Shaev v. Saper

Opinions of the United

2003 Decisions States Court of Appeals

for the Third Circuit

2-21-2003

Shaev v. Saper

Precedential or Non-Precedential: Precedential

Docket 02-2206

Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2003

Recommended Citation

"Shaev v. Saper" (2003). 2003 Decisions. Paper 771.

http://digitalcommons.law.villanova.edu/thirdcircuit_2003/771

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova

University School of Law Digital Repository. It has been accepted for inclusion in 2003 Decisions by an authorized administrator of Villanova

University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.

PRECEDENTIAL

Filed February 21, 2003

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 02-2206

DAVID B. SHAEV,

Appellant

v.

LAWRENCE SAPER; ALAN B. ABRAMSON;

DAVID ALTSCHILLER; JOSEPH GRAYZEL, M.D.;

GEORGE HELLER; ARNO NASH; DATASCOPE CORP.

Appeal from the United States District Court

For the District of New Jersey

D.C. No.: 01-CV-3744 (JAP)

District Judge: Honorable Joel A. Pisano

Argued: December 20, 2002

Before: SLOVITER, McKEE, and ROSENN, Circuit Judges.

(Filed: February 21, 2003)

A. Arnold Gershon, Esq. (Argued)

BALLON, STOLL, BADER & NADLER

1450 Broadway, 14th Floor

New York, NY 10018

Counsel for Appellant

Louis M. Solomon, Esq. (Argued)

Andrew J. Levander, Esq.

SWIDLER BERLIN SHEREFF

FRIEDMAN

405 Lexington Avenue

The Chrysler Building

New York, NY 10174

Counsel for Appellees

OPINION OF THE COURT

ROSENN, Circuit Judge:

This case presents important questions pertaining to

corporate governance and responsibility. They involve the

application and alleged violations of Securities Exchange

and Treasury Regulations with respect to shareholder proxy

statements soliciting shareholder approval of executive

incentive compensation plans. Datascope Corporation

(Datascope or the Company), a corporation chartered under

the laws of Delaware, has its principal place of business in

Montvale, New Jersey, where it is engaged in the

manufacture of complex cardiology, vascular, and other

medical proprietary products. The Company’s board of

directors (Board) issued a proxy statement to its

shareholders soliciting support for an amendment to its

Management Incentive Plan (MIP) which determined the

bonus compensation to be awarded to Datascope’s

president, Lawrence Saper.

Datascope shareholder David Shaev brought a derivative

lawsuit under the Federal Securities Exchange Act of 1934

and applicable regulations alleging that the proxy statement

made false and misleading statements regarding material

facts. The District Court dismissed Shaev’s claim on the

pleadings and declined to exercise supplemental

jurisdiction over Shaev’s excessive compensation claim

under Delaware law. Shaev timely appealed. We vacate and

remand.

I.

For the purposes of defendants’ motion to dismiss, we

must accept as true Shaev’s allegations in his complaint

2

and make all reasonable inferences in his favor. Hayes v.

Gross, 982 F.2d 104, 105-06 (3d Cir. 1992). The

defendant’s motion to dismiss automatically halted

discovery. Thus, Shaev has not had the opportunity to

substantiate some of his allegations.

Saper has been the Chief Executive Officer (CEO) and

chairman of the Board of Datascope since 1964. Saper and

his immediate family hold approximately 19% of

Datascope’s shares, which are traded on NASDAQ. As of

July 1, 1996, Saper entered into an employment agreement

with Datascope for a term of five years with an automatic

extension, unless either party gave notice of an intent to

terminate the contract. Saper receives an annual base

salary with increases as determined by the Board or the

Compensation Committee. On September 22, 1999, the

Compensation Committee increased Saper’s annual base

salary to $1 million per year. Saper also became entitled to

receive bonuses under various long-term and annual

incentive compensation plans. On May 26, 1999, Saper

received an immediately-exercisable option to purchase

70,000 shares of stock at an exercise price equal to the

market price of the stock, expiring May 25, 2009. Using an

option-pricing model, Shaev alleges that this option was

worth $1,016,200. Additionally, the complaint alleges that

Saper’s annual lifetime retirement payments are worth

approximately $1,406,400 per year and cost the company

$10,000,000.

On December 7, 1999, Datascope adopted a

supplemental Management Incentive Plan that provided for

bonus payments to eligible executives. The payments were

contingent on attainment of various corporate goals and

some subjective criteria.1 The December 7, 1999,

_________________________________________________________________

1. The MIP is described as a Supplemental Incentive Plan, but it does not

specify what it supplements. Datascope explained at oral argument that

it supplements the previous 1997 Plan, which is not in the record nor

described in the disputed proxy. Because of this omission, it is difficult

to evaluate the relevance and effect of the 1997 incentive Plan and its

interaction with the 1999 supplement and the 2000 amendment to the

supplement. Unlike the 1997 Plan, the 1999 supplement is part of the

record, although neither it nor its material terms were included in the

proxy statement.

3

supplement provides "the precise terms and provisions of

the performance goals" to calculate Saper’s bonus, based

on Datascope’s earnings per share measured before

extraordinary and/or special items.

On May 16, 2000, the Board’s Compensation Committee

amended the 1999 supplement. The Board adopted the

2000 amendment for a nine-month performance period

commencing October 1, 1999, and continuing through July

30, 2000. The performance goals for that nine-month

performance period were adopted on December 7, 1999.

However, as of December 7, 1999, the maximum Saper

bonus was $2,225,000. In the May 16, 2000, amendment,

the Board increased to $3,285,714 the amount of

compensation that would be awarded to Saper if Datascope

met the performance goals adopted five months earlier. The

performance period ended approximately six weeks later.

Under the 2000 amendment, Saper could have received

83% of the increase in the earnings of the company at the

high end of earnings per share. As a shareholder, Saper

would also get 19% of the remaining 17% if dividends were

issued, leaving only 14% of the remainder to the

shareholders.

On October 27, 2000, the Board issued a proxy

statement in connection with its annual meeting to be held

on December 12, 2000. The proxy statement solicited

shareholder approval of the 2000 amendment. However, the

proxy statement did not include the material features of the

1999 supplement which it amended, and it did not mention

the 1997 Plan which the 1999 MIP supplemented.

The proxy statement explained that the Board intended

to administer the amendment in a way that would allow the

Company to deduct bonuses and incentive payments for tax

purposes. Furthermore, the proxy stated that "[s]hareholder

approval of the Management Incentive Plan is required in

order for the Management Incentive Plan to be effective and

for bonuses payable thereunder to a ‘covered employee’

within the meaning of Section 162(m) . . . to be deductible

under 162(m) of the Code."

Saper earned $3,285,714 in bonus compensation in FYE

2002. According to the proxy statement, $1,485,714 of that

4

amount was subject to shareholder approval of the

amendment. See Dist. Ct. op. at A 6. The proxy statement

also stated that "[i]n the event that the Management

Incentive Plan is not approved by the shareholders of the

Corporation, the Compensation Committee may grant Mr.

Saper another bonus for FYE 2000, a portion of which may

not be deductible under Section 162(m) of the Code." On

December 12, 2000, the Board submitted the amendment

for shareholder approval at Datascope’s annual meeting.

The shareholders approved the amendment and the bonus

payment to Saper.2

Shaev filed a derivative action in the United States

District Court for the District of New Jersey. Shaev did not

make a demand on the Board prior to filing suit because he

alleges that demand would have been futile and was,

therefore, excused. Shaev asserts that the proxy statement

erroneously stated that a bonus to Saper would be tax

deductible to Datascope if it was approved by the

shareholders. Shaev asserts that regardless of whether the

shareholders voted for the Plan, the Company would not get

the full deduction. Shaev also alleges that the proxy

statement contained a material omission because it failed

to include or even mention the original 1997 MIP that was

being amended. Without the original 1997 MIP or a

statement of the material terms of its 1999 supplement,

Shaev alleges that the shareholders had no way of knowing

that the proposed Saper bonus exceeded the amount to

which he would have been entitled under the 1999

supplement’s performance goals. Shaev also alleges that

Saper’s compensation was excessive under Delaware law.

On April 2, 2002, District Judge Pisano dismissed

Shaev’s securities claim with prejudice under Fed. R. Civ.

P. 12(b)(6). Judge Pisano declined to assert supplemental

jurisdiction over the state law claims, which he dismissed

without prejudice. See A 2.

_________________________________________________________________

2. On December 6, 2000, Shaev filed a direct action against defendants

in the New York State Supreme Court. That action is still pending, but

the parties have orally agreed to stay the action pending resolution of the

current suit.

5

II.

The threshold question we must decide is the validity of

the defendants’ challenge to the plaintiff ’s right to sue in

behalf of the Company without first having made a demand

upon its Board of Directors to take appropriate action for

relief. In a derivative lawsuit, the shareholder must make a

demand on the board of directors of the corporation to take

action to correct the wrongdoing, or allege the reasons for

the plaintiff ’s failure for not making the effort. See Fed. R.

Civ. Proc. 23.1. The demand requirement ensures

exhaustion of intra-corporate remedies, thereby possibly

avoiding litigation in the first place. Additionally, it gives

the corporation an opportunity to pursue claims that the

Board believes are meritorious and seek dismissal of the

others. Finally, when demand is wrongfully refused by the

Board or excused because demand would have been futile,

the shareholder is free to seek relief by court action. Allright

Missouri, Inc. v. Billeter, 829 F.2d 631, 639 (8th Cir. 1987);

accord Untermeyer v. Fidelity Daily Income Trust, 580 F.2d

22, 23-24 (1st Cir. 1978).

Shaev alleges that he brings this action derivatively as

the right of and for the benefit of the Company. He asserts

that he has been a stockholder of the Company

continuously for many years and throughout the period of

the alleged wrongs. He acknowledges that he made no

demand upon the Board of Directors of the Company to file

and prosecute this action "because such demand would be

futile and, therefore, excused." In support of his claim of

futility, he avers that three of the six members of the Board

are financially interested in Saper’s payments. Saper, of

course, was the beneficiary of the stock options and

incentive benefits set up for him. The other two board

members, defendants Altschiller and Grayzel, are alleged in

the complaint to lack independence because their

consulting fees, bonuses, stock options and other

perquisites are subject to Saper’s control.

Plaintiff further alleges that under Delaware law, demand

on the Board of Directors is excused when three of the six

Board members are neither disinterested nor independent.

Furthermore, the complaint alleges that the entire Board is

neither disinterested nor independent since every member

6

of the Board is potentially liable for a violation of S 78n(a)

of the Exchange Act and Rule 14a-9.

The District Court did not address this issue; however,

the parties have briefed it on appeal. Under Delaware law,

a demand on a board of directors is excused where half of

the members of an even numbered board are alleged to be

interested or lack independence. Beneville v. York, 769 A.2d

80, 86 (Del. Ch. 2000) ("As a doctrinal matter, it thus

makes little sense to find that demand is refused in an

evenly divided situation."). The complaint also alleges that

Saper, as Chief Executive Officer, has the power to engage

consultants. Board member Altschiller has since September

1, 1998, been a consultant for the Company, initially at

$100,000 per year, but his compensation was increased on

December 1, 1998, to $135,500 per year. In August 1999,

he was given a discretionary bonus of $25,000. He has also

been the recipient of options to purchase Company stock.

The complaint further alleges that he is "financially

dependent and beholden" to Saper for his consulting

engagement fees and benefits he receives from the

Company.

As for Board member and defendant Grayzel, the

complaint alleges that he has been a consultant for the

Company since January 1968 and was paid fees "of

$161,700 in each of the fiscal years ending 1998, 1999,

and 2000." In addition, the complaint avers that the

Company paid him a discretionary bonus of $30,000 in

FYE 1998 and 1999, and granted him stock options as well;

that he too is dependent and beholden to Saper for

consulting engagement fees and benefits he receives from

the Company.

All of these allegations, for the purpose of the motion to

dismiss, must be taken as true. Under Rales v. Blasband,

634 A.2d 927, 936-37 (Del. 1993), an interested director is

one who receives a financial benefit from a corporate

transaction. Saper, Altschiller and Grayzel are allegedly

interested directors, and it is alleged that they constitute

half of the Board. Shaev alleges that a demand on the

directors for remedial action would have been futile. If so,

demand would be excused because the interest of the

Board in the situation was, at the very least, evenly divided.

7

On remand, the parties can pursue the factual issues

relevant to the futility of demand through the use of

discovery.

There is no point, therefore, to discuss plaintiff ’s

additional allegations that demand is excused under federal

law, were we to decide that Delaware law was to the

contrary.

III.

Under the Securities Exchange Act, it is unlawful to

solicit proxies in contravention of "such rules and

regulations as the [Securities Exchange] Commission may

prescribe as necessary or appropriate in the public interest

or for the protection of investors." 15 U.S.C.S 78n(a). SEC

Rule 14a-9 states in relevant part:

No solicitation subject to this regulation shall be made

by means of any proxy statement . . . which, at the

time . . . 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.

17 C.F.R. S 240.14a-9.

Shareholders have an implied cause of action to seek

relief when a false or misleading proxy statement interferes

with "fair corporate suffrage." J.I. Case v. Borak, 377 U.S.

426, 431-32 (1964). Section 14(a) seeks to prevent

management or others from obtaining authorization for

corporate actions by means of deceptive or inadequate

disclosures in proxy solicitations. J.I. Case , 377 U.S. at

431; Gould v. Am.-Hawaiian S.S. Co., 535 F.2d 761, 277-78

(3d Cir. 1976). This is a highly important rule in the

corporate life of this nation. A proxy statement should

inform, not challenge the reader’s critical wits. See Virginia

Bankshares, Inc. v. Sandberg, 501 U.S. 1083, 1097 (1991).

Also, it should not make stockholders unwitting agents of

self-inflicted damage. Id. at 1103.

8

To state a claim under S 14(a), a plaintiff must allege

that "(1) a proxy statement contained a material

misrepresentation or omission which (2) caused the plaintiff

injury and (3) that the proxy solicitation itself, rather than

the particular defect in the solicitation materials, was ‘an

essential link in the accomplishment of the transaction.’ "

Gen. Elec. Co. by Levit v. Cathcart, 980 F.2d 927, 932 (3d

Cir. 1992). An omitted fact is material if there is a

substantial likelihood that a reasonable shareholder would

consider it important in deciding how to vote. See TSC

Indus. Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976);

Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 384 (1970).

The Internal Revenue Code (IRC) generally disallows

deductions for employee remuneration in a publicly held

corporation in excess of $1 million. IRC S 162(m)(1).

However, the IRC contains exceptions for a narrow set of

incentive programs, among which is a properly established

employee incentive plan approved by the shareholders. The

IRC provides in relevant part for the deductibility of

remuneration to an applicable employee

only if-- (i) the performance goals are determined by a

compensation committee of the board of directors of

the taxpayer which is comprised solely of 2 or more

outside directors, (ii) the material terms under which

the remuneration is to be paid, including the

performance goals, are disclosed to shareholders and

approved by a majority of the vote in a separate

shareholder vote before the payment of such

remuneration.

IRC S 162(m)(4)(C).

Likewise, the Treasury Regulations elaborate on the

exception for the $1 million deduction limit under IRC

S 162(m) when a compensation plan meets certain criteria

for qualified performance-based compensation. See 26

C.F.R. S 1.162-27(e).3

_________________________________________________________________

3. The Treasury Regulations require: "Qualified performance-based

compensation must be paid solely on account of the attainment of one

or more preestablished, objective performance goals. A performance goal

is considered preestablished if it is established in writing by the

9

Companies may only deduct annual compensation in

excess of $1 million pursuant to a Plan that is

performance-based and approved by the company’s

stockholders. Here, the plaintiff alleges that the proxy

statement falsely represents that the Saper bonus would

qualify for an income tax deduction for the Company if the

stockholders approved it. This statement is false or

misleading, the complaint alleges, because the deduction

was unavailable, regardless of the shareholders’ approval

because: (1) the 2000 amendment to the Plan was

established too late for the performance goals to comply

with the Regulations; (2) deductibility is destroyed if the

bonus amount could be increased during the performance

period; and (3) the Board’s threat to take the deduction

regardless of shareholder approval obviates its deductibility,

even if approved.

Shaev’s complaint that the 2000 amendment to the Plan

was established too late to qualify for a deduction is well

made. The Regulations require that a qualified performance

goal be established not later than the ninetieth day of the

performance period or before twenty-five percent of the

performance period has elapsed. The supplement was

adopted in December 1999, halfway through Datascope’s

fiscal year, and then restated in May 2000. December was

too late to establish the necessary performance goals to

receive the deduction because the Company’s fiscal year

ended in June 2000. By adjusting the amount of the

_________________________________________________________________

compensation committee not later than 90 days after the commencement

of the period of service to which the performance goal relates, provided

that the outcome is substantially uncertain at the time the compensation

committee actually establishes the goal. However, in no event will a

performance goal be considered to be preestablished if it is established

after 25 percent of the period of service (as scheduled in good faith at the

time the goal is established) has elapsed." 26 C.F.R. S 1.162-27(e)(2). "(4)

Shareholder approval requirement -- (i) General rule. The material terms

of the performance goal under which the compensation is to be paid

must be disclosed to and subsequently approved by the shareholders of

the publicly held corporation before the compensation is paid. The

requirements of this paragraph . . . are not satisfied if the compensation

would be paid regardless of whether the material terms are approved by

shareholders." Id. at S 1.162-27(e)(4).

10

incentive compensation in May 2000 and shortening the

time period to less than a year, Datascope’s Board hoped to

circumvent the Regulations which allow corporations to

create incentives for executives to meet objective, uncertain

goals. As an incentive, the outcome of a performance goal,

of course, must be substantially uncertain at the time the

compensation committee establishes the goal. 26 C.F.R.

S 1.162-27(e)(2)(i). The Company’s alleged manipulation of

the performance goals undermined the goals’ character as

"preestablished" and "objective." The performance period for

the 1997 incentive plan was "a 12-month performance

period that is adopted each year going forward." The nine-

month performance period was adopted for the 2000 year

plan "[b]ecause the Company wanted to be able to take

advantage of the tax deduction that it was entitled to

receive if it were a nine-month performance period."

In the absence of special circumstances, such as when a

new company is formed or when an established company

changes its fiscal year in good faith, a performance period

shorter than one year makes it much less likely that the

MIP will meet this requirement. On the facts as alleged,

Datascope’s performance period was too short to meet the

Treasury Regulations requirements and improperly

impaired their purpose. The incentive plan was only an

exception to the general rule that salaries exceeding $1

million were not tax deductible. Therefore, an incentive

program that allowed in excess of $1 million must comply

strictly with the performance requirements set down by the

Treasury Regulations.

Furthermore, even if the Company had established a long

enough performance period, the existence of discretion to

increase the amount of the bonus so late in the

performance period undermined its deductibility. Under the

Treasury Regulations, if there is discretion to increase the

calculated bonus, the deduction is lost. See 26 C.F.R.

S 1.162-27(e)(2)(iii)(A) ("The terms of an objective formula or

standard must preclude discretion to increase the amount

of compensation payable that would otherwise be due upon

attainment of the goal") (emphasis added). Even though the

performance goals were set in December, 1999, the amount

11

of the compensation was changed on May 16, 2000,

thereby undermining deductibility.4

Payments of the Saper bonus, even if the shareholders

voted against it, also precluded the deduction. The

Regulations state that "[t]he material terms of the

performance goal under which the compensation is to be

paid must be disclosed to and subsequently approved by

the shareholders of the publicly held corporation before the

compensation is paid. The requirements of this paragraph

. . . are not satisfied if the compensation would be paid

regardless of whether the material terms are approved by

shareholders." 26 C.F.R. S 1.162-27(e)(4)(i). The Board’s

threat undermined the deductibility of the bonus even if the

shareholders approved it.

The complaint accurately alleges that Datascope’s Board

made a materially false statement in the proxy statement

when it stated that the bonus would be deductible if the

shareholders approved it. Regardless of the shareholders’

approval, the bonus would not have been deductible under

the Treasury Regulations, and the alleged false statement

in the proxy statement is actionable.5

IV.

The allegations in the complaint that the Board failed to

include the 1999 supplement in the proxy statement

_________________________________________________________________

4. The defendants argue that there was no discretion because the

shareholders, not the Board, made the relevant changes to the

performance goals. The problem with this reasoning is the timing. If the

MIP could be changed retroactively, the terms are not pre-established. If

they can only be changed prospectively, the time period would be six and

a half weeks, altogether too short to comply with the Treasury

Regulations. 26 C.F.R. S 1.162-27(e)(2).

5. Judge Sloviter notes that the District Court’s conclusion that a one-

year period is not required by the regulations is supported by an IRS

private letter ruling by Robert Misner which recognizes that a

performance period under a deductible plan "may be as short as a single

calendar quarter." Private Letter Ruling, PLR 1999 50021, 1999 WL

1208442 (Dec. 17, 1999). Although a private letter ruling may not be

cited as precedent, IRC S 6110(k)(3), the District Court may have deemed

it instructive.

12

amounted to a material omission under SEC Rule 14a-9.

Similarly, it was a material omission for the Board to fail

even to mention the existence of the 1997 Plan. Counsel for

the defendants concedes that the proxy statement would

not have informed a hypothetical investor who bought

Datascope stock on December 31, 1999, about the

existence of the 1997 Plan. He argues, however, that this

was not a material omission because the hypothetical

investor would have been advised by the proxy statement

that there was a separate bonus other than the MIP; the

hypothetical investor could have contacted "the investor

relations department at the Company to obtain past

filings."

We hold that the cryptic references in the proxy

statement were insufficient to satisfy Datascope’s disclosure

obligations under Rule 14a-9. Material not included in the

proxy statement is generally not charged to the knowledge

of the stockholder. Cf. Koppel v. 4987 Corp., 167 F.3d 125,

132 (2d Cir. 1999) (document that was only available at

defendants’ offices during business hours, but not

incorporated by reference in the proxy statement, was not

treated as part of the "total mix" of information available to

participants for 14a-9 purposes). That an investor could

hypothetically conduct research to clarify ambiguities and

discover omissions in the proxy statement does not relieve

the Board of its obligations under Rule 14a-9. Defendant’s

counsel conceded at oral argument that the proxy

statement "may not be the model of clarity and in hindsight

it could have been drafted differently to lay out additional

information. . ." We agree. A proxy statement should

inform, not challenge a shareholder’s critical wits. See

Virginia Bankshares, 501 U.S. at 1097.

The Proxy Statement’s omission of the performance goals

is material because the stockholders had no way of

knowing that Saper had not earned the $3,285,714 bonus

under the terms of the currently existing plan. The Proxy

Statement contains no discussion of the 1997 Plan or how

the 2000 amendment compares with the 1999 supplement

or the 1997 Plan.6 The defendants respond that the two

_________________________________________________________________

6. The defendants assert that "Appellant’s claim that the bonus payable

to Mr. Saper under the 2000 Plan exceeded the original maximum

13

Plans have little to do with one another: "there was no need

to publish the 1997 Plan again in the Proxy Statement nor

was there a need to compare it to the 2000 Plan since both

were to be in effect if the shareholders approved the 2000

Plan." This argument is sophistical because the 2000

amendment was not a stand-alone Plan. On the contrary, it

was an amendment to an unstated supplement. To

determine the overall incentive effects, stockholders would

have had to read the three documents together, and they

did not have them.

The terms of the 1997 Plan and the 1999 supplement are

also relevant to the stockholders’ assessment of the truth of

the statement that the bonus would be tax deductible if

approved. Assuming arguendo that the IRS treatment of the

bonus was uncertain at the time of the proxy statement, a

reasonable investor might take this uncertainty into

account in deciding whether to vote to authorize the bonus.

The risk that the bonus might not be tax deductible and

the information necessary to determine whether it was

deductible were material to the average investor’s action at

the time of the proxy statement, even if the IRS or a court

should ultimately reject Shaev’s argument.

The 1997 Plan and the 1999 supplement were also

relevant to the shareholders’ consideration of the 2000

proxy because the Board was asking the shareholders to

approve a retroactive increase in Saper’s bonus. There is no

authority that the Board has the power to increase Saper’s

bonus retroactively. By failing to include the 1999

supplement in the proxy, the Board effectively asked the

shareholders to do what the Board itself could not do, and

without any notice to stockholders that they were doing it.

_________________________________________________________________

amount of $2,225,000 is inaccurate." They explain that $1,800,000 was

payable pursuant to the 1997 Plan and $1,485,714 was payable under

the 2000 plan subject to shareholder approval. However, the combined

amount of $3,285,714 is more than $2,225,000, the original maximum.

At oral argument, the defendants tried to clear up"a misunderstanding

in the record" related to this point. However, the 1997 Plan is not even

in the record, and the defendants’ explanation does not point to

convincing record evidence that the maximum Saper bonus was not

increased by the 2000 amendment. Thus, the defendants have failed to

carry their burden on this issue.

14

The District Court erred in concluding that 26 C.F.R.

S 1.162-27(e)(4) insulates Datascope’s Board from a claim

under 15 U.S.C. S 78n(a) and Rule 14a-9. The District

Court held that "applicable regulations clearly state the

proxy statement need not disclose exactly that information

which plaintiff claims Datascope shareholders were entitled

[sic] so that they could determine whether executives merit

the bonuses the Board intends to award." See Dist. Ct. op.

at A 11. Even though the proxy statement did not have to

reveal "specific business criteria" it does not follow that the

proxy statement did not have to disclose the material terms

of the existing incentive plan which would have

demonstrated to the shareholders that the proposed bonus

substantially would exceed the amount to which Saper

would have been entitled under the extant MIP and to what

extent.

The District Court misread the federal regulations when

it concluded that Shaev’s complaint demanded access to

specific business criteria that the Board was not required to

disclose. It is true that under 26 C.F.R. S 1.162-

27(e)(4)(iii)(A), the specific business criteria upon which

bonuses are contingent need not be disclosed in proxy

statements. See Dist. Ct. op. at A 12.7 However, the

material terms of the incentive plan and general

performance goals on which the executive’s compensation

_________________________________________________________________

7. The District Court opinion misreads another regulation, 17 C.F.R.

S 240.14a-101. The regulation requires in pertinent part that, "plans

subject to security holder action" (1) briefly describe "the material

features of the plan acted upon, each class of persons who will be

eligible to participate therein, indicate the approximately number of

persons in each such class . . . (2) [and] such benefits or amounts [as]

are determinable." 17 C.F.R. S 240.14a-101(Item 10). The court

interpreted the regulation to mean that registrants do not need to

disclose specific targets upon which bonuses are contingent. Its opinion,

however, does not specify where in the somewhat lengthy provision it

finds support for its interpretation. Item 10 explains that when the

Board solicits shareholder approval for a compensation Plan, the proxy

statement must describe briefly the material features of the Plan and

disclose the amount of the benefit if determinable. Contrary to the

District Court’s reading, 17 C.F.R. S 240.14a-101 does not affirmatively

state that registrants do not need to disclose specific targets upon which

businesses are contingent.

15

is based must, at a minimum, be disclosed. This position is

supported by the Legislative History of the IRCS 162(m),

which states:

In order to meet the shareholder approval requirement,

the material terms under which the compensation is to

be paid must be disclosed . . . It is intended that not

all the details of a plan (or agreement) need be

disclosed in all cases . . . To the extent consistent with

[the SEC] rules, however, disclosure should be as

specific as possible. It is expected that shareholders

will, at a minimum, be made aware of the general

performance goals on which the executive’s

compensation is based and the maximum amount that

could be paid to the executive if such performance

goals were met.

See H.R. Conf. Rep. No. 103-213, at 587-88 (1993).

We conclude that pertinent information in the 1997 Plan

and notice that the proposed bonus substantially would

exceed the amount to which Saper would have been

entitled under the 1999 supplement were "material" within

the meaning of IRC S 162(m)(4)(C)(ii), even though the

"specific business criteria" discussed in 26 C.F.R. S 1.162-

27(e)(4) are not.8 We, therefore, hold that a proxy soliciting

shareholders’ approval of a proposed executive incentive

compensation plan, which refers to an existing incentive

plan, must disclose the material features of both plans. It

must also state, if determinable, the amount of the

increased benefits and performance goals under the

proposed plan.

The District Court erred when it held on a Rule 12(b)(6)

motion that the existence of the prior bonus Plan was not

material. See Dist. Ct. op. at A 11. The allegations in the

complaint were material unless the alleged

_________________________________________________________________

8. 17 C.F.R. S 240.14a-101 and Fed. Sec. L. Rep. (CCH), Reg. S-K

S 229.402(k) are not to the contrary. Regulation S-K applies to "specific

quantitative and qualitative performance-related factors considered by

the committee (or board). . ." Again, the use of the term "specific" limits

the scope of the exclusion to the specific details of the Plan, but does not

address whether weightier issues such as the existence of a former plan

or non-fulfillment of its requirements need to be disclosed.

16

misrepresentations and omissions were "so obviously

unimportant to an investor that reasonable minds cannot

differ on the question of materiality." Shapiro v. UJB

Financial Corp., 964 F.2d 272, 280-81 n.11 (3d Cir. 1992).

The defendants argue that whether the bonus was tax

deductible was immaterial because the deduction would

represent a small figure in comparison with the $300

million revenues of the company. See In re Westinghouse

Sec. Litig., 90 F.3d 696, 715 (3d Cir. 1996) (holding that a

write-down of .54% of net income was not material). 9

Although the potential deduction is small in relation to the

overall budget, the deduction is nevertheless material

because the Treasury Regulations required management

disclosure and stockholder approval of the principal

features of the incentive plan in order to qualify for the

deduction. Thus, materiality of the required disclosure is

not dependent on the quantity of money involved but on its

purpose of informing the stockholders.10

V.

The District Court may decline to exercise supplemental

jurisdiction over state law claims when the District Court

has dismissed all claims over which it has original

jurisdiction. See 28 U.S.C. S 1367(c); Dist. Ct. op. at A 12.

Because the District Court erred in dismissing the federal

securities claims, we vacate the District Court’s dismissal of

Shaev’s state law claims under 28 U.S.C. S 1367(c) and

_________________________________________________________________

9. Cf. Wilson v. Great Am. Indus., Inc., 855 F.2d 987, 994 (2d Cir. 1988)

(holding that it is fraudulent to fail to disclose a material amount of tax

savings).

10. The complaint alleges that among the material omissions in the

proxy were reasonable estimates of the bonus payable and the number

of eligible executive participants under the Plan. The Security

Regulations provide that proxies soliciting shareholder approval for

compensation plans must "[d]escribe briefly the material features of the

plan being acted upon, identify each class of person who will be eligible

to participate therein, indicate the approximate number of persons in

each such class, and state the basis of such participation." 17 C.F.R.

S 240.14a-101 (Item 10(a)(1)). These allegations raise important

questions pertaining to material violations of the Security Commission’s

Regulations.

17

remand for its consideration in light of the decision we

reach on this appeal.

VI.

To recapitulate, the plaintiff has stated a cause of action

on the following grounds: (1) the proxy statement failed to

disclose the existence and material terms of the 1997 Plan;

(2) the proxy statement failed to disclose the material terms

of the 1999 supplement. Importantly, it did not disclose

that the amount of compensation to which Saper would be

entitled under the 2000 amendment exceeded the

$2,225,000 compensation maximum established under the

1999 supplement; (3) the proxy statement omitted the

number of eligible executive participants under the Plan, in

violation of the Securities Exchange Regulations, 17 C.F.R.

S 240.14a-101; (4) the proxy statement contained

affirmative statements that were false or misleading in

violation of Rule 14a-9 when it stated that a bonus to Saper

would be tax deductible to Datascope if it was approved by

the shareholders. This statement was false or misleading

because (a) the 2000 amendment to the Plan was

established too late for the performance goals to comply

with the Treasury Regulations; (b) deductibility is destroyed

if the bonus amount could be increased during the

performance period; and (c) the Board’s threat to take the

deduction regardless of shareholder approval obviates its

deductibility even if approved. 26 C.F.R. S 1.162-27(e)(2); id.

at S 1.162-27(e)(4).

Accordingly, the District Court’s order dismissing Shaev’s

securities claim will be vacated and the case remanded to

the District Court for further proceedings consistent with

this opinion. Costs taxed against the appellees.

A True Copy:

Teste:

Clerk of the United States Court of Appeals

for the Third Circuit

18