Opinion ID: 583590
Heading Depth: 2
Heading Rank: 2

Heading: Omissions as to the Post-September Dillon Negotiations

Text: 39 Though we also conclude that summary judgment was appropriate with respect to Glazers' claim that defendants' post-September silence as to the Dillon Read negotiations violated Rule 10b-5, we do so on the ground that prior to Glazers' sale of their Formica holdings there was no duty to disclose the course of those negotiations, not on the ground that the negotiations were immaterial as a matter of law. 40 The district court in the present case appeared to conclude that defendants' post-September nondisclosure of the Dillon negotiations was not material as a matter of law because prior to November 4, 1988, those negotiations had not ripened into agreement-in-principle. Thus, noting that as of October 22, 1988, Dillon had agreed only to undertake the due diligence necessary to determine the viability of an LBO of the type that had been discussed, the court stated that the record is completely devoid of any evidence that defendants had reached 'an agreement in principle' with Dillon Read in October 1988 concerning the terms of a leveraged buyout which would meet with defendants' approval. Opinion at 9. 41 Prior to Basic, several courts had adopted the bright-line test that unless merger talks had ripened into agreement-in-principle as to price and structure, those discussions were as a matter of law not material within the meaning of Rule 10b-5. In Basic, the Supreme Court squarely rejected this approach, stating that it could 42 find no valid justification for artificially excluding from the definition of materiality information concerning merger discussions, which would otherwise be considered significant to the trading decision of a reasonable investor, merely because agreement-in-principle as to price and structure has not yet been reached by the parties or their representatives. 43 485 U.S. at 236, 108 S.Ct. at 986; see generally id. at 232-36, 108 S.Ct. at 983-86. Rather, the Court endorsed the materiality analysis set out in SEC v. Geon Industries, Inc., 531 F.2d 39 (2d Cir.1976) (Friendly, J.): 44 Since a merger in which it is bought out is the most important event that can occur in a small corporation's life, to wit, its death, we think that inside information, as regards a merger of this sort, can become material at an earlier stage than would be the case as regards lesser transactions--and this even though the mortality rate of mergers in such formative stages is doubtless high..... 45 We agree with that analysis. 46 Whether merger discussions in any particular case are material therefore depends on the facts. 47 Basic, 485 U.S. at 238-39, 108 S.Ct. at 986-87 (footnote omitted) (quoting SEC v. Geon Industries, Inc., 531 F.2d at 47-48). Thus, while we express no view in the present case as to whether the Dillon negotiations prior to November 4 were or were not material as a matter of fact, we conclude that a ruling that the negotiations were immaterial as a matter of law because they had not resulted in agreement-in-principle was inappropriate. 48 Nonetheless, summary judgment was proper because even if the negotiations with Dillon had become material, there was no evidence of any facts that gave defendants a duty to disclose that information prior to Glazers' sale of their Formica stock. As the Supreme Court has made clear in insider trading cases, the concepts of materiality and duty to disclose are different. See, e.g., Chiarella v. United States, 445 U.S. 222, 235, 100 S.Ct. 1108, 1118, 63 L.Ed.2d 348 (1980) (a duty to disclose under § 10(b) does not arise from the mere possession of nonpublic market information); Dirks v. SEC, 463 U.S. 646, 654, 103 S.Ct. 3255, 3261, 77 L.Ed.2d 911 (1983) (same); see also Basic 485 U.S. at 239 n. 17, 108 S.Ct. at 987 n. 17 ([s]ilence, absent a duty to disclose, is not misleading under Rule 10b-5). Thus, as the First Circuit stated in Backman v. Polaroid Corp., 910 F.2d 10 (1st Cir.1990) (en banc): 49 The materiality of the information claimed not to have been disclosed ... is not enough to make out a sustainable claim of securities fraud. Even if information is material, there is no liability under Rule 10b-5 unless there is a duty to disclose it. 50 Backman v. Polaroid Corp., 910 F.2d at 12 (quoting Roeder v. Alpha Industries, Inc., 814 F.2d 22, 26 (1st Cir.1987)). In Roeder, the court had elaborated: One situation in which there is a duty to disclose is when a corporate insider trades on confidential information.... [Or, w]hen a corporation does make a disclosure--whether it be voluntary or required--there is a duty to make it complete and accurate.... Id. The First Circuit thus rejected the proposition that  'a corporation has an affirmative duty to disclose all material information even if there is no insider trading, no statute or regulation requiring disclosure, and no inaccurate, incomplete, or misleading prior disclosures. The prevailing view ... is that there is no such affirmative duty of disclosure.'  Backman v. Polaroid Corp., 910 F.2d at 12 (quoting Roeder v. Alpha Industries, Inc., 814 F.2d at 27). 51 Other circuits have recognized the conceptual difference between materiality and duty to disclose in the context of merger or acquisition negotiations. Thus, the Sixth Circuit, upholding the summary dismissal of a Rule 10b-5 action challenging nondisclosures with respect to a tender offer, stated that the established view is that a 'duty to speak' must exist before the disclosure of material facts is required under Rule 10b-5. Starkman v. Marathon Oil Co., 772 F.2d 231, 238 (6th Cir.1985), cert. denied, 475 U.S. 1015, 106 S.Ct. 1195, 89 L.Ed.2d 310 (1986). Similarly, the Fourth Circuit, reversing a judgment against companies that had not disclosed that they [had] agreed to establish a relationship, described as similar to 'pinning' as that term was used socially thirty years ago, Taylor v. First Union Corp., 857 F.2d at 243, observed that Rule 10b-5 imposes ... a duty to disclose only when silence would make other statements misleading or false, id. at 243-44. We agree that the mere fact that exploration of merger or LBO possibilities may have reached a stage where that information may be considered material does not, of itself, mean that the companies have a duty to disclose. 52 In the present case, Glazers adduced no evidence of any facts giving rise to a duty on the part of defendants prior to November 4, 1988, to disclose the existence and status of the Dillon negotiations. There was no suggestion that defendants were trading in Formica stock. Nor was there any suggestion that they made any public statements other than the September Releases. Those releases were not false or misleading: they stated that the company would entertain any acquisition proposal regarded by the company as serious. Glazers proffered no evidence that that was false. And the conduct of negotiations with Dillon was indisputably consistent, not inconsistent, with the prior representation that such overtures would be considered. 53 In sum, we conclude that judgment summarily dismissing Glazers' claim under Rule 10b-5 for defendants' failure to disclose the post-September Dillon Read negotiations was proper because Glazers failed to show any duty to disclose.