Dillon v. Berg

United States District Court for the District of Delaware · 1971 · Corporations

326 F. Supp. 1214 (D. Del. 1971)

Updated August 22, 2026

CorporationsFederal Proxy RegulationDirectorsShareholder VotingSection 14(a)Rule 14a-3Rule 14a-9Schedule 14A

Facts

Scotten, Dillon's board split into two hostile factions, and at a July 22, 1970 board meeting the Berg faction purported to elect Summers to the board, designate Bissell and Summers as management nominees, and authorize preparation of proxy materials for the annual meeting. The proxy materials stated that Power had resigned and Summers had replaced him, described the solicitation as made on behalf of management, omitted the existence of two unfilled directorships, omitted information required by Schedule 14A, and contained other inaccuracies and omissions. The court found that Power had not effectively resigned, that Summers had not been validly elected, and that several disclosures required by federal proxy rules were missing or false. Plaintiffs sought to void the annual meeting and the proxies obtained through those materials.

Issue

Whether the proxy materials used for Scotten, Dillon's 1970 annual shareholders meeting violated § 14(a), Rule 14a-3, and Rule 14a-9 through false statements, misleading omissions, and failure to include information required by Schedule 14A. Relatedly, the court had to determine the validity under Delaware law of Power's purported resignation, Summers's purported election, and the claimed authority to label the solicitation as management's.

Rule

Under Rule 14a-9, a proxy statement is materially false or misleading if the defect might have been considered important by a reasonable shareholder deciding how to vote and has a significant propensity to affect the voting process. Under Rule 14a-3, omission of information specifically required by Schedule 14A violates § 14(a). Under Delaware law as applied here, a director's resignation must be unequivocal written notice to the corporation, secret adverse resignation arrangements are ineffective, and a vacancy must be filled by a majority of the directors then in office.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Harbor Forge, Inc., a Delaware corporation based in Cleveland, has a seven-member board split into rival factions. Before a board meeting, chair Nolan Price privately demands that director Elena Cruz hand him an undated resignation in exchange for his support for her reelection; Cruz gives him the letter, but no written notice is sent to the corporation or the other directors. Weeks later, Price mails proxy materials stating that Cruz resigned and that a replacement has taken her seat.

If shareholders sue under the federal proxy rules, which argument is strongest?

Explanation. The controlling rule is that a Delaware director's resignation must be unequivocal, in writing, and communicated to the corporation. Delivery to a corporate agent can suffice in the ordinary case, but not where that agent is acting adversely to the corporation. A secret, undated resignation extracted as part of an arrangement allowing one faction leader to neutralize a director is ineffective, so stating that the director resigned is false and can support proxy-rule liability.