-ed in investigating the circumstances surrounding the loss or disappearance, and that Power may still be claiming a right to his directorship and presidency. . . .”. (4) The proxy statement should discuss the Gray faction’s abortive attempt to increase the board’s membership to 15. (5) Regarding Davis, Cornell wrote: “We recommend that the Commission obtain supplementally information documenting the ‘ownership’ of the amount of shares recited. The Company has received information that Davis is holding all, or a substantial part of such shares, as a nominee for an undisclosed principal.” (PX 44 at 10, item 33). Not content to await the outcome of the Reconvened 1970 Annual Shareholders Meeting before actively pursuing his claim for breach of contract against Scotten, Dillon, on September 30, 1971 Power caused a writ of attachment to be issued against the Wisconsin Tobacco Company’s plant in Viroquia, Wisconsin. (Docket Item 63 at 415; Docket Item 162 at 549). Early in the morning of October 1, Richards, Layton & Finger, the Gray faction’s Delaware counsel, was informed of the seizure by Potter, Anderson & Corroon, Scotten, Dillon’s Delaware counsel (Docket Item 162 at 550, Tr. 72) and Grass was immediately notified by Richards, Layton & Finger. However, before Grass could consult with Gray, Davis or Dillon about this matter, Potter, Anderson & Corroon informed Richards, Layton & Finger that the Gray faction’s assistance was unnecessary and Grass did not thereafter attempt to verify whether Power had in fact seized the plant or attempt to ascertain why Power had done so (Docket Item 162 at 552), only learning some details either a week later in casual telephone conversations with Power (Docket Item 152 at 114-115; Docket Item 63 at 350) or after the institution of the lawsuit captioned Abraham v. Gray, et al. in late October 1971. (Docket Item 1). Also on October 1 the SEC forwarded Grass additional comments about the draft proxy materials, specifically directing that the proxy statement “should disclose the Dillon group’s intentions as to the law suit brought by the company against Power.” (DX 19 at 2). On October 4 Grass submitted a revised draft of the proxy materials. (PX 51). Of interest in this proxy draft is a noticeable embellishment on the theretofore brief section in tabular format entitled “Information Concerning Nominees for Director.” Appended to this section were the following statements: “Neither have any of the nominees been within the past year a party to any contract, arrangement or understanding with any person with respect to any securities of the Company. . . . Each of the above statements applies as well to Len J. Dillon, Fred R. Davis, Harold Gray and Ralph R. Power, who participated as directors of the Company at the Directors’ meetings held on July 1 and July 16, 1971 pursuant to Judge Latchum’s order described elsewhere herein, except that in June 1969, Harold Gray purchased 10,000 shares of the Company’s common stock with funds borrowed from a personal acquaintance, which loan is still outstanding. . [Windels, Merritt & Ingraham] represents the plaintiffs in Dillon v. Berg ... , the action instituted by Messrs. Dillon and Davis . . and in connection with the 1970 reconvened meeting of shareholders. Messrs. Dillon, Davis and Gray intend to seek reimbursement from the Company for disbursements and reasonable attorneys fees incurred and expended in connection with their prosecution of Dillon v. Berg, including appeals. Among the firms to which such legal fees would be payable is Windels, Merritt & Ingraham. At the meeting on July 1, 1971, of the Board of Directors of the Company pursuant to the Order of the U.S. District Court, District of Delaware the firm of Windels, Merritt & Ingraham was engaged as special counsel for the purpose of preparing this proxy material and in connection with the contemplated special meeting. Said firm expects to be compensated by the Company for the reasonable value of its legal services rendered in that regard.” On October 4 the SEC informed Grass that it had no further comments regarding the proxy materials. The next day Grass wrote Lerner, advising him that the Reconvened 1970 Annual Shareholders Meeting was to be scheduled for October 27, 1971. (PX 53). D. Final Proxy Statement Highlights of the twenty-one page proxy statement, as finally printed, issued and distributed to shareholders, are these (PX 8): (1) The front page, which gave notice of the meeting, was headed in bold face capitals SCOTTEN, DILLON COMPANY and was signed in large and small capitals “Scotten, Dillon Company.” (2) Near the top of page one the following caption appeared: “This Solicitation Has Been Authorized by a Majority of the Directors of the Company in Office on July 22, 1970.” (3) In the “Background Section” on page one, Harold Gray was termed “the largest single stockholder then [July 22, 19701 on the Board.” (4) On page 3 the section entitled “The Court’s Opinion” opened with the statement that “[t]he. Court’s Opinion held, among other things, that the covert agreement giving Berg power to remove Power at any time and without cause was void and unenforceable under Delaware law.” Also excerpted from the Court’s opinion in Dillon v. Berg were passages such as, “Berg’s obtaining Power's undated resignation was done on his own behalf and in his own interest and not as an agent of the corporation. ... To allow the removal of one director, without cause, by another director through the vehicle of obtaining a secret, undated resignation as a quid pro quo for allowing an uncontested reelection to the Board is an even more serious violation of Delaware law. . . . As a consequence, the designation of the proxy materials, drawn up only by Berg and the members of his faction and not authorized by the Board, cannot be regarded as ‘management.’ (5) On page 5 in the section entitled “Steps Taken to Comply With Court’s Order” there was no mention of the Court’s July 2 and 7 orders nullifying the resolution passed on July 1 that had been designed to expand the membership of the board to fifteen directors. (6) On page 6, the section entitled “Persons Making the Solicitation” read: “This solicitation is made pursuant to the Order of the United States District Court for the District of Delaware as set forth above.” (7) On page 8 in the section entitled “Voting Securities and Principal Holders Thereof” it was noted that according to the records of Scotten, Dillon’s transfer agent, no one person owned of record more than 10% of the shares entitled to vote at the Reconvened 1970 Annual Shareholders Meeting. (8) On page 10, the third entry in the “Recent Developments Section” was this sentence: “In August 1971, the Company instituted an action against Ralph R. Power and others in (sic) United States District Court for the Western District of Wisconsin alleging waste, mismanagement and conversion of certain assets of the Company in connection with a tobacco inventory loss reported by the Company in its Annual Report for the fiscal year ended December 31, 1970.” However, the amount of the inventory loss ($936,000) was disclosed approximately midway through the annual report enclosed with the proxy statement, in a section entitled “Scotten, Dillon Company and Subsidiaries Notes to Consolidated Financial Statements December 31, 1970,” and in another section entitled “Opinion of Independent Accountants.” (PX 9). The existence of a “substantial” tobacco inventory loss was also referred to at the beginning of the annual report in Part I, Item 1 (Business (b)(3)). (9) On page 13 of the proxy statement, in the section entitled “Election of Directors,” the stockholders were informed that if they did not vote to expand the board to nine, then Messrs. Baratelli and Grass would be nominated to replace Messrs. Power and Bissell in the two positions on the seven man board of directors that were to be filled as a matter of course. (10) On pages 14-15, about two-thirds of the way through the proxy statement, there appeared a section entitled “Information Concerning Nominees for Directors.” With respect to each nominee there was presented in tabular fashion (1) the number of shares of Scotten, Dillon common stock he beneficially owned as of September 1, 1971, and (2) his principal occupation. The portion of the table focusing on Grass did reveal that he was a partner with Windels, Merritt & Ingraham and that the Windels firm represented the plaintiffs in Dillon v. Berg, but no mention was made of its longstanding representation of C. B. Richard, Ellis & Co. Below the tabular information there were five paragraphs which included these two references: (a) “In June, 1969 Harold Gray purchased 10,000 shares of the Company’s common stock with funds borrowed from a personal acquaintance, which loan is still outstanding.” (b) “At the meeting on July 1, 1971, of the Board of Directors of the Company pursuant to the Order of the U.S. District Court, District of Delaware the firm of Windels, Merritt & In-graham was engaged as special counsel for the purpose of preparing this proxy material and in connection with the contemplated special meeting.” (11) The section entitled “Information Regarding Directors and Others,” stretching from pages 16 to 21 of the proxy statement, provided information about S. Geyer Bean, Berg, Bissell, Davis, Dillon, Gray, William Lerner, William M. Prifti, Power and Summers. Samplings from this section include the following: (a) Fred Davis was described as “the owner, as at September 1, 1971 of 3,100 shares of the Company’s Common Stock, all of which are entitled to one vote each at this Special Stockholders Meeting.” (b) Harold Gray was described as “the owner of 10,100 shares of the Company’s Common Stock as at September 1, 1971, each of which is éntitled to one vote at this Special Shareholders Meeting. . . . Since 1955, Mr. Gray has been a practicing attorney in Florida with a present business address of P.O. Box 347, Miami, Florida. . . . Mr. Gray is also a limited partner of C. B. Richard, Ellis & Co., New York, New York, a member firm of the New York Stock Exchange.” (c) Regarding Power, these assertions were made: “. . . The Board of Directors attempted to terminate Mr. Power as President of the Company in July 1970; Mr. Power continued as an employee of the Company and as President of Wisconsin Tobacco Company, a wholly-owned subsidiary, until December 1970, when he was sought to be terminated as an employee of the Company and as an officer and employee of Wisconsin Tobacco Company, following the disclosure of the tobacco inventory loss at Wisconsin Tobacco Company reported by the Company in the Annual Report for the fiscal year ended December 31, 1970.” “. . .In December 1970 Mr. Power was the record owner of an additional 5,000 shares of the Company’s common stock which the Company sought to cancel on the books of its transfer agent. . . .” (emphasis added). Finally, came this crucial paragraph: “The nominees listed herein have been informed by Mr. Power that, although he has not formally notified the Company, he believes that he has a claim against the Company for unpaid compensation in respect of the aforesaid termination of the employment contract and the attempted cancellation of his 5,000 shares of common stock. The said nominees have advised Mr. Power that if elected they will seek to have the Company review Mr. Power’s relationship with it and to meet with his attorney, if requested, for the purpose of seeking a mutually satisfactory disposition of Mr. Power’s claims. See also ‘Recent Developments’ for a discussion of certain litigation instituted by the Company against Mr. Power. In connection with the litigation instituted by the Company against Mr. Power as described in ‘Recent Developments’ the nominees hereby undertake that if they are elected and such litigation is still pending at the time of their election they will seek the advice and recommendation of independent counsel as to the merits of such litigation. They further undertake that they will seek court review and approval of any disposition which such independent counsel may advise or recommend.” (12) The proxy statement closed with the subscription (in large and small capitals) “Scotten, Dillon Company.” E. Proxy Card The proxy card (PX 7) accompanying the proxy statement also had a curious format. To begin with, the third line of its heading contained the same language at the top lines of page one of the proxy statement, viz., “This solicitation has been authorized by a majority of the directors of the Company in office on July 22, 1970.” The front of the proxy card had been designed to permit a shareholder (1) to vote for or against the proposal to expand the board of directors to nine and (2) to vote for or against the entire Gray faction slate of four nominees. However, by virtue of this design a shareholder was denied the option to specify which two of the four nominees he desired to cast his vote for should he choose to vote against the proposal to increase the board from seven to nine directors or should the proposal fail to pass at the reconvened shareholders meeting. (Docket Item 163 at 695). On the reverse side of the proxy card a shareholder was warned, somewhat ambiguously, that “if no choice is specified” his proxy (once the proxy card was properly signed) would be voted in .favor of the proposal to expand the board to nine and for “the slate of directors proposed by a majority of the Board of Directors of the Company in office on July 22, 1970.” F. The Reminder Notice On October 18, 1971 the Gray faction mailed a one page reminder notice to those shareholders who had not yet responded to the proxy solicitation. (PX 10). This notice was both captioned and signed “Scot-ten, Dillon Company.” The reminder notice impressed upon the reader the fact that since many Scotten, Dillon shares eligible to vote at the meeting were held in small amounts, his signed proxy would be helpful. This reminder letter had been cleared with the SEC. (Docket Item 63 at 252-254). G. Schedule 14B’s Because of the formal notification given to the SEC by Berg, Himmel, Prouty and Summers that they intended to contest the Gray faction’s proxy solicitation (PX 42) Grass advised the directors on the July 27, 1970 board of directors and the four nominees to file Schedule 14B’s. The following disclosures from the Schedule 14B’s subsequently filed are pertinent: Gray’s Schedule 14B filed on September 18,1971 discloses that he “owned beneficially” 10,100 shares of Scotten, Dillon common stock, that in June 1969 he had “purchased 10,000 shares of common stock,” that “the funds used to purchase these shares were borrowed from P. M. Hill, a personal acquaintance,” and that “this loan is still outstanding.” (PX 21). Fred Davis’ Schedule 14B, also filed on September 18, indicates that he owned beneficially 3,100 shares of Scotten, Dillon common. (PX 25). However, subsequently on October 22, 1971, Davis hastily filed an amended Schedule 14B which disclosed that he owned beneficially only 1,100 shares of Scotten, Dillon common and that 2,000 shares were owned of record but not beneficially. (PX 26). Davis was prompted to confer with Grass after meeting in mid-October 1971 in Reading, Pennsylvania with his old friend William Knauer and with John Russell. Davis now feared that Russell or McGonigle or Berg would sue him for violation of the securities laws since Russell apparently knew that Knauer was the beneficial owner of 2,000 of Davis’s shares. (Tr. 178,112-113 160-161, 178-179). Throughout the summer of 1971 Davis had been aware of the difference between beneficial and record ownership of stock (Tr. at 145; Docket Item 122 at 71; PX 25, item 2(c)), but had lied to Grass when Grass confronted him in late July with the accusation that McGonigle owned some or all of Davis’ 3,100 shares. When Grass finally learned the truth concerning Davis’ record ownership of 2,000 of his 3,100 shares (Tr. 645; Docket Item 162 at 541-544, 555), Grass did not see fit to attempt to amend the portion of the proxy statement disclosing Davis’ beneficial ownership of 3,100 shares or to notify the Court of this matter. (Tr. 645, 648-650, 652; Docket Item 163 at 582-584). Grass’ approach was that securities law (Regulation 14A) required disclosure in the proxy statement of beneficial owner of shares held of record by a nominee and Davis was not a nominee. However, the amended Schedule 14B still failed to disclose the beneficial owner of the 2,000 shares. H. Input of Gray Faction Nominees To Proxy Materials Before discussing liability for various misstatements in the proxy materials, it is necessary to consider the input Grass received from the Gray faction nominees and directors. Charles A. Baratelli. Baratelli never authorized anyone to speak with Power on Baratelli’s behalf with regard to Power’s claim for breach of contract (Tr. 431, 444; Docket Item 138 at 27) nor was he informed either by Power or Davis about the nature of Power’s claims or any possible settlement of them. (Tr. 443; Docket Item 138 at 27, 30). Moreover, he made no promises directly or through an agent concerning review of Scotten, Dillon’s lawsuit against Power. Thus, the representations on page 20 of the proxy statement are false with respect to Baratelli. Baratelli concedes that he received some, but not all, of the four drafts of the proxy statement (Tr. 438; Docket Item 138 at 31), and that he was not very careful in his review. Harold Gray. Grass acknowledges that at least since June 1971 he has been aware of the combined lawyer-client and debtor-creditor relationship existing between Gray and Phyllis Joan Mandary Briggs Hill. (Tr. 687-688; Docket Item 163 at 608). For a period of the same duration he further concedes that he has been aware that there is a “note outstanding” between Gray and Hill. (Docket Item 163 at 612, 606-608). However Grass contends that he first learned of the specific, more predatory terms of the Gray-Hill “borrowing” transaction in December 1974, at Hill’s and Gray’s depositions in Florida taken in connection with this lawsuit. (Tr. 691-692). Gray maintains that in September 1971 he informed Grass of the specifics of his “borrowing” transaction with Hill, when he and Grass filled out Schedule 14B’s (Tr. 572) and that Grass has been aware of the unique Gray-Hill combined lawyer-client and debtor-creditor relationship since August 1970 when Gray retained Grass in connection with the Dillon v. Berg lawsuit. (Tr. 572). Fred Davis. Davis concedes that in July 1971 he lied to Grass about his record ownership of 2,000 shares of Scotten, Dillon common stock on behalf of William Knauer. And, despite Grass’ request, Davis did not consult with either Goldschmidt or Baratelli in order to acquaint them with Power’s claims against Scotten, Dillon or with Scot-ten, Dillon’s lawsuit against Power, or to obtain their assent to the representation in the proxy statement that once elected" the Gray faction nominees would review these matters. (Docket Item 162 at 519, 514-523; Tr. 740; Docket Item 161 at 30-33). Robert Goldschmidt. Robert Goldschmidt never discussed with Power or his representative either Power’s claims against Scotten, Dillon or its lawsuit against him. Goldschmidt never authorized anyone to speak with Power or Power’s representative on his behalf regarding these matters. (Docket Item 161 at 30-33). He also does not recall reaching an agreement with the other nominees that once elected they would seek the advice of independent counsel. (Id.) Nevertheless, Goldschmidt made no attempt, in so far as the record reflects, to correct these misstatements in the proxy materials. Len J. Dillon. There is nothing in the record regarding his participation in the preparation of the proxy materials for the Reconvened 1970 Annual Shareholders Meeting or regarding his knowledge of the facts underlying the Gray-Hill transaction, Davis’ record ownership of 2,000 shares, or potential litigation between Scotten, Dillon and Power. However, Dillon was present at both meetings of the board as lawfully constituted on July 22, 1970, held on July 1 and July 16, 1971, respectively. Robert M. Schroder. Schroder, who now lives in Beruit, Lebanon, resigned as a general “back office” partner of C. B. Richard, Ellis & Co. on August 1, 1972. (Tr. 229). His deposition was not taken in this case; however the record does show that in late summer 1971 Grass informed him of the nature of Power’s claims against Scotten, Dillon and of the Company’s lawsuit against Power. (Docket Item 63 at 317; Docket Item 162 at 518-519). II. THE LAW The recapitulation of the aforementioned facts makes it evident that the Scotten, Dillon Reconvened 1970 Shareholders Meeting was a struggle for control between the Gray and Berg factions. In such a charged atmosphere the admonitions of Rule 14a-9, issued pursuant to Section 14(a) of the Securities Exchange Act of 1934, are the initial tool for analyzing the Gray faction’s proxy materials. Rule 14a-9 provides: “No solicitation shall be made by means of any proxy statement, form of proxy notice of meeting or other communication . . ' . 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.” There are three predicates to the establishment of a violation of Rule 14a-9. First, the false or misleading statement or the omission must be found to have been “material.” Second, those individuals participating in the proxy solicitation must be found to have satisfied some degree of culpability or fault. Third, the proxy solicitation must have been an essential link in the accomplishment of the transaction. Mills v. Electric Auto-Lite, 396 U.S. 375, 385, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970); Epic Enterprises, Inc. v. Brothers, 395 F.Supp. 773, CCH Secur.L.Rep. ¶ 95,289 (N.D.Okl.1975). Gould v. American Hawaiian Steamship Co., 351 F.Supp. 853 (D.Del.1972), aff’d in relevant part, Nos. 75-1338 and 75-1339 (C.A.3, April 8, 1976). (1) The definition of “material” under Rule 14a-9 has evolved somewhat since the seminal decision of the Supreme Court in Mills v. Electric Auto-Lite, 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970). There, the Court remarked: “Where the misstatement or omission in a proxy statement has been shown to be ‘material,’ . . . that determination itself indubitably embodies a conclusion that the defect was of such a character that it might have been considered important by a reasonable shareholder who was in the process of deciding how to vote. This requirement that the defect have a significant propensity to affect the voting process is found in the express terms of Rule 14a-9, and it adequately serves the purpose of ensuring that a cause of action cannot be established by proof of a defect so trivial, or so unrelated to the transaction for which approval is sought, that correction of the defect or imposition of liability would not further the interests protected by § 14(a).” (emphasis in the original). This passage in Mills spawned a debate over the governing definition of “material”. Compare, Northway, Inc. v. TSC Industries, Inc., 512 F.2d 324, 331 (C.A.7, 1975), cert. granted, 423 U.S. 820, 96 S.Ct. 33, 46 L.Ed.2d 37, 44 U.S.L.W. 3200 (1975) with Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1302 (C.A.2, 1973). But the Third Circuit has now adopted the view of the Second Circuit, holding in Gould v. American-Hawaiian Steamship Co., Nos. 75-1338 and 75-1339 (C.A.3, April 8, 1976) (Maris, Van Dusen & Hunter, J.J.), slip opinion at page 14 that “The basic test of materiality in a section 14(a) setting is whether it is probable that a reasonable shareholder would attach importance to the fact falsified, misstated or omitted in determining how to cast his vote on the question involved. Or . whether ‘taking a properly realistic view, there is a substantial likelihood that the misstatement or omission may have led a stockholder to grant a proxy to the solicitor or to withhold one from the other side, wh