Opinion ID: 109481
Heading Depth: 2
Heading Rank: 2

Heading: Favorability of the Terms to TSC Shareholders

Text: The Court of Appeals also found that the failure to disclose two sets of facts rendered the proxy statement materially deficient in its presentation of the favorability of the terms of the proposed transaction to TSC shareholders. The first omission was of information, described by the Court of Appeals as bad news for TSC shareholders, contained in a letter from an investment banking firm whose earlier favorable opinion of the fairness of the proposed transaction was reported in the proxy statement. The second omission related to purchases of National common stock by National and by Madison Fund, Inc., a large mutual fund, during the two years prior to the issuance of the proxy statement.
The proxy statement revealed that the investment banking firm of Hornblower & Weeks-Hemphill, Noyes had rendered a favorable opinion on the fairness to TSC shareholders of the terms for the exchange of TSC shares for National securities. In that opinion, the proxy statement explained, the firm had considered, among other things, the current market prices of the securities of both corporations, the high redemption price of the National Series B preferred stock, the dividend and debt service requirements of both corporations, the substantial premium over current market values represented by the securities being offered to TSC stockholders, and the increased dividend income. App. 267. The Court of Appeals focused upon the reference to the substantial premium over current market values represented by the securities being offered to TSC stockholders, and noted that any TSC shareholder could calculate the apparent premium by reference to the table of current market prices that appeared four pages later in the proxy statement. Id., at 271. On the basis of the recited closing prices for November 7, 1969, five days before the issuance of the proxy statement, the apparent premiums were as follows. Each share of TSC Series 1 preferred, which closed at $12, would bring National Series B preferred stock and National warrants worth $15.23for a premium of $3.23, or 27% of the market value of the TSC Series 1 preferred. Each share of TSC common stock, which closed at $13.25, would bring National Series B preferred stock and National warrants worth $16.19for a premium of $2.94, or 22% of the market value of TSC common. [16] The closing price of the National warrants on November 7, 1969, was, as indicated in the proxy statement, $5.25. The TSC shareholders were misled, the Court of Appeals concluded, by the proxy statement's failure to disclose that in a communication two weeks after its favorable opinion letter, the Hornblower firm revealed that its determination of the fairness of the offer to TSC was based on the conclusion that the value of the warrants involved in the transaction would not be their current market price, but approximately $3.50. If the warrants were valued at $3.50 rather than $5.25, and the other securities valued at the November 7 closing price, the court figured, the apparent premium would be substantially reducedfrom $3.23 (27%) to $1.48 (12%) in the case of the TSC preferred, and from $2.94 (22%) to $0.31 (2%) in the case of TSC common. In simple terms, the court concluded: TSC and National had received some good news and some bad news from the Hornblower firm. They chose to publish the good news and omit the bad news. 512 F. 2d, at 335. It would appear, however, that the subsequent communication from the Hornblower firm, which the Court of Appeals felt contained bad news, contained nothing new at all. At the TSC board of directors meeting held on October 16, 1969, the date of the initial Hornblower opinion letter, Blancke Noyes, a TSC director and a partner in the Hornblower firm, had pointed out the likelihood of a decline in the market price of National warrants with the issuance of the additional warrants involved in the exchange, and reaffirmed his conclusion that the exchange offer was a fair one nevertheless. The subsequent Hornblower letter, signed by Mr. Noyes, purported merely to explain the basis of the calculations underlying the favorable opinion rendered in the October 16 letter. In advising TSC as to the fairness of the offer from [National], Mr. Noyes wrote, we concluded that the warrants in question had a value of approximately $3.50. [17] On its face, then, the subsequent letter from Hornblower does not appear to have contained anything to alter the favorable opinion rendered in the October 16 letterincluding the conclusion that the securities being offered to TSC shareholders represented a substantial premium over current market values. The real question, though, is not whether the subsequent Hornblower letter contained anything that altered the Hornblower opinion in any way. It is, rather, whether the advice given at the October 16 meeting, and reduced to more precise terms in the subsequent Hornblower letterthat there might be a decline in the market price of the National warrantshad to be disclosed in order to clarify the import of the proxy statement's reference to the substantial premium over current market values represented by the securities being offered to TSC stockholders. We note initially that the proxy statement referred to the substantial premium as but one of several factors considered by Hornblower in rendering its favorable opinion of the terms of exchange. Still, we cannot assume that a TSC shareholder would focus only on the bottom line of the opinion to the exclusion of the considerations that produced it. TSC and National insist that the reference to a substantial premium required no clarification or supplementation, for the reason that there was a substantial premium even if the National warrants are assumed to have been worth $3.50. In reaching the contrary conclusion, the Court of Appeals, they contend, ignored the rise in price of TSC securities between early October 1969, when the exchange ratio was set, and November 7, 1969a rise in price that they suggest was a result of the favorable exchange ratio's becoming public knowledge. When the proxy statement was mailed, TSC and National contend, the market price of TSC securities already reflected a portion of the premium to which Hornblower had referred in rendering its favorable opinion of the terms of exchange. Thus, they note that Hornblower assessed the fairness of the proposed transaction by reference to early October market prices of TSC preferred, TSC common, and National preferred. On the basis of those prices and a $3.50 value for the National warrants involved in the exchange, TSC and National contend that the premium was substantial. Each share of TSC preferred, selling in early October at $11, would bring National preferred stock and warrants worth $13.10for a premium of $2.10, or 19%. And each share of TSC common, selling in early October at $11.63, would bring National preferred stock and warrants worth $13.25for a premium of $1.62, or 14%. [18] We certainly cannot say as a matter of law that these premiums were not substantial. And if, as we must assume in considering the appropriateness of summary judgment, the increase in price of TSC's securities from early October to November 7 reflected in large part the market's reaction to the terms of the proposed exchange, it was not materially misleading as a matter of law for the proxy statement to refer to the existence of a substantial premium. There remains the possibility, however, that although TSC and National may be correct in urging the existence of a substantial premium based upon a $3.50 value for the National warrants and the early October market prices of the other securities involved in the transaction, the proxy statement misled the TSC shareholder to calculate a premium substantially in excess of that premium. The premiums apparent from early October market prices and a $3.50 value for the National warrants19% on TSC preferred and 14% on TSC commonare certainly less than those that would be derived through use of the November 7 closing prices listed in the proxy statement27% on TSC preferred and 22% on TSC common. But we are unwilling to sustain a grant of summary judgment to Northway on that basis. To do so we would have to conclude as a matter of law, first, that the proxy statement would have misled the TSC shareholder to calculate his premium on the basis of November 7 market prices, and second, that the difference between that premium and that which would be apparent from early October prices and a $3.50 value for the National warrants was material. These are questions we think best left to the trier of fact.
The final omission that concerns us relates to purchases of National common stock by National and by Madison Fund, Inc., a mutual fund. Northway notes that National's board chairman was a director of Madison, and that Madison's president and chief executive, Edward Merkle, was employed by National pursuant to an agreement obligating him to provide at least one day per month for such duties as National might request. [19] Northway contends that the proxy statement, having called the TSC shareholders' attention to the market prices of the securities involved in the proposed transaction, should have revealed substantial purchases of National common stock made by National and Madison during the two years prior to the issuance of the proxy statement. [20] In particular, Northway contends that the TSC shareholders should, as a matter of law, have been informed that National and Madison purchases accounted for 8.5% of all reported transactions in National common stock during the period between National's acquisition of the Schmidt interests and the proxy solicitation. The theory behind Northway's contention is that disclosure of these purchases would have pointed to the existence, or at least the possible existence, of conspiratorial manipulation of the price of National common stock, which would have had an effect on the market price of the National preferred stock and warrants involved in the proposed transaction. [21] Before the District Court, Northway attempted to demonstrate that the National and Madison purchases were coordinated. The District Court concluded, however, that there was a genuine issue of fact as to whether there was coordination. Finding that a showing of coordination was essential to Northway's theory, the District Court denied summary judgment. The Court of Appeals agreed with the District Court that collusion is not conclusively established. 512 F. 2d, at 336. But observing that it is certainly suggested, ibid., the court concluded that the failure to disclose the purchases was materially misleading as a matter of law. The court explained: Stockholders contemplating an offer involving preferred shares convertible to common stock and warrants for the purchase of common stock must be informed of circumstances which tend to indicate that the current selling price of the common stock involved may be affected by apparent market manipulations. It was for the shareholders to determine whether the market price of the common shares was relevant to their evaluation of the convertible preferred shares and warrants, or whether the activities of Madison and National actually amounted to manipulation at all. Ibid. In short, while the Court of Appeals viewed the purchases as significant only insofar as they suggested manipulation of the price of National securities, and acknowledged the existence of a genuine issue of fact as to whether there was any manipulation, the court nevertheless required disclosure to enable the shareholders to decide whether there was manipulation or not. The Court of Appeals' approach would sanction the imposition of civil liability on a theory that undisclosed information may suggest the existence of market manipulation, even if the responsible corporate officials knew that there was in fact no market manipulation. We do not agree that Rule 14a-9 requires such a result. Rule 14a-9 is concerned only with whether a proxy statement is misleading with respect to its presentation of material facts. If, as we must assume on a motion for summary judgment, there was no collusion or manipulation whatsoever in the National and Madison purchasesthat is, if the purchases were made wholly independently for proper corporate and investment purposes, then by Northway's implicit acknowledgment they had no bearing on the soundness and reliability of the market prices listed in the proxy statement, [22] and it cannot have been materially misleading to fail to disclose them. [23] That is not to say, of course, that the SEC could not enact a rule specifically requiring the disclosure of purchases such as were involved in this case, without regard to whether the purchases can be shown to have been collusive or manipulative. We simply hold that if liability is to be imposed in this case upon a theory that it was misleading to fail to disclose purchases suggestive of market manipulation, there must be some showing that there was in fact market manipulation. [24]