Seinfeld v. Bartz

In 1998, Greg Seinfeld (plaintiff) became a shareholder of Cisco Systems, Inc. (Cisco) (defendant). The following year, Cisco’s board of directors (the board) (defendants) sought the shareholders’ approval of a proposed amendment to Cisco’s Automatic Option Grant Program for outside directors that aimed to increase the number of stock options granted to outside directors upon joining the company. The board circulated a proxy statement to Cisco’s shareholders to solicit proxies to vote in favor of the amendment. The shareholders ultimately approved the amendment. Thereafter, Seinfeld filed a derivative claim alleging that Cisco and the board violated § 14(a) of the Securities and Exchange Act of 1934 because the proxy statement purportedly contained materially false and misleading statements and omitted material facts in violation of the proxy rules of the Securities and Exchange Commission (SEC). Namely, Seinfeld argued that the proxy statement undervalued the stock options by not using the Black-Sholes option-pricing model (the Black-Scholes model) to value the stock options and that the proxy statement failed to disclose federal estate, gift, and generation-skipping transfer-tax consequences of the option grants. The district court dismissed the action with prejudice for failure to state a claim. Seinfeld appealed.