Materiality Flashcards
TSC Industries, Inc. v. Northway, Inc. (1976) summary
Petitioners issued a joint proxy statement to their shareholders proposing the liquidation of Petitioner TSC’s assets and their sale to Petitioner National. The proposal was accepted and Petitioner TSC was dissolved. Respondent, a shareholder of Petitioner TSC, brought suit against Petitioners for violating Rule 14a-3 of the Act by omitting from the proxy statement that Petitioner National would gain control of Petitioner TSC by the transfer of Respondent’s shares to Petitioner National. Respondent also stated that Petitioners violated Rule 14a-9 of the Act by omitting the material facts of Petitioner National’s control of Petitioner TSC and how favorable the terms of the proposed dissolution of Petitioner TSC would be to the shareholders. The Court of Appeals for the Seventh Circuit upheld the denial of summary judgment for the alleged violation of Rule 14a-3 of the Act, but reversed the denial of summary judgment for the alleged violation of Rule 14a-3 of the Act because the omissions by Petitioners, as a matter of law, were material.
The omission of a possible lower market price of Petitioner National’s stock after the dissolution of Petitioner TSC was not an omission of material fact since it was merely an explanation of how the favorable terms of the proposal were calculated. As a matter of law it could not be stated that referring to the calculated premiums of stock in the proxy statement was misleading. Also, the omission that Petitioner National purchased large amounts of Petitioner National’s common stock and that this could manipulate the market price of Petitioner National’s stock after the dissolution of Petitioner TSC could not be decided as a matter of law. Requiring this disclosure as a material fact would impose civil liability when stock manipulation is suggested in summary judgment. But since a motion for summary judgment in this case requires the assumption that there was no manipulation, there could be no material fact of misleading.
TSC Industries, Inc. v. Northway, Inc. (1976) rule
An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.
Basic Inc. v. Levinson (1988) summary
Petitioners made chemical refractories for the steel industry. A second business, Combustion Engineering, Inc., targeted Petitioner as a good acquisition. During merger discussions, the volume of trading for Petitioner’s stock increased and the price was increasing, seemingly due to rumors of a potential acquisition. Petitioner publicly refuted the rumors of a merger. Shortly thereafter Petitioner requested to suspend trading because of merger talks. Respondents sold their shares before the suspension but after the public denials of merger discussions. Therefore Respondents claimed that Petitioners violated Section 10(b) of the Securities Exchange Act and of Rule 10b-5.
The court determined that determining whether misleading statements or omissions were material under Rule 10b-5 would require a fact-based assessment. The court did not adopt Petitioner’s “agreement-in-principle” test that would have considered only misstatements after an agreement was made in principle. The court did not think that the probability of a failed merger outweighed the importance of providing the information to the investor. The court instead took a fact-based approach, reasoning that the probability would be weighed against the magnitude of the facts. In this case, a merger has a high magnitude on investor decisions and therefore the probability of a successful merger does not have to be as absolute as more trivial topics. The misstatements would still need to be material.
Basic Inc. v. Levinson (1988) rule
Misleading statements during merger discussions will be material under Rule 10b-5 if the misstatements would have changed the view of the total information by a reasonable investor.
