This action, in the District Court for the Southern District of New York, arises from a plan of recapitalization adopted by defendant The Curtis Publishing Company (Curtis), a Pennsylvania corporation, at an annual meeting of shareholders on September 14, 1972. Curtis' capitalization had consisted of $7,485,000 of Subordinated 6% Income Debentures due October 1, 1986, bearing $2,470,000 of accrued interest; 334,470 shares of $4 Prior Preferred Stock on which $10,034,100 of cumulative dividends were unpaid as of May 1, 1972; 239,418 shares of $1.60 Prior Preferred Stock on which $1,436,508 of cumulative dividends were also unpaid; and 3,555,568 of Common Stock. The objective of the plan was to exchange a new Common Stock for the two series of Prior Preferred Stock and so many of the Income Debentures as consented, thereby eliminating the preferred stocks with the large arrearages of dividends and part of the Debentures and leaving Curtis with a simple capital structure of the unexchanged Debentures and Common Stock. The exchange ratios were 9.84 shares of new Common Stock for each $100 of Debentures, 1.54 shares for each share of $4 Dividend Prior Preferred Stock, 0.93 shares for each share of $1.60 Dividend Prior Preferred Stock, and 0.10 shares for each share of existing common stock. These ratios were determined by giving the Debentures and the two issues of Prior Preferred Stock five times their average market value in terms of the average market value of the old common stock, giving the old common stock its average market value, and then dividing all the ratios by 10 to avoid issuance of an undue number of shares of new common stock.

The Proxy Statement for the annual meeting contained the following:

The Business Corporation Law of Pennsylvania sets forth certain rights and remedies applicable to holders of shares of Prior Preferred Stock of Curtis who may object to and desire to dissent from the cancellation of their right to receive dividends which have accrued but have not been declared. The following brief summary of such rights and remedies does not purport to be complete and is qualified in its entirety by reference to Sections 810 and 515 of such law, a copy of which appears in Exhibit C hereto. Under such provisions, a holder of Prior Preferred Stock of Curtis who wishes to demand payment of the fair value of his shares must file with Curtis, prior to the commencement of voting by shareholders upon the Amended and Restated Articles of Incorporation, a written objection thereto and must not vote in favor of this proposal. Voting against the proposal or giving a proxy to vote against it will not constitute such a written objection. In addition, such shareholder must, within 20 days after the date on which the vote on this proposal was taken, make written demand on Curtis for payment of the fair value of his shares, stating the number and class and series, if any, of the shares owned by him with respect to which he dissents. Within 20 days after such demand, such shareholder must submit his certificate or certificates to Curtis for notation that such demand has been made. Within 30 days after the Amended and Restated Articles of Incorporation become effective, Curtis will give written notice thereof to dissenting shareholders who have complied with the foregoing requirements and will make a written offer to each such shareholder to pay a specified price as the fair value of his shares. If, at any time after 60 days and within 90 days after the Amended and Restated Articles of Incorporation become effective, the fair value is not agreed upon between Curtis and a dissenting shareholder, the shareholder may demand court proceedings to value his shares. The costs and expenses of any such proceedings will be assessed against Curtis but may be fully or partly apportioned and assessed against any or all of the dissenting shareholders who are parties to the proceedings if the court shall find that the action of such shareholders in failing to accept Curtis' offer to pay for the shares was arbitrary, vexatious or not in good faith.

The statute provides that unless a shareholder of Curtis files a written objection and makes the necessary demand within the 20-day period described above, he shall be conclusively presumed to have consented to the Amended and Restated Articles of Incorporation and shall be bound by the terms thereof.

The foregoing relates only to holders of Prior Preferred Stock of Curtis. The holders of Common Stock of Curtis will have no appraisal rights.

Copies of §§ 810 and 515 of the Pennsylvania Business Corporation Law were attached as Exhibit C; we quote in the margin § 515B, D, E, F and H.1 Exhibit C did not include a subsection, § 2(18), of the general definitions section in the Pennsylvania Business Corporation Law which states:

"Shareholder" means a registered owner of shares in a business corporation.

Plaintiff Oscar Gruss, an experienced stock-broker, is a general partner of Oscar Gruss & Son, which is a member of the New York and American Stock Exchanges and the National Association of Securities Dealers. At the time of Curtis' 1972 meeting he was the beneficial owner of 12,560 shares of the $4 Prior Preferred Stock, which were registered in the name of Oscar Gruss & Son. On receipt of the proxy material Oscar Gruss & Son initially returned an affirmative proxy for these shares.2 However, Mr. Gruss directed Julius Anreder, a securities analyst employed by the firm, to study the plan. Anreder concluded it would be advisable for Mr. Gruss to exercise dissenters' rights. He prepared a letter, dated September 12, 1972, to Mr. SerVaas, the chief officer of Curtis. The letter on the letterhead of Oscar Gruss & Son but signed by Mr. Gruss,3 is set forth in the margin.4 Enclosed with it was a negative proxy which, of course, revoked its predecessor. Apparently the proxy found its way into the hands of Curtis' general counsel, the respected Philadelphia firm of Morgan, Lewis & Bockius, but was not voted. The failure to vote this and the use of the prior affirmative proxy, which is unexplained, had no effect on the approval of the plan by the holders of more than the required two-thirds of the two classes of preferred stock, nor of course, on the required affirmative majority of common stock holders.

On September 21, 1972, Mr. Gruss wrote Mr. SerVaas, again on the letterhead of Oscar Gruss & Son, making a demand for payment of the fair value of his $4 Prior Preferred shares. At the same time Oscar Gruss & Son sent a letter enclosing the certificates for Mr. Gruss' shares for notation of the demand thereon. On the advice of counsel Curtis rejected Mr. Gruss' demand because the exercise of dissenters' rights had been incorrectly initiated by the objection of Gruss as the beneficial owner rather than by the partnership, Gruss and Son, as record owner. Mr. Gruss did not pursue the matter further in Pennsylvania; instead, on January 17, 1973, he filed the complaint in this action in the District Court for the Southern District of New York.

The first count of the complaint alleged that the proxy materials were false and misleading in violation of § 14(a) of the Securities Exchange Act and Item 2 of Schedule 14A,5 in that they failed to define the words "holders of shares" and to state that the term "shareholder" was defined by § 2(18) of the Business Corporation Law of Pennsylvania to mean a "registered owner of shares" rather than an actual or beneficial owner.6 The second count set forth a pendent claim that plaintiff was in fact entitled to an appraisal under Pennsylvania law. Plaintiff's interest lay in the first count.

The district court held that the Proxy Statement was false and misleading since the failure to define the term holder "created a typical 'trap for the unwary.' " Plaintiff was thus entitled to receive the equivalent of the appraisal rights which the court thought he had lost by failing to see to it that all communications were in the name of Oscar Gruss & Son, rather than Oscar Gruss. The court found the value of the $4 Prior Preferred Stock to be $15 per share7 and accordingly awarded judgment for $188,400 plus a $1,500 appraisal fee and pre-judgment interest. Without discussion the judge found Curtis was entitled to judgment on the pendent claim doubtless a correct conclusion since Mr. Gruss' right to an appraisal apparently had become time-barred. Defendant has appealed from the judgment against it. We reverse and direct dismissal of the complaint.

Our first ground for reversal is that plaintiff failed to show that he was in fact deprived of the appraisal rights accorded by the Pennsylvania Business Corporation Law. The hypertechnical stand taken by Curtis in rejecting plaintiff's demand did not end the matter. Plaintiff's situation was not at all like a case where all communications had come from a name not appearing on the stock records and nothing had occurred that would apprise the company that objection was being voiced by the registered owner. Here the letter of objection itself, on the firm's letterhead, disclosed that the 12,560 shares were registered in the name of Oscar Gruss & Son, and the signature could well be construed as including action by Mr. Gruss as a member of the partnership that bore his name. This sufficed to meet the statutory objective of advising Curtis that if it proceeded with the recapitalization plan it should reckon with the probability of an appraisal demand for these shares. Similarly, both September 21 letters were on the Oscar Gruss & Son letterhead, each referred to the other, and Oscar Gruss' letter making demand promised delivery of shares by the record holder. The receipt of those shares surely dispelled any reasonable doubt as to the authority for objection. Although the leading Pennsylvania cases on the subject, Era Co., Limited v. Pittsburgh Consolidation Coal Co., 355 Pa. 219, 49 A.2d 342 (1946); Martin v. Pittsburgh Consolidation Coal Co., 355 Pa. 223, 49 A.2d 344 (1946); In re Kreher, 379 Pa. 313, 108 A.2d 708 (1954), firmly enforce the principle that a company is entitled to have its attention called to names identifiable on its records, none of these approaches the extent of technicality that would have been necessary to sustain the position taken by Curtis here. Indeed Mr. Gruss' case is not essentially different from that of the holders of the 900 shares in Kreher in whose behalf an objection was entered by an attorney, also not the holder of record, and whose appraisal rights were vindicated. Rather than deciding his case under Pennsylvania law against himself and rushing into the federal court in New York, Mr. Gruss could have invoked the aid of a Pennsylvania court;8 our prediction is that it would have sustained his right to an appraisal if, indeed, Curtis had persisted in its obduracy, which may be doubtful since it was confronted with admittedly valid demands by other shareholders.

Alternatively we hold that plaintiff failed to show that the proxy statement was false and misleading.9 The most common rule10 is that objections giving rise to appraisal rights must be made by stockholders of record, just as voting rights can only be exercised by such holders.11 Determination of the persons entitled to vote is one of the functions performed by setting a record date, and the Notice of Annual Meeting stated that the board of directors had fixed July 27, 1972 "as the record date for the determination of holders of Prior Preferred Stock and Common Stock entitled to notice of and to vote at the meeting." The reference to "holders of shares" and "shareholder(s)" in the section of the proxy statement entitled "Appraisal Rights" which we have quoted must be read in this light. Mr. Gruss must have known that he was receiving the proxy material through his firm as record holder and should have realized that communications in the other direction should emanate from the same source.

To be sure, in the blinding glare of hindsight one can see that it would have been better if the proxy materials had included the definition in § 2(18) of the Pennsylvania Business Corporation Law. But we cannot sustain the district court's conclusion that failure to do this constituted negligence by Curtis the standard of culpability we have held applicable as a minimum in damage suits for violations of the Proxy Rules. Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1298-1301 (2 Cir. 1973).12 The relevant portions of the Proxy Statement did not lead in the wrong direction; plaintiff's claim is that they did not lead so far in the right one as to eliminate any possibility of error.

This is too strict a standard, at least for the present case. In the first place, it is hardly clear that Curtis is solely responsible for a failure to inform the beneficial owner of all the requirements for the assertion of appraisal rights, since Curtis could reasonably assume that the holder of record, whose duty it was to pass the proxy solicitation on to the beneficial owner, would take precautions to see that any objection was properly made. Here there was every reason to rely on a high estimation of the competence and reliability of the record holder, an established and sophisticated securities firm; there was little likelihood that proper care would not be used; and since the beneficial owner was himself the head of the securities investment firm, it would appear to have been easy for "the actor himself (to have taken) precautions," see Prosser, Law of Torts, 176-77 (4th Ed.). Even if Curtis had some duty to anticipate and guard against the conduct of erring beneficial owners, this would be measured against a realistic assessment of the capabilities and probable behavior of the parties involved, see Second Restatement of Torts, §§ 290, 302 (1965). We do not have here the case of proxies having been forwarded by an inexperienced country bank to Auntie Mame; surely it is too much to expect that a company should anticipate that the head of a successful investment house would err with respect to his own securities held in the firm name if err he did.13

Moreover, plaintiff offered no evidence of any practice by lawyers in general or Pennsylvania lawyers in particular to caution expressly that, in order to qualify for appraisal rights, objections must be made by the holder of record.14 Although absence of such a custom or practice is not conclusive in a defendant's favor, it is entitled to weight. See the discussion in SEC v. Geon Industries, Inc., 531 F.2d 39, 52-53 (2 Cir. 1976). There likewise was no evidence that the Proxy Statement had proved to be a "trap for the unwary" for anyone but Mr. Gruss if, indeed, it was as to him or that similar proxy statements by other Pennsylvania corporations had proved to be so.

The judgment in favor of the plaintiff is reversed with instructions to dismiss the complaint. Mr. Gruss is, of course, entitled to receive the common stock issuable in respect of his $4 Prior Preferred shares under the recapitalization plan.