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Precedential or Non-Precedential: Precedential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




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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, 

, 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, 

, 639 (8th Cir. 1987);
accord Untermeyer v. Fidelity Daily Income Trust, 

, 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, 

, 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,

, 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, 

, 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., 

, 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, 

, 1097 (1991).
Also, it should not make stockholders unwitting agents of
self-inflicted damage. 

                                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, 

, 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., 

, 449 (1976);
Mills v. Elec. Auto-Lite Co., 

, 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." 

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, 

(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., 

,
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 

.

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.

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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., 

, 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., 

, 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., 

, 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); 

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

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