Source: https://case-law.vlex.com/vid/485-u-s-224-605081302
Timestamp: 2019-03-22 14:10:20
Document Index: 200545738

Matched Legal Cases: ['§ 10', '§ 10', '§ 10', '§ 10', '§ 78', '§ 240', '§ 10']

485 U.S. 224 (1988), 86-279, Basic, Inc. v. Levinson - Federal Cases - Case Law - VLEX 605081302
485 U.S. 224 (1988), 86-279, Basic, Inc. v. Levinson
Docket Nº: No. 86-279
Citation: 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194, 56 U.S.L.W. 4232
Party Name: Basic, Inc. v. Levinson
Case Date: March 07, 1988
108 S.Ct. 978, 99 L.Ed.2d 194, 56 U.S.L.W. 4232
No. 86-279
The Securities and Exchange Commission's Rule 10b-5, promulgated under § 10(b) of the Securities Exchange Act of 1934 (Act), prohibits, in connection with the purchase or sale of any security, the making of any untrue statement of a material fact or the omission of a material fact that would render statements made not misleading. In December 1978, Combustion Engineering, Inc., and Basic Incorporated agreed to merge. During the preceding two years, representatives of the two companies had various meetings and conversations regarding the possibility of a merger; during that time Basic made three public statements denying that any merger negotiations were taking place or that it knew of any corporate developments that would account for heavy trading activity in its stock. Respondents, former Basic shareholders who sold their stock between Basic's first public denial of merger activity and the suspension of trading in Basic stock just prior to the merger announcement, filed a class action against Basic and some of its directors, alleging that Basic's statements had been false or misleading, in violation of § 10(b) and Rule 10b-5, and that respondents were injured by selling their shares at prices artificially depressed by those statements. The District Court certified respondents' class, but granted summary judgment for petitioners on the merits. The Court of Appeals affirmed the class certification, agreeing that, under a "fraud-on-the-market" theory, respondents' reliance on petitioners' misrepresentations could be presumed, and thus that common issues predominated over questions pertaining to individual plaintiffs. The Court of Appeals reversed the grant of summary judgment and remanded, rejecting the District [108 S.Ct. 980] Court's view that preliminary merger discussions are immaterial as a matter of law, and holding that even discussions that might not otherwise have been material become so by virtue of a statement denying their existence.
1. The standard set forth in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, whereby an omitted fact is material if there is a substantial likelihood that its disclosure would have been considered significant by a reasonable investor, is expressly adopted for the § 10(b) and Rule 10b-5 context. Pp. 230-232.
3. The Court of Appeals' view that information concerning otherwise insignificant developments becomes material solely because of an affirmative denial of their existence is also rejected: Rule 10b-5 requires that the statements be misleading as to a
material fact. Pp. 237-238.
4. Materiality in the merger context depends on the probability that the transaction will be consummated, and its significance to the issuer of the securities. Thus, materiality depends on the facts, and is to be determined on a case-by-case basis. Pp. 238-241.
BLACKMUN, J., delivered the opinion of the Court, in which BRENNAN, MARSHALL, and STEVENS, JJ., joined, and in Parts I, II, and III of which WHITE and O'CONNOR, JJ., joined. WHITE, J., filed an opinion concurring in part and dissenting in part, in which O'CONNOR, J., joined, post, p. 250. REHNQUIST, C.J., and SCALIA and KENNEDY, JJ., took no part in the consideration or decision of the case.
This case requires us to apply the materiality requirement of § 10(b) of the Securities Exchange Act of 1934 (1934 Act), 48 Stat. 881, as amended, 15 U.S.C. § 78a et seq., and the Securities and Exchange Commission's Rule 10b-5, 17 CFR § 240. 10b-5 (1987), promulgated thereunder, in the context of preliminary corporate merger discussions. We must also determine whether a person who traded a corporation's shares [108 S.Ct. 981] on a securities exchange after the issuance of a materially misleading statement by the corporation may invoke a rebuttable presumption that, in trading, he relied on the integrity of the price set by the market.
Prior to December 20, 1978, Basic Incorporated was a publicly traded company primarily engaged in the business of manufacturing chemical refractories for the steel industry. As early as 1965 or 1966, Combustion Engineering, Inc., a company producing mostly alumina-based refractories, expressed some interest in acquiring Basic, but was deterred from pursuing this inclination seriously because of antitrust concerns it then entertained. See App. 81-83. In 1976, however, regulatory action opened the way to a renewal of
Combustion's interest.1 The "Strategic Plan," dated October 25, 1976, for Combustion's Industrial Products Group included the objective: "Acquire Basic Inc. $30 million." App. 337.
Beginning in September, 1976, Combustion representatives had meetings and telephone conversations with Basic officers and directors, including petitioners here,2 concerning the possibility of a merger.3 During 1977 and 1978, Basic made three public statements denying that it was engaged in merger negotiations.4 On December 18, 1978, Basic asked
the New York Stock Exchange to suspend trading in its shares and issued a release stating that it had been "approached" by another company concerning a merger. Id. at 413. On December 19, Basic's board endorsed Combustion's offer of $46 per share for its common stock, id. at 335, 414-416, and on the following day publicly announced its approval of Combustion's tender offer for all outstanding shares.
Respondents are former Basic shareholders who sold their stock after Basic's first public statement of October 21, 1977, and before the suspension of trading in December, 1978. Respondents brought a class action against Basic and its directors, asserting that the defendants issued three [108 S.Ct. 982] false or misleading public statements, and thereby were in violation of § 10(b) of the 1934 Act and of Rule 10b-5. Respondents alleged that they were injured by selling Basic shares at artificially depressed prices in a market affected by petitioners' misleading statements and in reliance thereon.
The District Court adopted a presumption of reliance by members of the plaintiff class upon petitioners' public statements that enabled the court to conclude that common questions of fact or law predominated over particular questions pertaining to individual plaintiffs. See Fed.Rule Civ.Proc. 23(b)(3). The District Court therefore certified respondents' class.5 On the merits, however, the District Court granted
The United States Court of Appeals for the Sixth Circuit affirmed the class certification, but reversed the District Court's summary judgment, and remanded the case. 786 F.2d 741 (1986). The court reasoned that, while petitioners were under no general duty to disclose their discussions with Combustion, any statement the company voluntarily released could not be "`so incomplete as to mislead.'" Id. at 746, quoting SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 862 (CA2 1968) (en banc), cert. denied sub nom. Coates v. SEC, 394 U.S. 976 (1969). In the Court of Appeals' view, Basic's statements that no negotiations were taking place, and that it knew of no corporate developments to account for the heavy trading activity, were misleading. With respect to materiality, the court rejected the argument that preliminary merger discussions are immaterial as a matter of law, and held that,
once a statement is made denying the existence of any discussions, even discussions that might not have been...
891 N.W.2d 304 (Minn. 2017), A16-1379, Bicking v. City of Minneapolis