Document: 426 U.S. 438 96 S.Ct. 2126 48 L.Ed.2d 757 TSC INDUSTRIES, INC., et al., Petitioners,v.NORTHWAY, INC. No. 74-1471. Argued March 3, 1976. Decided June 14, Syllabus Rule 14a-9, promulgated under § 14(a) of the Securities Exchange Act 1934, provides that no proxy solicitation shall be made "which . is false or misleading with respect to any material fact, which omits state fact necessary in order make statements therein not misleading." The dispute this case centers on acquisition petitioner Industries (TSC) by National (National). purchased 34% Of TSC's voting securities from founder and principal shareholder his family. son promptly resigned board directors, five nominees were placed board, including National's president executive vice president, who subsequently became, respectively, chairman committee. Thereafter, approved a proposal liquidate sell all assets exchanging common preferred stock for warrants purchase stock. then issued joint statement their shareholders recommending approval proposal. was successful, liquidation dissolution, exchange shares effected. Respondent, shareholder, brought action damages, restitution, other relief against National, claiming incomplete materially violation 14a-9 it omitted facts relating degree control over (I. e., failed disclose positions held reports filed Commission indicating "may deemed 'parent' TSC") favorability proposed certain unfavorable information about contained letter an investment banking firm whose earlier favorable opinion reported statement, also recent substantial purchases stock, suggestive manipulation, mutual fd). District Court denied respondent's motion summary judgment, but Appeals reversed, holding claimed omissions as matter law, defining "all reasonable Might consider important." Held: 1. general standard materiality best comporting 14a-9's policies applied follows: An if there likelihood would important deciding how vote. This fully consistent description requirement "the defect have significant Propensity affect process." Mills v. Electric Auto-Lite Co., 396 375, 384, 90 616, 621, 24 593. It does require proof disclosure caused investor change vote, contemplates showing that, circumstances, assumed actual significance shareholder's deliberations. Pp. 444-449. 2. issue mixed question law involving application legal particular set facts, only established are "so obviously minds cannot differ materiality" ultimate appropriately resolved "as law" judgment. P. 450. 3. Under forth P 1, Supra, none been were, so far record reveals, hence respondent entitled 450-463. 512 F.2d 324, reversed remanded. Joseph N. Morency, Jr., Chicago, Ill., petitioners. Harry B. Reese, respondent. Mr. Justice MARSHALL delivered Court. 1 rules 1934 bar use presentation omission facts. We called upon definition those rules, appropriateness resolving judgment case. 2 * Industries, Inc., Inc. In February 1969 acquired Charles E. Schmidt Schmidt, had along directors. board; Stanley R. Yarmuth, chief officer, became F. Simonelli, On October 16, 1969, attending abstaining, National. substance provided Series B warrants.1 November 12, shareholders, 3 Northway, Stat. 895, 15 U.S.C. 78n(a),2 Rules 14a-3 17 CFR §§ 240.14a-3, 240.14a-9 (1975), thereunder.3 basis Northway's claim transfer interests given TSC.4 claim, insofar concerns us,5 terms shareholders.6 4 Northway its complaint United States Northern Illinois December 4, day before meeting transaction, while requested injunctive never moved. 1972 amended seek money equitable relief. Shortly thereafter, moved liability. motion, granted leave appeal pursuant 28 s 1292(b). Seventh Circuit agreed existed genuine whether resulted control, therefore inappropriate claim. But Court's denial claims, law. 324 (1975). 5 certiorari because appeared conflict Courts Appeals. 423 820, 33, 46 37 now hold erred ordering partial Northway. II A. 6 As we noted more than one occasion, "was intended promote 'the free exercise rights stockholders' ensuring proxies solicited 'explanation stockholder real nature questions authority cast vote sought.' " 381, 620, 593 (1970), quoting H.R.Rep.No.1383, 73d Cong., 2d Sess., 14 (1934); S.Rep.No.792, 12 (1934). See J. I. Case Co. Borak, 377 426, 431, 84 1555, 1559, (1964). 14(a)'s broad remedial purposes required recognition 27 Act, 78aa, implied private right violations provision. And Mills, attempted clarify some extent elements cause 14(a). suit challenging sufficiency soliciting votes favor merger, need demonstrate alleged actually decisive effect voting. So long misstatement material, causal relation between injury sufficiently established, concluded, itself essential link accomplishment transaction." U.S., at 385, S.Ct., 622. After then, content notion assumes heightened significance.7 7 materiality, universally agreed, objective one, misrepresented investor. Variations formulation test occur articulation just must or, put another way, investor's 8 concluded include F.2d, 330 (emphasis added). has explicitly rejected least two courts setting too low threshold imposition liability 14a-9. Gerstle Gamble-Skogmo, 478 1281, 1301-1302 (C.A.2 1973); Smallwood Pearl Brewing 489 579, 603-604 (C.A.5 1974). these cases, panels Second Fifth Circuits opted conventional tort man Would attach importance determining course action. Restatement (Second) Torts 538(2) (a) (Tent.Draft 10, Apr. 20, 1964). American Law Institute, Federal Code 256(a) 2, 1973).8 supra, 1302, following standard, formulated reference contested election: "whether, taking properly realistic view, may led grant solicitor withhold side, whereas absence he taken contrary course." General Time Corp. Talley 403 159, 162 1968), cert. denied, 393 1026, 89 631, 21 570 (1969). 9 arriving important, relied heavily language supra. That reliance misplaced. did characterize determination "embod(ying) conclusion such character might considered shareholdewho process vote." 621. read suggesting can opinion's subsequent "requirement Ibid. (Emphasis original.) For said "adequately serves purpose trivial, unrelated transaction sought, correction further protected 14(a)." Even read, however, appreciation specifically declined Mills. Id., 381 n. 620. references simply preliminary our consideration sole supplemented outcome clear, intend foreclose inquiry into meaning 14a-9.9 C 10 formulating guided, course, Borak Rule's purpose. merely ensure judicial means when judged terms, fair otherwise adequate, disclosures corporate management enable informed choice. abstract proposition, most desirable role court sort, coming after consummation perhaps determine favored consummated omission. recognized 382 5, matters subject certainty. Doubts critical misstated will commonplace. particularly view prophylactic within management's appropriate doubts statute designed protect. 11 aware, policy embodied regulations without limit. id., Some dubious insistence accomplish harm good. potential great indeed, unnecessarily low, corporation subjected insignificant misstatements, fear exposing bury avalanche trivial result hardly conducive decisionmaking. Precisely dangers presented, think, adopted important. agree Judge Friendly, speaking Gerstle, "might" "too mere possibility, however unlikely." 1302. think comports What contemplate deliberations shareholder. Put viewed having significantly altered "total mix" available.10 D 13 characterized considering appropriate,11 bear mind underlying often dispute, starting point materiality. requires delicate assessments inferences "reasonable shareholder" draw him, peculiarly ones trier fact.12 Only investor, Johns Hopkins University Hutton, 422 1124, 1129 (C.A.4 1970). 604; Rogen Ilikon Corp., 361 260, 265-267 (C.A.1 1966). III found involved issues time solicitation, shareholders. Control influence, First, issued, directors committee president. Second, filing SEC, both indicated term defined Regulations 1933." App. 490, 512, 517.13 Courtf relying negotiate behalf possible rate they "persuasive indicators thus 'sat sides table' exchange." 333. 16 do entry record. Our same separately together. prominently displayed owned outstanding TSC, person 10%. 262-263, 267. revealed out nominees, recited indicating, among things, Yarmuth director Simonelli D., These clearly relationship alerted exercised influence TSC. disclosures, certainly say additional record, could 18 Nor SEC filings parent TSC." already noted, denying controlled solicitation. assume present purposes, assumption, duty qualification exist. If conclusory TSC," appropriate, necessary, included disclaimer knowledge TSC.14 net contribution contents accompanied disclaimers obvious significance, exclusion renders law.15 19 Favorability Terms Shareholders 20 failure sets rendered deficient first information, described "bad news" fairness statement. second related Madison Fund, large fund, during years prior issuance Hornblower & Weeks-Hemphill, Noyes securities. opinion, explained, considered, "among current market prices corporations, high redemption price dividend debt service requirements premium values represented being offered stockholders, thencreased income." 22 focused "substantial stockholders," calculate apparent table four pages later 271. closing 7, days premiums follows. Each share preferred, closed $12, bring worth $15.23 $3.23, 27% value preferred. $13.25, $16.19 $2.94, 22% common.16 23 was, $5.25. misled, statement's communication weeks letter, offer based price, approximately $3.50. valued $3.50 rather $5.25, figured, substantially reduced $3.23 (27%) $1.48 (12%) $2.94 (22%) $0.31 (2%) common. "In simple terms," concluded: "TSC received good news bad firm. They chose publish omit news." 335. appear, firm, felt news," nothing new all. At date initial Blancke Noyes, partner pointed decline exchange, reaffirmed nevertheless. signed purported explain calculations letter. advising (National)," wrote, "we $3.50."17 face, appear anything alter values." 25 question, though, way. is, rather, advice meeting, precise mart disclosed import stockholders." note initially referred several factors rendering exchange. Still, focus "bottom line" considerations produced it. 26 insist clarification supplementation, reason even reaching conclusion, Appeals, contend, ignored rise early ratio set, suggest ratio's becoming public knowledge. When mailed, reflected portion Thus, assessed common, contend substantial. selling $11, $13.10 $2.10, 19%. each $11.63, $13.25 $1.62, 14%.18 if, increase part market's reaction refer existence premium. There remains although correct urging misled excess 19% 14% less derived through listed unwilling sustain basis. To conclude first, oxy prices, second, difference material. left fact. final us relates fund. notes Madison, Madison's executive, Edward Merkle, employed agreement obligating him provide per month duties request.19 contends shareholders' attention should statement.20 particular, should, accounted 8.5% transactions period theory behind contention existence, conspiratorial manipulation transaction.21 29 Before Court, coordinated. coordination. Finding coordination theory, 30 "collusion conclusively established." 336. observing "it suggested," Ibid., la explained: 31 "Stockholders contemplating convertible circumstances tend indicate affected manipulations. relevant evaluation warrants, activities amounted all." 32 short, suggested securities, acknowledged nevertheless decide not. 33 Appeals' approach sanction civil undisclosed Suggest responsible officials knew manipulation. result. concerned If, collusion whatsoever wholly independently proper implicit acknowledgment bearing soundness reliability statement,22 fail them.23 34 say, enact rule requiring case, regard shown collusive manipulative. imposed manipulation.24 IV 35 summary, remanded proceedings opinion. 36 ordered. STEVENS took decision .5 11/2 warrants. .6 warrant. .75 A warrant entitles holder fixed until 1978. Section provides: "It unlawful person, mails instrumentality interstate commerce facility national otherwise, contravention prescribe interest protection investors, solicit permit name consent authorization security (other exempted security) registered section 78L title." pursued fraudulent plan acquire 10(b) 78j(b), 10b-5, 240.10b-5 thereunder. review. family, charging them aiding abetting defendants 10b-5. defendants, affirmed. aspect original us. 14a-3(a) "No regulation unless concurrently furnished previously written containing specified Schedule 14A." 14A, Item 5(e), requires: "If persons issuer occurred since beginning last fiscal year, percentage persons." 240.14a-101, 5(e) asserted assertion transaction. contended, legally applicable law; and, event affirmative votes, cautioned advisers. reach contention, second. Neither 14a-9(a) form proxy, notice communication, oral, which, light made, become cases occasion consider, what culpability establish issuing preparation 1298-1301 Richland Crandall, 262 F.Supp. 538, 553 (S.D.N.Y.1967); Jennings H. Marsh, Regulation: Cases Materials 1358-1359 (3d ed. 1972). Ernst Hochfelder, 425 185, 209 28, 1375, 1388, 47 668 (1976). close approximation, widely various sections laws. See, g., Chris-Craft Piper Aircraft 480 341, 363 1973) (§ 14(e)); John Lewis, Newman, 446 800, 804 1971) 10(b)); Gilbert Nixon, 429 348, 355-356 (C.A.10 1970) 12(2) 1933, ); 266 1966) Texas Gulf Sulphur 401 833, 849 Sub nom. Coates 394 976, 1454, 756 (1969) List Fashion Park, 340 457, 462 (C.A.2), Lerner, 811, 86 23, 60 (1965) Kohler 319 634, 642 (C.A.7 1963) 10(b)). see Sonesta Int'l Hotels Wellington Associates, 483 247, 251 1973). encompass contemplation value" involved. Ilikon, supra; Sulphur, Kohn Metal Climax, 458 255, 269 (C.A.3 1972) 10(b)), Ronson Liquifin Aktiengesellschaft, 846, 851 14(e)). Affiliated Ute Citizens States, 406 128, 92 1456, 741 (1972), dispositive. 10b-5 involves disclose, "positive prerequisite recovery. All withheld sense making decision." 153-154, 1472. quoted positive unnecessary articulate give "sense" notion. purport more. are, giving statutory interest" investors." Supra. Cf. 212-214, 1390-1391. SEC's balance insure adequate avoid adverse consequences consideration. Indiana Public Service Izaac Walton League, 15, 172, 173, 156 (1975); Udall Tallman, 380 16-17, 85 792, 801, 616 (1965). adopt supported SEC. Brief Amicus Curiae 13. Civ.Proc. 56(c) permits "there fact." analogous context, jury's unique competence applying man" thought ordinarily preclude negligence cases. C. Wright Miller, Practice Procedure: Civil 2729 (1973). Form 13D, compliance 13(d) 78m(d). 240.13d-1 Substantially identical 10-K, incorporated 8-K, 13(a) 78m(a). 240.13a-10-11 "parent" 12b-2(a), (f), (k), 240.12b-2(a), (k) (1975): "Unless context requires, used Regulation 13A 15D forms 15(d) (Securities Exchange) respective meanings rule: "(a) Affiliate. 'affiliate' of, 'affiliated' with, directly, indirectly intermediaries, controls, by, specified. "(f) Control. 'control' (including 'controlling,' 'controlled by' 'under with') possession, directly indirectly, power direct direction ownership contract, otherwise. "(k) Parent. affiliate controlling intermediaries." 1933 contain definitions. 230.405(a), (n) position "(s)ince old drew clear-cut battle lines, ever really ultimately entire shareholder-approved assets." Petitioners 33. emphasize imply control. example, reveal Stock presence regardless certainty "control" reasons twofold. issuance, doubt preparing resolve point, quite clear enjoyed calculated Preferred Common pfd. (at 5/8)..... $9.98 (.6 sh.) $8.31 (.5 1/4)...... 5.25 7.88 (1 1/2 war.) ______ Total Less (pfd. 12) (com. 1/4) 12.00 13.25 ------- ------ Premium........................ 3.23 2.94 Premium expressed market...... body dated 31, reads full: "You asked connection your Industries. understand (NII) allow NII $21.40 you desire 9, 1969. "Our stockholders I am director. 487,000 question. 2.6 million acquisition. "After studying relationships traded publicly, referring customary systems evaluation, particulars acquisition, concerning please feel call." 519. 16)......... $9.60 $8.00 3.50)....... 3.50 ----- 11)y 5/8)................... 11.00 11.63 Premium......................... 2.10 1.62 market.......... Employed 1967, Merkle salary $2,500 year (increased 1968 $12,000) option 10,000 520, 522. "Statements Consolidated Stockholders' Equity," 83,000 own sold 67,000 plans, employment agreements, 330. 170,000 two-year period, $2 debentures suggestion collusion, indication issued. violated pertinently, Since find sufficient remaining aspects decision. circumstantial well evidence, themselves considered.

Category: 7