Opinion
Civl Action NO. H-02-1942
June 14, 2002
MEMORANDUM AND OPINION DENYING APPLICATION FOR TEMPORARY RESTRAINING ORDER
This case involves a proxy statement/prospectus mailed on May 16, 2002 by defendant Nabors Industries, Inc. ("Nabors Delaware") seeking shareholder approval to reorganize and change its place of incorporation from Delaware to Bermuda. The company proposes to reorganize as Nabors Industries Ltd. ("Nabors Bermuda"). Plaintiff Steven Rosenberg, a Nabors Delaware shareholder, filed this suit on May 23, 2002, alleging that the proxy statement/prospectus violates sections 13 and 14 of the Securities Exchange Act of 1934 and their implementing regulations. See 15 U.S.C. § 78m-78n; 17 C.F.R. § 240.13e-3; 17 C.F.R. § 240.14a-4; 17 C.F.R. § 240.14a-9. The AFL-CIO has intervened to allege that the proxy statement/prospectus violates section 14 of the Securities Exchange Act of 1934.
This court granted the AFL-CIO's motion for permissive intervention upon finding that there are common questions of law and fact between the claims asserted by the AFL-CIO and Rosenberg, and that intervention would neither delay the case nor prejudice the opposing party. (Docket Entry No. 11). The motion was granted on the record at the hearing on the temporary restraining order.
On June 10, 2002, Rosenberg filed an application for a temporary restraining order to prevent Nabors Delaware from closing the shareholder vote as scheduled on June 14, 2002, and from effectuating the merger and reincorporation. Rosenberg based his application on the allegations that the proxy statement/prospectus is materially misleading under federal securities law. (Docket Entry Nos. 9, 10 17). Defendants have responded. (Docket Entry Nos. 18, 20, 21). The AFL-CIO joined in Rosenberg's motion for a temporary restraining order and participated in the hearing held on June 13, 2002, with Rosenberg and Nabors Delaware.
The only issue addressed in this opinion is the application for a temporary restraining order. The narrow issue is whether plaintiff and intervenor have made the necessary showing for the issuance of a TRO to prevent the closing of the shareholder vote. Based on a careful review of the application, the response, the proxy statement/prospectus at issue, the parties' submissions, the arguments of counsel, and the applicable law, this court concludes that plaintiff and intervenor fail to make the requisite showing and DENIES the application for a temporary restraining order. The reasons for this ruling are stated below.
I. Background
In January 2002, Nabors Delaware announced a proposal to merge with a wholly-owned subsidiary of Nabors Bermuda, a company created for the purpose of this merger. If Nabors Delaware shareholders approve the merger, the shareholders will exchange their Nabors Delaware stock for shares of Nabors Bermuda and the company will change its place of incorporation from Delaware to Bermuda.
On May 16, 2002, Nabors Delaware mailed a proxy statement/prospectus to its shareholders describing the proposal to reorganize the company and change its place of incorporation. (Docket Entry No. 18, Brusca Decl., Ex. A, Nabors Delaware Proxy Statement/Prospectus dated May 10, 2002) ("Proxy Statement"). Shareholders were notified that a special meeting would be held on Friday, June 14, 2002 at 11:00 a.m. to vote on the plans described in the Proxy Statement. The Proxy Statement included as attachments the Agreement and Plan of Merger approved by Nabors Delaware's Board of Directors, the Memorandum of Association of Nabors Bermuda, and the Amended and Restated Bye-Laws of Nabors Bermuda. After this lawsuit was filed, Nabors Delaware sent its shareholders an amendment to the Proxy Statement, describing Rosenberg's allegations.
Plaintiff and intervenor ask this court to issue a TRO to prevent Nabors Delaware from closing and certifying the shareholder vote that is scheduled to close at the end of today's special meeting, and from taking the steps to effectuate the reorganization proposed in the Agreement and Plan of Merger.
II. The Applicable Legal Standards
A temporary restraining order or preliminary injunction is an extraordinary equitable remedy that may be granted only if plaintiff establishes four elements: (1) a substantial likelihood of success on the merits, (2) a substantial threat that plaintiff will suffer irreparable injury if the injunction is denied, (3) the threatened injury outweighs any damage that the injunction might cause defendants, and (4) the injunction will not disserve the public interest. See Sugar Busters, LLC. v. Brennan, 177 F.3d 258, 265 (5th Cir. 1999). In this case, plaintiff and intervenor must establish a substantial likelihood that they will succeed in proving the securities laws violations they assert.
Plaintiff and intervenor allege that Nabors Delaware violated section 14(a) and Rule 14a-9 because the Proxy Statement contains materially misleading statements and omissions. Section 14(a) of the 1934 Act provides that it is unlawful "to solicit . . . any proxy or consent or authorization in respect of any security" in "contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors." 15 U.S.C. § 78n. Rule 14a-9(a) provides that no proxy solicitation shall be made
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 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.17 C.F.R. § 240.14a-9(a).
A claim under section 14(a) and Rule 14a-9 involves three elements: (1) that the proxy contained a material misrepresentation or omission; (2) that the defendant was at least negligent; and (3) that the proxy "was the essential link in completing the transaction in question." An omission is material if "there [is] a substantial likelihood that the disclosure of the omitted fact would have been viewed by a reasonable investor as having significantly altered the `total mix' of information made available." TSC Industries, Inc. v. Northway, 426 U.S. 438, 449 (1976). "However, in a proxy context this definition of materiality assumes that the omitted information would have influenced a reasonable shareholder against the proposed transaction for which the proxies were sought." Minzer v. Keegan, 218 F.3d 144, 149 (2d Cir. 2000). Section 14(a) was designed to "prevent management or others from obtaining authorization for corporate action by means of deception or inadequate disclosure in proxy solicitation." J.I. Case Co. v. Borak, 84 S.Ct. 1555 (1964).
Rosenberg also claims that the proxy ballot violates Rule 14a-4(a)(3) and (b)(l) because it provides for only one vote on the transaction. Rule 14a-4(a)(3) provides that the proxy "[s]hall identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters. . . ." 17 C.F.R. § 240.14a-4(a)(3). Rule 14a-4(b)(1) similarly provides:
[m]eans shall be provided whereby the person solicited is afforded an opportunity to specify by boxes the choice between approval or disapproval of or abstention with respect to each separate matter referred to therein as intended to be acted upon.
17 C.F.R. § 240.14(b)(1). The goal of these rules is to "prohibit electoral tying arrangements that restrict shareholder voting choices." Regulation of Communications Among Shareholders, Exchange Act Release No. 34-31326, 57 Fed. Reg. 48, 276 (Oct. 22, 1992). The issue on this allegation is whether plaintiff has made a sufficient showing of a likelihood that items grouped in the approval of the Agreement and Plan of Merger constitute "separate matters." See Koppel v. 4987 Corp., 167 F.3d 125 (2d Cir. 1999). Rosenberg also argues that the time between the mailing of the Proxy Statement and the Special Meeting was insufficient for shareholders to adequately deliberate on the issues and cast their vote.
In his third category of claims, Rosenberg alleges that the Proxy Statement is defective because of Nabors Delaware's failure to make disclosures under section 13(e)(1) of the 1934 Act and Rule 13e-3. 15 U.S.C. § 78m(e)(1); 17 C.F.R. § 240.13e-3. Section 13(e)(1) makes it unlawful for an issuer which has a class of registered securities to "purchase" any equity security of the issuers if such purchase contravenes the SEC rules. Rule 13e-3 provides, however, that certain transactions are excepted from its requirements. Nabors Delaware argues that this transaction falls within one of the exceptions.
III. The Challenges to the Proxy Statement
A. The Claim of Misstatements as to the Differences in Shareholder Rights Under Bermuda and Delaware Law
Plaintiff and intervenor allege that the Proxy Statement violates Rule 14a-9 by misrepresenting the differences between the rights of Nabors shareholders under Bermuda law and under Delaware law. Plaintiff and intervenor assert that the Proxy Statement falsely assures Nabors Delaware stockholders that their rights as shareholders of Nabors Bermuda will be "substantially" the same. Plaintiff and intervenor argue that the Proxy Statement fails to provide sufficient or accurate disclosure as to the differences between Delaware and Bermuda law affecting Nabors shareholders' rights. In support of this argument, plaintiff submits a proxy statement from another company, Accenture, which recently changed its state of incorporation to Bermuda. Plaintiff argues that Accenture's disclosures, differing from Nabors Delaware's, indicate that Nabors Delaware's disclosures are materially misleading.
The discussion regarding shareholder rights begins in the "Questions and Answers About the Reorganization Section" of the Proxy Statement. It states in relevant part as follows:
[D]espite certain differences, the corporate legal system, based on English law, is such that your rights as a Nabors Bermuda shareholder will be substantially unchanged from your rights as a stockholder in Nabors Delaware. We encourage you to read the section "Comparison of Rights of Stockholders" beginning on page 28 for a more detailed description of the differences between your rights under Delaware law and under Bermuda law.
Proxy Statement, at 3. On page 9, in the "Summary," the Proxy Statement states:
Rights of Stockholders (See Page 28)
The principal attributes of Nabors Delaware common stock and the Nabors Bermuda common shares will be substantially similar. There are differences, however, between the rights of stockholders under Delaware law and shareholders under Bermuda law. . . . We encourage you to read the section titled "Comparison of Rights of Stockholders" on page 28 for a more detailed discussion of these differences.
Id. at 9. On page 15, the Proxy Statement again discusses the rights of the shareholders. Under the heading "Your rights as a stockholder will change as a result of the reorganization," the following appears:
Because of differences in Bermuda law and Delaware law and the differences in the governing documents of Nabors Delaware and Nabors Bermuda, your rights as a stockholder will change if the reorganization is completed. For example, it may be more difficult for you to bring a shareholder derivative suit on behalf of the company under Bermuda law than it is to bring such a suit under Delaware law.
Id. at 15. This paragraph again ends by referring to the comparison section beginning on page 28. On page 28, under the heading "Comparison of Rights of Stockholders," the following paragraph appears:
The principal attributes of the Nabors Delaware common stock and the Nabors Bermuda common shares will be substantially similar; however, there are certain differences between your rights as a stockholder under Delaware law and as a shareholder under Bermuda law, which is modeled after the law of England. In addition, there are certain differences between Nabors Delaware's restated certificate of incorporation and by-laws and Nabors Bermuda's memorandum of association and bye-laws. Other than the addition of the advance notice provision in the bye-laws and an increase in the maximum number of directors the company may have, it is our intention that your rights as a stockholder be substantially the same before and after the merger and, accordingly, any differences which may arise would be as a consequence of the difference between Bermuda and Delaware law. In addition, there are similarities between those actions that constitute violations of the U.S. federal securities laws that would also constitute or give rise to a cause of action under Bermuda law. . . . In addition, any use of any deceptive or manipulative devices by the company or by its officers or directors on behalf of the company in connection with the purchase or sale of the company's securities would give rise to civil liability on the Bermuda company and its directors and officers under Bermuda and U.S. securities laws.
Id. at 28. Following this paragraph, the Proxy Statement contains a lengthy, detailed, side-by-side column comparison of the "material rights of holders of Nabors Delaware common stock and Nabors Bermuda common shares." Id. at 30-39.
The Proxy Statement also contains a description of difficulties that a shareholder may have in enforcing a judgment, including one based on federal securities violations obtained in an American court, against Nabors Bermuda. This disclosure is very similar to the corresponding disclosure in the Accenture proxy statement. The Proxy Statement provides:
Nabors Bermuda is a Bermuda exempted company. As a result, it may be difficult for you to effect service of process within the United States or to enforce judgments obtained against Nabors Bermuda in United States courts. This difficulty may adversely affect your rights in this regard as a shareholder of Nabors Bermuda when compared to your rights as a stockholder of Nabors Delaware. Nabors Bermuda will irrevocably agree that it may be served with process with respect to actions based on offers and sales of securities made in the United States and other violations of U.S. securities laws by having Nabors Industries, Inc. (Nabors Delaware) located at 515 West Greens Road, Suite 1200, Houston, Texas 77067, be its United States agent appointed for that purpose.
Nabors Bermuda has been advised by its Bermuda counsel, Appelby, Spurling Kempe, that a judgment for the payment of money rendered by a court in the United States based on civil liability would not be automatically enforceable in Bermuda. Nabors Bermuda has also been advised by Appleby, Spurling Kempe that a final and conclusive judgment obtained in a court of competent jurisdiction in the United States under which a sum of money is payable (not being a sum payable in respect of taxes or other charges of a like nature, in a respect of a fine or other penalty, or in respect of multiple damages as defined in the Protection of Trading Interests Act of 1981) may be the subject of an action in the Supreme Court of Bermuda under the common law doctrine of obligation, by action on the debt evidenced by the court's judgment. Such an action should be successful upon proof that the sum of money is due and payable, and without having to prove the facts supporting the underlying judgment, as long as:
the court that gave the judgment was competent to hear the action in accordance with private international law principles as applied by the courts in Bermuda; and
the judgment is not contrary to public policy in Bermuda, was not obtained by fraud or in proceedings contrary to natural justice of Bermuda and is not based on an error in Bermuda law. A Bermuda court may impose civil liability on Nabors Bermuda or its directors or officers in a suit brought by shareholders or others in the Supreme Court of Bermuda against Nabors Bermuda or such persons with respect to facts that constitute a violation of U.S. federal securities laws only if the facts surrounding such violation would constitute or give rise to a cause of action under Bermuda law.
(Proxy Statement, at 14).
The characterizations of the Nabors shareholders' rights under Bermuda and Delaware law as "substantially similar" but "different" is followed by the detailed comparison of the differences. In Virginia Bankshares, Inc. v. Sandberg, 501 U.S. 1083 (1991), the Court considered whether conclusory statements of reasons, opinion, or belief can be materially misleading within the meaning of Rule 14a-9. The Court held that "a plaintiff is permitted to prove a specific statement of reason knowingly false or misleadingly incomplete, even when stated in conclusory terms." Id. at 1096. In that case, petitioner had argued that liability for a misleading opinion, reason, or belief does not exist under Section 14(a) where the shareholders are given the "offending statement's factual basis" and given "an opportunity to draw th[e] conclusion themselves." The Court agreed with this statement, stating:
While a misleading statement will not always lose its deceptive edge simply by joinder with others that are true, the true statements may discredit the other one so obviously that the risk of real deception drops to nil. Since liability under § 14(a) must rest not only on deceptiveness but materiality as well (i.e., it has to be significant enough to be important to a reasonable investor deciding how to vote, see TSC Industries, 426 U.S. at 449, 96 S.Ct. at 2132), petitions are on perfectly firm ground insofar as they argue that publishing accurate facts in a proxy statement can render a misleading proposition too unimportant to ground liability.Id. at 1097. However, "if it would take a financial analyst to spot the tension between the one and the other, whatever is misleading will remain materially so, and liability will follow." Id. (citing Gerstel v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1297 (2d Cir. 1973).
The conclusory characterization in the Proxy Statement that the rights of a Nabors Bermuda shareholder and the rights of a Nabors Delaware shareholder are "substantially similar" but have differences is followed by the detailed information on which this characterization is based. That information is primarily in a side-by-side column presentation in the Proxy Statement comparison section. Plaintiff and intervenor do not show a substantial likelihood of success on the merits as to the argument that the conclusory characterization is materially misleading in light of the detailed information set out in the Proxy Statement chart. The detailed description of differences in the Nabors Bermuda and Nabors Delaware corporate governance provisions includes a detailed description of the difficulties that a shareholder of Nabors Bermuda might encounter in attempting to sue directors and officers for breaching duties under Bermuda law; in attempting to file a derivative suit under Bermuda law; and in attempting to enforce a judgment, including one obtained for violations of federal and state securities laws. ( Proxy Statement, at 14-15, 28-29, 32-32, 38).
Plaintiff and intervenor specifically contend that the Proxy Statement insufficiently conveys the status of a shareholder's ability under Bermuda law to bring direct or derivative actions against the officers and directors of the corporation. Plaintiff and intervenor argue the Proxy Statement should include language similar to that found in Accenture's proxy statement:
Bermuda law differs from the laws in effect in the United States and may afford less protection to shareholders . . . The Companies Act differs in some material respects from laws generally applicable to United States corporations and shareholders, including the provisions relating to interested directors, mergers and acquisitions, takeovers, shareholder lawsuits and indemnification of directors. See Description of Capital.
Under Bermuda law, the duties of directors and officers of a company are generally owed to the company only. Shareholders of Bermuda companies do not generally have rights to take action against directors or officers of the company, and may only do so in limited circumstances.
(Docket Entry No. 10, Ex. K). The portions of Accenture's proxy statement submitted to this court only contain this summary. It is unclear that Accenture's statement contained the detailed comparison of the rights of shareholders under the law of the relevant American jurisdiction, as opposed to Bermuda law, or what such a comparison included.
Both Nabors Delaware and plaintiff present evidence describing shareholder rights under Bermuda law. The evidence reveals the complexity of an accurate comparison with Delaware law. Nabors Delaware's Proxy Statement includes much of the same information that is in the Accenture proxy statement, in the column-by-column comparison rather than more directly stated. Both proxy statements make it clear that it is more difficult for a shareholder to file suits and enforce judgments against the officers or directors under Bermuda law than under the relevant law of American jurisdictions. The section on the side-by-side comparison of the shareholder derivative suits concludes by stating: "In general, it may be more difficult for you to bring a shareholder derivative suit on behalf of the company under Bermuda law than it is to bring such a suit under Delaware law." (Proxy Statement, at 3 8-9). In addition, the "Limitations on Liability" section of the comparison states that:
Nabors Bermuda's bye-laws provide that, subject to applicable law, each shareholder . . . agree[s] to waive any claim or right of action, whether individually or derivatively, against any current or former officer, director, resident representative or committee member on account of any action. . ., provided that such waiver shall not apply to claims or rights of action arising out of the fraud or dishonesty of such person or to recover any gain, personal profit, or advantage to which such person is not legally entitled.
In addition to the terms of Nabors Bermuda's bye-laws, in order to maintain a derivative action on behalf of the company, a shareholder must satisfy the requirements described under "Shareholder Derivative Suits" on page 38.
Id. at 33.
There is an insufficient showing that had a reasonable shareholder read the prospectus in its entirety, the alleged untrue facts and alleged omitted facts would have assumed actual significance in the deliberations or would have significantly altered the "total mix" of information made available. See In re USEC Sec. Litig., 190 F. Supp.2d 808, 825 (D. Md. 2002); TSC Indus., Inc., 426 U.S. at 438. Plaintiff and intervenor have failed to make the necessary showing of a likelihood of success as to the claim that Nabors Delaware's statements describing shareholder rights after the merger are materially false or misleading, so as to warrant issuance of a TRO.
The argument that the Proxy Statement is materially misleading because it fails to include a description of the differences in shareholder rights to access corporate records also fails to make the necessary showing needed for a TRO. Plaintiff and intervenor again rely on Accenture' s proxy statement, which they quote as stating:
Bermuda law does not, however, provide for a general right for shareholders to inspect or obtain copies [of corporate records other than public records, bye-laws of the company, minutes of general meetings and company's audited financial statements].
Plaintiff states that this quote can be found on page 23 of Accenture's proxy statement, but page 23 does not appear in the materials submitted to this court. Nabors Delaware notes in response that Nabors Bermuda will remain subject to SEC reporting requirements and federal securities laws, a fact that plaintiff and intervenor acknowledged at the hearing.
Plaintiff also argues that Bermuda law does not facilitate shareholder communications by allowing access to information concerning beneficial owners. Nabors Delaware responds that Section 65 and 66 of the Bermuda Companies Act of 1981 provide for access to information regarding each shareholder similar to that provided by Delaware law. (Docket Entry No. 21, Bell Decl., ¶¶ 3-7). Shareholders are allowed, under Bermuda law, to communicate with beneficial owners through the nominee holders. (Id., ¶ 7).
In sum, the allegations as to the Proxy Statement's description of the differences between the rights of Nabors Bermuda shareholder and Nabors Delaware shareholder do not establish a substantial likelihood of success in establishing a violation of Rule 14a-9, so as to support issuance of a TRO.
B. The Claim that the Proxy Statement Omitted Estimates of the Anticipated Tax Savings and Other Benefits
The Proxy Statement includes several statements of the Board's belief that the reorganization will result in benefits to the company, including "maximization of our potential business growth and cash flow"; "expansion of our international businesses . . ."; increased competitiveness"; "potential improvement of our global tax position and global tax management"; "use of the greater cash flow to invest for further earnings growth"; and "expansion of our investor base." The Proxy Statement sets out "reasons for the reorganization" in several places, including the statement that "we anticipate that the reorganization may result in significant tax savings net of tax costs," although "we cannot give any assurance as to what our tax savings net of tax costs will be after the reorganization." In the explanation of the anticipated effect of the reorganization on the "global tax position," the Proxy Statement again states that the Board is recommending the reorganization
in part because it believes that the reorganization will improve our global tax position and should maximize potential growth and cash flow. We anticipate that the reorganized structure may enhance our ability to realize significant tax savings net of tax costs. However, we cannot give any assurance as to what our tax savings net of tax costs will be after the reorganization. After the reorganization our tax rate will depend on, among other things, profitability and the relative mix of our operations worldwide and our ability to react to any changes in tax laws, treaties and policies and the interpretation of such laws, treaties and policies in the jurisdictions where we operate. Our actual effective tax rate may vary materially from our expectation.
(Proxy Statement, at 15). The Proxy Statement sets out a number of factors, including changes in legislation, that could reduce or eliminate the anticipated tax benefits from the reorganization. The Proxy Statement explains that the uncertainties prevent the board from predicting "what impact, if any, the reorganization will have in the longterm." ( Id. at 1).
Plaintiff and intervenor fault defendants for omitting what is described by plaintiff as "hard information . . . quantifying the economic benefits to Nabors" that the Board stated it expected from the reorganization. Intervenor complains that the proxy prospectus fails to "include any pro forma financial statements done on a post-reorganization basis or any estimate of the potential tax benefits to the Company once the reorganization is effective." The issue is whether plaintiff and intervenor have shown a sufficient likelihood of succeeding on the merits of this claim to support the issuance of a TRO.
A plaintiff must show that the proxy statement "omits to state any material fact necessary in order to make the statements therein not false or misleading." 17 C.F.R. § 240.14a-9; 15 U.S.C. § 78n(a). "An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." TSC Indus., 96 S.Ct. at 2132. In assessing the materiality of an omission, a court must determine whether "disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available." Id. Plaintiff and intervenor do not allege that the Board lacked a reasonable basis for anticipating tax benefits from the reorganization in Bermuda. Plaintiff and intervenor do not argue that the Board materially understated the presence of risk factors that could reduce or eliminate the hoped-for tax benefits. Rather, the argument is that the Board's failure to include internal financial projections of the possible tax effects of the reorganization is a material omission.
The Proxy Statement, read as a whole, in light of the applicable case law, does not support this argument as a basis for the TRO sought. Plaintiff and intervenor do not show that the Proxy Statement violated specific disclosure requirements specific to the type of reorganization transaction at issue by failing to include pro forma financial statements. The Proxy Statement explicitly sets out factors that could make any such specific estimates vulnerable to challenge as speculative and unreliable. The Proxy Statement makes no attempt to quantify anticipated future tax savings from the reorganization. Given the obvious absence of such estimates in the Proxy Statement, the absence of internal projections that might have explained the basis for such an estimate is an insufficient basis for the issuance of a TRO. See Shaw v. Digital Equipment Corp., 82 F.3d 1194, 1209 (1st Cir. 1996); In re VeriFone Securities Litig., 11 F.3d 865, 869 (9th Cir. 1993).
C. The Claim that the Proxy Statement Failed to Disclose Certain Directors' Personal Financial Interests in the Reincorporation
Plaintiff and intervenor assert that the Proxy Statement is deficient in disclosing the relationship between the compensation of some of the directors and the reincorporation. Plaintiff and intervenor assert that because two of the individual defendants, the CEO and the COO, have compensation arrangements that base compensation on a percentage of the net cash flow above certain levels, the Proxy Statement had to disclose the extent of the potential benefit those directors will receive from the reorganization. However, defendants point out that the proxy materials shareholders received in connection with the annual meeting and election of directors disclosed the stock options awarded to the directors and disclosed the relationship between the bonus some of the directors received and Nabors's cash flow. (Docket Entry No. 10, Squitieri Decl., Ex. C, Nabors Delaware's Schedule 14A, at 12). Defendants also point out that the information previously disclosed to the shareholders makes it clear that the bonus compensation of these directors is linked to the company's pre-tax cash flow. See Docket Entry No. 18, Brusca Decl., Ex. 17, Employment Agreements of Petrello and Isenberg. Counsel for intervenor conceded during oral argument that this arrangement undercuts the argument that the tax consequences expected from the reorganization will provide a windfall to certain directors. Moreover, the financial press widely reported a possible relationship between the employment agreements of certain directors and the compensation they might receive after the reincorporation. "When the subject of a proxy solicitation has been widely reported in a readily available media, shareholders may be deemed to have constructive notice of the facts reported, and the court may take this into consideration in determining whether representations in or omissions from the proxy statement are materially misleading." United Paperworkers Int'l Union v. Int'l Paper Co., 985 F.2d 1190, 1199 (2d Cir. 1993). This argument does not provide a sufficient basis for the issuance of a TRO.
D. The Claim that the Proxy Statement Fails to Disclose the Possibility that Nabors Could be Excluded from the SP 500 Index and the Consequence of Such an Exclusion
The Proxy Statement includes the following:
Our common stock is currently listed on the American Stock Exchange. There is currently no established public trading market for the common shares of Nabors Bermuda. We have made an application so that, immediately following the reorganization, the common shares ofNabors Bermuda will be listed on the American Stock Exchange under the symbol "NBR," the same symbol under which Nabors Delaware common stock is currently listed. Based on prior transactions similar to the reorganization by member companies of the SP 500 Index, we believe that the pending change of domicile to Bermuda should not affect the company's status as a member of the SP 500 Index.
(Proxy Statement, at 21). Plaintiff does not assert that this statement is incorrect. Plaintiff does not argue that there were any prior similar transactions that resulted in exclusion of the reincorporated companies from the SP 500 Index, or that other omitted information made the statement inaccurate. Plaintiff instead urges that the statement compares unfavorably to a similar disclosure in a Form S-4 apparently prepared in November 2001 for a December 14 shareholders' meeting of IngersollRand Company, in connection with a similar proposed reorganization to move the company's domicile to Bermuda. In that document, Ingersoll-Rand expressed the conclusion that "[b]ased on a review of the factors considered by the SP to determine inclusion in the SP 500 Index, we believe that IR-Limited will satisfy the criteria for continued inclusion in the SP 500 Index." However, Ingersoll-Rand further explained the consequence that might result from the eventuality of exclusion:
In the event IR-Limited is not included in the SP 500 Index, certain mutual funds currently holding a substantial number of shares of IR-New Jersey common stock would be required to sell such shares. . . . These sales could adversely affect the market price of IR-Limited Class A common shares.
(Docket Entry No. 10, Squitieri Dccl., Ex. Q, at 16). Plaintiff contends that the same language should have appeared in the Nabors Delaware Proxy Statement.
Does the absence of a similar explanation in the proxy statement provide a basis for a TRO because the omission is material? The present record provides no support for an affirmative response. The Supreme Court has cautioned against an overly expansive approach to materiality:
The disclosure policy embodied in the proxy regulations is not without limit. . . . Some information is of such dubious significance that insistence on its disclosure may accomplish more harm than good. . . . [I]f the standard of materiality is unnecessarily low, not only may the corporation and its management be subjected to liability for insignificant omissions or misstatements, but also management's fear of exposing itself to substantial liability may cause it to simply bury the shareholders in an avalanche of trivial information — a result that is hardly conducive to informed decisionmaking.TSC Indus., 96 S.Ct. at 2132. This contention does not support the issuance of a TRO.
IV. The Challenge to the Form of the Proxy Ballot
Rules 14a-4(a)(3) and 14a-4(b)(1) provide technical requirements for the form of proxy ballots. Both subsections of Rule 14a-4 require that "separate matters" be separately listed on the ballot so that shareholders may vote on each matter to be decided. The goal of these rules is to "prohibit electoral tying arrangements that restrict shareholder voting choices." Regulation of Communications Among Shareholders, Exchange Act Release No. 34-31326, 57 Fed. Reg. 48,276 (Oct. 22, 1992). Plaintiff asserts that the proxy ballot provided by Nabors Delaware violates these rules because it "bundles" together separate issues and only provides for one vote on the entire proposal. The issue is whether the reorganization steps are "separate matters" upon which shareholders must be allowed to cast separate votes.
The Proxy Statement describes the reorganization process as follows:
A new Delaware company, Nabors Acquisition Corp. VIII, which has been formed specifically for the merger, will merge into Nabors Delaware. Nabors Delaware will be the surviving company in the merger and become a wholly-owned, indirect subsidiary of Nabors Bermuda. As a result of the merger, each share of Nabors Delaware outstanding immediately prior to the effective time of the merger will automatically convert into the right to receive a common share of Nabors Bermuda.
(Proxy Statement, at 1 15). Plaintiff argues that the reorganization outlined in the Proxy Statement are improperly "bundled" into one item on the proxy ballot. The proxy ballot provides:
Item I. To adopt the Agreement and Plan of Merger among Nabors Industries, Inc., Nabors Acquisition Corp. VIII, Nabors Industries, Ltd., a Bermuda exempted company, and Nabors US Holdings, Inc. whereby the company will effectively change its place of incorporation from Delaware to Bermuda by merging Nabors Acquisition Corp. VIII with Nabors Industries, Inc., which will be the surviving entity and become a wholly-owned, indirect subsidiary of Nabors Industries Ltd., and pursuant to which each share of Nabors Industries, Inc. will automatically be converted into the right to receive a share of Nabors Industries Ltd. and all current stockholders of Nabors Industries, Inc. will become shareholders of Nabors Industries Ltd.
In support of his argument that this proxy ballot is defective, plaintiff cites Koppel v. 4987 Corp., 167 F.3d 125 (2d Cir. 1999), which held that a private right of action exists under section 14(a) for violations of Rules 14a-4(a)(3) and 14a-4(b)(1). In Koppel, a partnership sought consent for continuing to forbear on terminating a lease, sale of the leased property, distribution of the proceeds of the sale to the new lessee, and liquidation of the partnership following the distribution of the sale proceeds. The proxy contained one item, asking for approval of the "Sale Program." The Second Circuit looked to the corporate documents and considered the "SEC's apparent preference for more voting items rather than fewer" to determine whether the items should be separately listed on the proxy. The court held that although interrelated, the items were "separable" because the partnership document required a separate vote for at least two prongs of the Sale Program. Id. at 138. Plaintiff argues that the reorganization similarly involves interrelated, yet separable items: a merger, a change in the by-laws and a change in the certificate of incorporation. Plaintiff points to Delaware law, which requires a vote of stockholders for any of the foregoing changes.
In this case, however, the only transaction to be voted upon is the Agreement and Plan of Merger. The change in by-laws and change of certificate of incorporation are necessary steps that follow approval of the merger, but are not separate from it. The proxy ballot asks for approval of only the Agreement and Plan of Merger. The Agreement and Plan of Merger does involve steps to be taken to effectuate the merger, but this does not make the elements of the merger "separate items" that are required to be separately listed on the proxy. Plaintiff has failed to make a substantial showing of success on the merits of this claim, so as to support issuance of a TRO.
V. The Challenge to Compliance with Section 13 and Rule 13e-3
Plaintiff seeks to show a significant probability of success on the merits as to the claim that the Proxy Statement is defective for failing to include a Schedule 13e-3, including a statement from the directors that the transaction is "fair" to all stockholders and whether other alternatives were considered by the Board. Nabors Delaware argues that it was not required to file a Schedule 13e-3 because this transaction falls within the exception stated in Rule 13e-3(g)(2). That rule states:
(g) This section shall not apply to:
(2) Any Rule 13e-3 transaction in which the security holders are offered or receive only an equity security Provided, That:
(i) Such equity security has substantially the same rights as the equity security which is the subject of the Rule 13e-3 transaction including, but not limited to, voting, dividends, redemption and liquidation rights except that this requirement shall be deemed to be satisfied if unaffiliated security holders are offered common stock.
(ii) Such equity security is registered pursuant to section 12 of the Act or reports are required to be filed by the issuer thereof pursuant to section 15(d) of the Act; and
(iii) If the security which is the subject of the Rule 13e-3 transaction was listed on a national securities exchange such equity security is listed on a national stock exchange. . . .17 C.F.R. § 240.13e-3(g)(2).
Plaintiff does not dispute that the proposed reorganization meets the requirements imposed by subparts (ii) and (iii) of Rule 13e-3(g)(2), but argues the transaction does not meet subpart (i) because Nabors Bermuda stock is not an equity with "substantially the same rights" as the Nabors Delaware stock. Plaintiff has cited no case law nor provided any evidence in support of his position. Under the plain language of the Rule, it appears the proposed reorganization satisfies subpart (i) because the "unaffiliated security holders [of Nabors Delaware] are offered common stock [of Nabors Bermuda]." 17 C.F.R. § 240.1 3e-3(g)(2)(i). Plaintiffs do not dispute that the proposed reorganization involves the issuance of the common stock of Nabors Bermuda to the shareholders of Nabors Delaware.
The subparagraph (g)(2) exception was designed to except from the operation of the Rule recapitalizations, transactions structured to create a holding company or reincorporate the entity in a new jurisdiction; and. mergers with and exchange offers by affiliates in which unaffiliated security holders would receive common stock by the surviving entity.Exchange Act Release No. 34-17719, 46 Fed. Reg. 22,571, 22,577 (April 20, 1981) (attached as Ex. 10 to Docket Entry No. 18, Brusca Decl.). Based on the present record, plaintiff has failed to establish a substantial likelihood of success on the merits of this claim.
VI. The Challenge to the Timing of the Proxy Statement
Plaintiff argues that the fact that only twenty-eight days intervened between the mailing of the Proxy Statement and the date of the Special Meeting indicates a "desire to rush the vote." Plaintiff does not argue that the allowance of only twenty-eight days is a violation of any SEC Rule or statute, or that it supports his claims made the basis for the TRO. Plaintiff does allege that the twenty-eight day time frame is inconsistent with SEC recommendations.
Plaintiff argues that the SEC has recommended distribution of proxy materials at least thirty days before the meeting date and that longer periods may be required "particularly where non-routine issues are being voted upon." (Docket Entry No. 9, at 6) (citing Docket Entry No. 10, Squitieri Decl., Ex. F, Timely Distribution of Proxy and Other Soliciting Material, 59 Fed. Reg. 13,517, 13,518 n. 6 (Mar. 22, 1994)). As noted in the Securities and Exchange Commission Release cited, the SEC states:
Although the rules do not specify the number of days before the meeting by which registrants must make their proxy materials available for distribution to their beneficial owners, in order to comply with the timeliness requirement, the materials must be mailed sufficiently in advance of the meeting date to allow five business days for processing by the banks and brokers and an additional period to provide ample time for delivery of the material, consideration of the material by the beneficial owners, return of the voting instructions, and transmittal of the vote from the bank or broker to the tabulator.
(Docket Entry No. 10, Squitieri Decl., Ex. F, Timely Distribution of Proxy and Other Soliciting Material, 59 Fed. Reg. 13,517, 13,518 (Mar. 22, 1994)). In a footnote to this paragraph, the SEC notes that,
[f]or example, § 402.05 of the New York Stock Exchange Listed Company Manual recommends that proxy materials be sent 30 calendar days before the meeting date, while section 703 of the American Stock Exchange Company Guide recommends that the material be received by shareholders as many days as possible (preferably at least 20 calendar days) in advance of the meeting date.
Plaintiff cites this as a "20 business day minimum." (Docket Entry No. 9, at 6).
(Docket Entry No. 10, Squitieri Decl., Ex. F, Timely Distribution of Proxy and Other Soliciting Material, 59 Fed. Reg. 13,517, 13,518 n. 6 (Mar. 22, 1994). The footnote also states: "In many cases, a longer period may be required, particularly where non-routine issues are being voted upon or third-class bulk rate mail is used." Plaintiff argues that this Proxy Statement covers a non-routine issue and should have been mailed earlier.
The SEC recommendations cited show that twenty to thirty calendar days is generally sufficient. The present record shows that plaintiff, intervenor, and advisors of institutional investors had time to analyze the issues involved in the vote. (Docket Entry No. 18, Brusca Decl., Exs. 3-5, 7-9, 16). The financial press has widely reported the basic terms of the proposed merger since January 2002. (Docket Entry No. 18, Brusca Decl., Ex. 15). No case law is cited indicating that a twenty-eight day period between mailing a proxy statement and a special meeting is a basis for enjoining a proxy vote. Plaintiff has failed to show a substantial likelihood of success on the merits of this claim.
VII. Conclusion
Based on the present record, this court finds that plaintiff and intervenor have failed to make a showing of a substantial likelihood of success on the merits of their claims against Nabors Delaware, as required for this court to issue a temporary restraining order. Because this court finds that plaintiff and intervenor have not demonstrated the first element necessary to obtain a TRO, the court does not reach the other elements. The application for the temporary restraining order is DENIED.