Securities Regulation Daily Wrap Up, PROXIES—S.D. Ind.: Misleading proxy statements didn’t directly cause shareholder losses, (May 28, 2026)

By Jay Fishman, J.D.

Courts have consistently found that connection tenuous.

Indiana’s Southern District Court dismissed without prejudice the plaintiff shareholders’ federal Exchange Act Section 14(a) claim against the defendant company’s directors and officers, ultimately finding no direct causal connection between certain misleading proxy statements and board of director elections, and the shareholders’ subsequent stock value declines. As for the shareholders’ fiduciary duty claim under Indiana law, the court determined to decide that state law claim if dismissal of the amended federal Section 14(a) claim was denied, but to relinquish control of the state law claim to state court if the amended federal claim was either dismissed or not filed at all (Vladimir Gusinsky Revocable Trust v. Cummins, Inc., No. 1:24-cv-00128-TWP-MKK (S.D. Ind. May 27, 2026)).

Defendant company repeatedly fails to comply with EPA and Clean Air Act warnings. The plaintiffs owned stock shares in the defendant diesel engine manufacturing company located in Indiana. For many years starting in the late 1990s, the company, through its board of directors, continuously failed to comply with Clean Air Act and Environmental Protection Act mandates on diesel engine emissions and “defeat devices” that resulted in a number of billion-dollar settlements with the company. The latest, a $2.04 billion dollar settlement in 2023 led to the plaintiffs’ shareholder derivative suit in 2024.

Proxy solicitations, board elections, and stock value declines. The plaintiffs’ complaint identified two proxy solicitations filed in 2022 and 2023, respectively, that omitted the EPA and Clean Air Act emission and defeat devise compliance failures. The shareholders’ alleged that not knowing the omitted-from-the-proxy-solicitation fraud led them to vote for incumbent directors and officers (who would perpetuate the emission failures) rather than for new officers and directors who might, instead, work to resolve the EPA/Clean Air Act wrong-doing. The plaintiffs’ alleged a direct causal link between the misleading proxy statements, their electing the incumbent board members, and the shareholders’ economic losses under Exchange Act Section 14(a).

Court ultimately finds for defendants under Section 14(a). In the end, the court found for the defendants on the economic loss causation issue but ruled in favor of the shareholders on the other Section 14(a) elements.

Shareholder derivative suit without demand sets the stage for 14(a) claim. The shareholder derivative suit was initiated without making a demand, thereby requiring the plaintiffs to show that demand would have been futile. The Indiana Supreme Court, looking to well established Delaware corporation law, held that to excuse a pre-suit demand, a “particularized factual allegations [must] create a reasonable doubt that the board could have properly exercised disinterested business judgment in responding to a demand, and a director is ‘interested’ for demand futility purposes if a derivative claim poses a significant risk of personal liability for the director.” Here, the shareholders and officer-directors disputed whether, in fact, the defendants faced a substantial likelihood of personal liability for the plaintiffs’ federal and state law claims.

Plaintiffs win on personal liability and some of Section 14(a). Regarding the federal claim, the plaintiffs needed to show under Section 14(a) that: (1) the proxy statement contained a material misstatement or omission that; (2) caused the plaintiffs injury; and (3) that the proxy solicitation was an essential link in accomplishing the transaction. The defendants argued that under Section 14(a), the plaintiffs could not show a substantial likelihood of personal liability against the defendants because: (a) the plaintiffs failed to adequately allege reckless or willful misconduct by the defendants as required for personal liability under Indiana law; (b) the Section 14(a) claims were time-barred; and (c) the plaintiffs failed to adequately plead causation; and (d) the proxy statements were not false or misleading.

The court began by debunking most of the defendants above-mentioned arguments. First, that the defendants’ mental state whether reckless or willful conduct was not required under Indiana law; only a showing of mere negligence was necessary to demonstrate personal liability under Section 14(a), which the shareholders successfully showed. Second, the proxy statements were misleading by not mentioning the nonconforming diesel emissions. And the court agreed with the plaintiffs reasoning for why the Section 14(a) claim was not time-barred—it was brought within the required statute of limitations and repose periods.

Plaintiffs fail on economic loss part of 14(a) claim. The court acknowledged the shareholders’ argument that the false and misleading proxy statements directly caused their economic harm; that had they known the proxy statements omitted the truth about the diesel emissions failures, they would have elected directors who would have worked to prevent or mitigate the harm to the company rather than re-electing incumbent directors to continue the wrong-doing. But the court relied on Seventh Circuit precedent to rule against them: in cases like this one, there is no direct causal link between the proxy statements for the re-election of board members, and the loss caused by the elected board members’ subsequent misconduct. In other words, “the mere fact that omissions in proxy materials, by permitting directors to win re-election, indirectly lead to financial loss through mismanagement will not create a sufficient nexus with the alleged monetary loss.”

The case is No. 1:24-cv-00128-TWP-MKK.

Judge: Pratt, T.

Attorneys: James M. Ficaro (The Weiser Law Firm, P.C.) for The Vladimir Gusinsky Revocable Trust. Jessica Naima Djilani (Wilmer Cutler Pickering Hale and Dorr LLP) for Cummins, Inc.

Companies: The Vladimir Gusinsky Revocable Trust; Cummins, Inc.

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