Royal Business Group, Inc. v. Realist, Inc.

Royal Business Group, Inc. (Royal) and its subsidiary American Business Group, Inc. (ABG) (plaintiffs) attempted a hostile takeover of Realist, Inc. (defendant). To that end, in March 1988, ABG acquired 8 percent of Realist’s voting stock. Two months later, Royal informed Realist of its intent to acquire all outstanding Realist shares. In response, Realist took defensive measures. Realist eliminated one board seat to lessen the number of seats to be filled at the 1989 annual meeting. Additionally, in the spring of 1989, Realist initiated negotiations to acquire Ammann Laser Technik AG (Ammann) to make the hostile takeover less attractive by diluting Royal and ABG’s stake in Realist, making Realist less liquid, reducing Realist’s short-run earnings, and resurrecting the eliminated board seat for Ammann’s president. Thereafter, in April 1989, Realist circulated its proxy-solicitation materials for the annual meeting, which made no mention of the negotiations with Ammann. Meanwhile, Royal instituted a proxy contest seeking a shareholder vote on its offer to acquire Realist. Royal and ABG also nominated their own director candidates and circulated proxy-solicitation materials indicating that their candidates would actively pursue the sale of Realist to Royal. Shortly before the annual meeting, two Realist directors purchased significant shares of Realist stock from a proxy who planned to support Royal and ABG’s candidates. Though Royal and ABG’s candidates won the election, a court ordered a new election, at which the seats went uncontested. Royal and ABG subsequently sued Realist for the alleged use of deceptive or misleading statements in the solicitation of proxies under § 14(a) of the Securities Exchange Act of 1934 by failing to disclose the negotiations to acquire Ammann and the planned purchase of shares shortly before the annual meeting. The district court dismissed the lawsuit because Royal and ABG sought damages in their capacity as proxy contestants rather than shareholders. Royal and ABG appealed.