|
Page 438
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, 1976.
Syllabus
Rule 14a-9, promulgated under §
14(a) of the Securities Exchange Act of
1934, provides that no proxy solicitation
shall be made "which . . . is false or
misleading with respect to any material
fact, or which omits to state any material
fact necessary in order to make the
statements therein not false or misleading."
The dispute in this case centers on the
acquisition of petitioner TSC Industries
(TSC) by petitioner National Industries
(National). National purchased 34% Of TSC's
voting securities from TSC's founder and
principal shareholder and his family. The
founder and his son promptly resigned from
TSC's board of directors, and five National
nominees were placed on the board, including
National's president and executive vice
president, who subsequently became,
respectively, chairman of the board and
chairman of TSC's executive committee.
Thereafter, the TSC board approved a
proposal to liquidate and sell all of TSC's
assets to National by exchanging TSC common
and preferred stock for National preferred
stock and warrants to purchase National
common stock. TSC and National then issued a
joint proxy statement to their shareholders
recommending approval of the proposal. The
proxy solicitation was successful, TSC was
placed in liquidation and dissolution, and
the exchange of shares was effected.
Respondent, a TSC shareholder, brought this
action for damages, restitution, and other
relief against TSC and National, claiming
that their joint proxy statement was
incomplete and materially misleading in
violation of § 14(a) and Rule 14a-9 in that
it omitted material facts relating to the
degree of National's control over TSC (I.
e., it failed to disclose the positions in
TSC held by National's president and
executive vice president, and reports filed
with the Securities and Exchange Commission
by National and TSC indicating that National
"may be deemed a 'parent' of TSC") and the
favorability of the proposed acquisition to
TSC shareholders (I. e., it failed to
disclose certain unfavorable information
about the proposal contained in a letter
from an investment banking firm whose
earlier favorable opinion of the
Page 439
proposal was reported in the proxy
statement, and also recent substantial
purchases of National's common stock,
suggestive of manipulation, by National and
a mutual fd). The District Court denied
respondent's motion for summary judgment,
but the Court of Appeals reversed, holding
that the claimed omissions of fact were
material as a matter of law, and defining
material facts as "all facts which a
reasonable shareholder Might consider
important." Held:
1. The general standard of
materiality best comporting with Rule
14a-9's policies is not the standard applied
by the Court of Appeals but is as follows:
An omitted fact is material if there is a
substantial likelihood that a reasonable
shareholder would consider it important in
deciding how to vote. This standard is fully
consistent with the general description of
materiality as a requirement that "the
defect have a significant Propensity to
affect the voting process."
Mills v. Electric Auto-Lite Co., 396 U.S.
375, 384, 90 S.Ct. 616, 621, 24 L.Ed.2d 593.
It does not require proof of a substantial
likelihood that disclosure of the omitted
fact would have caused the reasonable
investor to change his vote, but
contemplates a showing of a substantial
likelihood that, under all the
circumstances, the omitted fact would have
assumed actual significance in the
reasonable shareholder's deliberations. Pp.
444-449.
2. The issue of materiality is
a mixed question of law and fact, involving
as it does the application of a legal
standard to a particular set of facts, and
only if the established omissions are "so
obviously important to an investor that
reasonable minds cannot differ on the
question of materiality" is the ultimate
issue of materiality appropriately resolved
"as a matter of law" by summary judgment. P.
450.
3. Under the standard set forth
in P 1, Supra, none of the omissions claimed
to have been in violation of Rule 14a-9 in
this case were, so far as the record
reveals, materially misleading as a matter
of law, and hence respondent was not
entitled to summary judgment. Pp. 450-463.
512 F.2d 324, reversed and
remanded.
Joseph N. Morency, Jr.,
Chicago, Ill., for petitioners.
Page 440
Harry B. Reese, Chicago, Ill.,
for respondent.
Mr. Justice MARSHALL delivered
the opinion of the Court.
The proxy rules promulgated by
the Securities and Exchange Commission under
the Securities Exchange Act of 1934 bar the
use of proxy statements that are false or
misleading with respect to the presentation
or omission of material facts. We are called
upon to consider the definition of a
material fact under those rules, and the
appropriateness of resolving the question of
materiality by summary judgment in this
case.
I
The dispute in this case
centers on the acquisition of petitioner TSC
Industries, Inc., by petitioner National
Industries, Inc. In February 1969 National
acquired 34% Of TSC's voting securities by
purchase from Charles E. Schmidt and his
family. Schmidt, who had been TSC's founder
and principal shareholder, promptly resigned
along with his son from TSC's board of
directors. Thereafter, five National
nominees were placed on TSC's board; and
Stanley R. Yarmuth, National's president and
chief executive officer, became chairman of
the TSC board, and Charles F. Simonelli,
National's executive vice president, became
chairman of the TSC executive committee. On
October 16, 1969, the TSC board, with
Page 441
the attending National nominees
abstaining, approved a proposal to liquidate
and sell all of TSC's assets to National.
The proposal in substance provided for the
exchange of TSC common and Series 1
preferred stock for National Series B
preferred stock and warrants.1 On
November 12, 1969, TSC and National issued a
joint proxy statement to their shareholders,
recommending approval of the proposal. The
proxy solicitation was successful, TSC was
placed in liquidation and dissolution, and
the exchange of shares was effected.
This is an action brought by
respondent Northway, a TSC shareholder,
against TSC and National, claiming that
their joint proxy statement was incomplete
and materially misleading in violation of §
14(a) of the Securities Exchange Act of
1934, 48 Stat. 895, 15 U.S.C. § 78n(a),2
and Rules 14a-3 and 14a-9, 17 CFR §§
240.14a-3, 240.14a-9 (1975), promulgated
thereunder.3 The basis
Page 442
of Northway's claim under Rule 14a-3 is
that TSC and National failed to state in the
proxy statement that the transfer of the
Schmidt interests in TSC to National had
given National control of TSC.4.
The Rule 14a-9 claim, insofar as it concerns
us,5 is that TSC and National
omitted from the proxy statement material
facts relating to the degree of National's
control over TSC
Page 443
and the favorability of the terms of the
proposal to TSC shareholders.6
Northway filed its complaint in
the United States District Court for the
Northern District of Illinois on December 4,
1969, the day before the shareholder meeting
on the proposed transaction, but while it
requested injunctive relief it never so
moved. In 1972 Northway amended its
complaint to seek money damages,
restitution, and other equitable relief.
Shortly thereafter, Northway moved for
summary judgment on the issue of TSC's and
National's liability. The District Court
denied the motion, but granted leave to
appeal pursuant to 28 U.S.C. s 1292(b). The
Court of Appeals for the Seventh Circuit
agreed with the District Court that there
existed a genuine issue of fact as to
whether National's acquisition of the
Schmidt interests in TSC had resulted in a
change of control, and that summary judgment
was therefore inappropriate on the Rule
14a-3 claim. But the Court of Appeals
reversed the District Court's denial of
summary judgment to Northway on its Rule
14a-9 claims, holding that certain omissions
of fact were material as a matter of law.
512 F.2d 324 (1975).
We granted certiorari because
the standard applied by the Court of Appeals
in resolving the question of materiality
appeared to conflict with the standard
applied by other Courts of Appeals. 423 U.S.
820, 96 S.Ct. 33, 46 L.Ed.2d 37 (1975).
Page 444
We now hold that the Court of Appeals
erred in ordering that partial summary
judgment be granted to Northway.
II
A.
As we have noted on more than
one occasion, § 14(a) of the Securities
Exchange Act "was intended to promote 'the
free exercise of the voting rights of
stockholders' by ensuring that proxies would
be solicited with 'explanation to the
stockholder of the real nature of the
questions for which authority to cast his
vote is sought.' "
Mills v. Electric Auto-Lite Co., 396 U.S.
375, 381, 90 S.Ct. 616, 620, 24 L.Ed.2d 593
(1970), quoting H.R.Rep.No.1383, 73d
Cong., 2d Sess., 14 (1934); S.Rep.No.792,
73d Cong., 2d Sess., 12 (1934).
J. I. Case Co. v. Borak, 377 U.S. 426, 431,
84 S.Ct. 1555, 1559, 12 L.Ed.2d 423 (1964).
In Borak, the Court held that § 14(a)'s
broad remedial purposes required recognition
under § 27 of the Securities Exchange Act,
15 U.S.C. § 78aa, of an implied private
right of action for violations of the
provision. And in Mills, we attempted to
clarify to some extent the elements of a
private cause of action for violation of §
14(a). In a suit challenging the sufficiency
under § 14(a) and Rule 14a-9 of a proxy
statement soliciting votes in favor of a
merger, we held that there was no need to
demonstrate that the alleged defect in the
proxy statement actually had a decisive
effect on the voting. So long as the
misstatement or omission was material, the
causal relation between violation and injury
is sufficiently established, we concluded,
if "the proxy solicitation itself . . . was
an essential link in the accomplishment of
the transaction."
396 U.S., at 385, 90
S.Ct., at 622. After Mills, then, the
content given to the notion of materiality
assumes heightened significance.7
Page 445
B
The question of materiality, it
is universally agreed, is an objective one,
involving the significance of an omitted or
misrepresented fact to a reasonable
investor. Variations in the formulation of a
general test of materiality occur in the
articulation of just how significant a fact
must be or, put another way, how certain it
must be that the fact would affect a
reasonable investor's judgment.
The Court of Appeals in this
case concluded that material facts include
"all facts which a reasonable shareholder
Might consider important."
512 F.2d, at 330
(emphasis added). This formulation of the
test of materiality has been explicitly
rejected by at least two courts as setting
too low a threshold for the imposition of
liability under Rule 14a-9.
Gerstle v. Gamble-Skogmo, Inc., 478 F.2d
1281, 1301-1302 (C.A.2 1973);
Smallwood v. Pearl Brewing Co., 489 F.2d
579, 603-604 (C.A.5 1974). In these
cases, panels of the Second and Fifth
Circuits opted for the conventional tort
test of materiality whether a reasonable man
Would attach importance to the fact
misrepresented or omitted in determining his
course of action. See Restatement (Second)
of Torts § 538(2) (a) (Tent.Draft No. 10,
Apr. 20, 1964). See also American Law
Institute, Federal Securities Code § 256(a)
(Tent.Draft No. 2, 1973).8
Gerstle
Page 446
v. Gamble-Skogmo, supra, at 1302, also
approved the following standard, which had
been formulated with reference to statements
issued in a contested election: "whether,
taking a properly realistic view, there is a
substantial likelihood that the misstatement
or omission may have led a stockholder to
grant a proxy to the solicitor or to
withhold one from the other side, whereas in
the absence of this he would have taken a
contrary course."
General Time Corp. v. Talley Industries,
Inc.,
403 F.2d 159, 162 (C.A.2 1968),
cert. denied, 393 U.S. 1026, 89 S.Ct. 631,
21 L.Ed.2d 570 (1969).
In arriving at its broad
definition of a material fact as one that a
reasonable shareholder Might consider
important, the Court of Appeals in this case
relied heavily upon language of this Court
in Mills v. Electric Auto-Lite Co., supra.
That reliance was misplaced. The Mills Court
did characterize a determination of
materiality as at least "embod(ying) a
conclusion that the
Page 447
defect was of such a character that it
might have been considered important by a
reasonable shareholdewho was in the process
of deciding how to vote."
396 U.S., at 384,
90 S.Ct., at 621. But if any language in
Mills is to be read as suggesting a general
notion of materiality, it can only be the
opinion's subsequent reference to
materiality as a "requirement that the
defect have a significant Propensity to
affect the voting process." Ibid. (Emphasis
in original.) For it was that requirement
that the Court said "adequately serves the
purpose of ensuring that a cause of action
cannot be established by proof of a defect
so trivial, or so unrelated to the
transaction for which approval is sought,
that correction of the defect or imposition
of liability would not further the interests
protected by § 14(a)." Ibid. Even this
language must be read, however, with
appreciation that the Court specifically
declined to consider the materiality of the
omissions in Mills. Id., at 381 n. 4, 90
S.Ct., at 620. The references to materiality
were simply preliminary to our consideration
of the sole question in the case whether
proof of the materiality of an omission from
a proxy statement must be supplemented by a
showing that the defect actually caused the
outcome of the vote. It is clear, then, that
Mills did not intend to foreclose further
inquiry into the meaning of materiality
under Rule 14a-9.9
Page 448
C
In formulating a standard of
materiality under Rule 14a-9, we are guided,
of course, by the recognition in Borak and
Mills of the Rule's broad remedial purpose.
That purpose is not merely to ensure by
judicial means that the transaction, when
judged by its real terms, is fair and
otherwise adequate, but to ensure
disclosures by corporate management in order
to enable the shareholders to make an
informed choice. See Mills,
396 U.S., at 381, 90 S.Ct., at 620. As an abstract
proposition, the most desirable role for a
court in a suit of this sort, coming after
the consummation of the proposed
transaction, would perhaps be to determine
whether in fact the proposal would have been
favored by the shareholders and consummated
in the absence of any misstatement or
omission. But as we recognized in Mills,
supra, at 382 n. 5, 90 S.Ct., at 620, such
matters are not subject to determination
with certainty. Doubts as to the critical
nature of information misstated or omitted
will be commonplace. And particularly in
view of the prophylactic purpose of the Rule
and the fact that the content of the proxy
statement is within management's control, it
is appropriate that these doubts be resolved
in favor of those the statute is designed to
protect. Mills, supra, at 385, 90 S.Ct., at
622.
We are aware, however, that the
disclosure policy embodied in the proxy
regulations is not without limit. See id.,
at 384, 90 S.Ct., at 621. Some information
is of such dubious significance that
insistence on its disclosure may accomplish
more harm than good. The potential liability
for a Rule 14a-9 violation can be great
indeed, and if the standard of materiality
is unnecessarily low, not only may the
corporation and its management be subjected
to liability for insignificant omissions or
misstatements, but also management's fear of
exposing itself to substantial liability may
cause it simply to bury the shareholders in
an avalanche of trivial information a result
that is
Page 449
hardly conducive to informed
decisionmaking. Precisely these dangers are
presented, we think, by the definition of a
material fact adopted by the Court of
Appeals in this case a fact which a
reasonable shareholder might consider
important. We agree with Judge Friendly,
speaking for the Court of Appeals in
Gerstle, that the "might" formulation is
"too suggestive of mere possibility, however
unlikely."
478 F.2d, at 1302.
The general standard of
materiality that we think best comports with
the policies of Rule 14a-9 is as follows: An
omitted fact is material if there is a
substantial likelihood that a reasonable
shareholder would consider it important in
deciding how to vote. This standard is fully
consistent with Mills general description of
materiality as a requirement that "the
defect have a significant Propensity to
affect the voting process." It does not
require proof of a substantial likelihood
that disclosure of the omitted fact would
have caused the reasonable investor to
change his vote. What the standard does
contemplate is a showing of a substantial
likelihood that, under all the
circumstances, the omitted fact would have
assumed actual significance in the
deliberations of the reasonable shareholder.
Put another way, there must be a substantial
likelihood that the disclosure of the
omitted fact would have been viewed by the
reasonable investor as having significantly
altered the "total mix" of information made
available.10
Page 450
D
The issue of materiality may be
characterized as a mixed question of law and
fact, involving as it does the application
of a legal standard to a particular set of
facts. In considering whether summary
judgment on the issue is appropriate,11
we must bear in mind that the underlying
objective facts, which will often be free
from dispute, are merely the starting point
for the ultimate determination of
materiality. The determination requires
delicate assessments of the inferences a
"reasonable shareholder" would draw from a
given set of facts and the significance of
those inferences to him, and these
assessments are peculiarly ones for the
trier of fact.12 Only if the
established omissions are "so obviously
important to an investor, that reasonable
minds cannot differ on the question of
materiality" is the ultimate issue of
materiality appropriately resolved "as a
matter of law" by summary judgment.
Johns Hopkins University v. Hutton,
422 F.2d 1124, 1129 (C.A.4 1970). See Smallwood
v. Pearl Brewing Co.,
489 F.2d, at 604;
Rogen v. Ilikon Corp., 361 F.2d 260, 265-267
(C.A.1 1966).
III
The omissions found by the
Court of Appeals to have been materially
misleading as a matter of law involved two
general issues the degree of National's
control over TSC at the time of the proxy
solicitation, and the favor-
Page 451
ability of the terms of the proposed
transaction to TSC shareholders.
A. National's Control of TSC
The Court of Appeals concluded
that two omitted facts relating to
National's potential influence, or control,
over the management of TSC were material as
a matter of law. First, the proxy statement
failed to state that at the time the
statement was issued, the chairman of the
TSC board of directors was Stanley Yarmuth,
National's president and chief executive
officer, and the chairman of the TSC
executive committee was Charles Simonelli,
National's executive vice president. Second,
the statement did not disclose that in
filing reports required by the SEC, both TSC
and National had indicated that National
"may be deemed to be a 'parent' of TSC as
that term is defined in the Rules and
Regulations under the Securities Act of
1933." App. 490, 512, 517.13 The
Page 452
Courtf Appeals noted that TSC
shareholders were relying on the TSC board
of directors to negotiate on their behalf
for the best possible rate of exchange with
National. It then concluded that the omitted
facts were material because they were
"persuasive indicators that the TSC board
was in fact under the control of National,
and that National thus 'sat on both sides of
the table' in setting the terms of the
exchange."
512 F.2d, at 333.
We do not agree that the
omission of these facts, when viewed against
the disclosures contained in the proxy
statement, warrants the entry of summary
judgment against TSC and National on this
record. Our conclusion is the same whether
the omissions are considered separately or
together.
The proxy statement prominently
displayed the facts that National owned 34%
Of the outstanding shares in TSC, and that
no other person owned more than 10%. App.
262-263, 267. It also prominently revealed
that 5 out of 10 TSC directors were National
nominees, and it recited the positions of
those National nominees with National
indicating, among other things, that Stanley
Yarmuth was president and a director of
National, and that Charles Simonelli was
executive vice president and a director of
National. D., at 267. These disclosures
clearly revealed the nature of National's
relationship with TSC and alerted the
reasonable shareholder to the fact that
National exercised a degree of influence
over TSC. In view of these disclosures, we
certainly cannot
Page 453
say that the additional facts that
Yarmuth was chairman of the TSC board of
directors and Simonelli chairman of its
executive committee were, on this record, so
obviously important that reasonable minds
could not differ on their materiality.
Nor can we say that it was
materially misleading as a matter of law for
TSC and National to have omitted reference
to SEC filings indicating that National "may
be deemed to be a parent of TSC." As we have
already noted, both the District Court and
the Court of Appeals concluded, in denying
summary judgment on the Rule 14a-3 claim,
that there was a genuine issue of fact as to
whether National actually controlled TSC at
the time of the proxy solicitation. We must
assume for present purposes, then, that
National did not control TSC. On that
assumption, TSC and National obviously had
no duty to state without qualification that
control did exist. If the proxy statements
were to disclose the conclusory statements
in the SEC filings that National "may be
deemed to be a parent of TSC," then it would
have been appropriate, if not necessary, for
the statement to have included a disclaimer
of National control over TSC or a disclaimer
of knowledge as to whether National
controlled TSC.14 The net
contribution of including the contents of
the SEC filings accompanied by such
disclaimers is not of such obvious
significance, in view of the other facts
contained in the proxy statement, that their
exclusion renders the statement materially
misleading as a matter of law.15
Page 454
B. Favorability of the Terms
to TSC Shareholders
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.
1
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
Page 455
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 thencreased
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
Page 456
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 Oc-
Page 457
tober 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,
Page 458
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 mart
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.
Page 459
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
Page 460
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 oxy 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.
2
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
Page 461
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
Page 462
purchases was materially misleading as a
matter of la 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 bear-
Page 463
ing 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
IV
In summary, none of the
omissions claimed to have been in violation
of Rule 14a-9 were, so far as the record
reveals, materially misleading as a matter
of law, and Northway was not entitled to
partial summary judgment.
Page 464
The judgment of the Court of Appeals is
reversed, and the case is remanded for
further proceedings consistent with this
opinion.
It is so ordered.
Mr. Justice STEVENS took no
part in the consideration or decision of
this case.
1 Each share of TSC common
stock brought .5 share of National Series B
preferred stock and 11/2 National warrants.
Each share of TSC Series 1 preferred stock
brought .6 share of National Series B
preferred stock and one National warrant.
National Series B preferred stock is
convertible into .75 share of National
common stock. A National warrant entitles
the holder to purchase one share of National
common stock at a fixed price until October
1978.
2 Section 14(a) provides:
"It shall be unlawful for any person, by
the use of the mails or by any means or
instrumentality of interstate commerce or of
any facility of a national securities
exchange or otherwise, in contravention of
such rules and regulations as the Commission
may prescribe as necessary or appropriate in
the public interest or for the protection of
investors, to solicit or to permit the use
of his name to solicit any proxy or consent
or authorization in respect of any security
(other than an exempted security) registered
pursuant to section 78L of this title."
3 Northway also alleged in
its complaint that National pursued a
fraudulent plan to acquire TSC for less than
its fair value in violation of § 10(b) of
the Securities Exchange Act, 15 U.S.C. §
78j(b), and Rule 10b-5, 17 CFR § 240.10b-5
(1975), promulgated thereunder. Northway has
not pursued this claim in the proceedings
that we are called upon to review. Northway
also brought suit against Charles Schmidt
and his family, charging them with aiding
and abetting the corporate defendants in
violation of § 10(b) and Rule 10b-5. The
District Court granted summary judgment to
the Schmidt defendants, and the Court of
Appeals affirmed. That aspect of the
original suit is not before us.
4 Rule 14a-3(a) provides:
"No solicitation subject to this
regulation shall be made unless each person
solicited is concurrently furnished or has
previously been furnished with a written
proxy statement containing the information
specified in Schedule 14A."
Schedule 14A, Item 5(e), requires:
"If to the knowledge of the persons on
whose behalf the solicitation is made a
change in control of the issuer has occurred
since the beginning of its last fiscal year,
state the name of the person or persons who
acquired such control, the basis of such
control, the date and a description of the
transaction or transactions in which control
was acquired and the percentage of voting
securities of the issuer now owned by such
person or persons." 17 CFR § 240.14a-101,
Item 5(e) (1975).
5 Northway also asserted a
claim under Rule 14a-9 that the proxy
statement was materially misleading in its
assertion that the TSC board of directors
had approved the proposed transaction. It
contended, first, that the proposal was
never legally approved under applicable
state law; and, second, that the statement
should have in any event disclosed that the
proposal received only four affirmative
votes, and that the National nominees were
cautioned against voting by their legal
advisers. The Court of Appeals did not reach
the first contention, and it found summary
judgment inappropriate on the second.
Neither contention is before us.
6 Rule 14a-9(a) provides:
"No solicitation subject to this
regulation shall be made by means of any
proxy statement, form of proxy, notice of
meeting or other communication, written or
oral, containing any statement which, at the
time and in the light of the circumstances
under which it is made, is false or
misleading with respect to any material
fact, or which omits to state any material
fact necessary in order to make the
statements therein not false or misleading
or necessary to correct any statement in any
earlier communication with respect to the
solicitation of a proxy for the same meeting
or subject matter which has become false or
misleading."
7 Our cases have not
considered, and we have no occasion in this
case to consider, what showing of
culpability is required to establish the
liability under § 14(a) of a corporation
issuing a materially misleading proxy
statement, or of a person involved in the
preparation of a materially misleading proxy
statement.
Gerstle v. Gamble-Skogmo, Inc., 478 F.2d
1281, 1298-1301 (C.A.2 1973);
Richland v. Crandall, 262 F.Supp. 538, 553
n. 12 (S.D.N.Y.1967); R. Jennings & H.
Marsh, Securities Regulation: Cases and
Materials 1358-1359 (3d ed. 1972).
Ernst & Ernst v. Hochfelder, 425 U.S. 185,
209 n. 28, 96 S.Ct. 1375, 1388, 47
L.Ed.2d 668 (1976).
8 This standard, or a close
approximation, has been widely recited in
cases involving various sections of the
securities laws. See, E. g.,
Chris-Craft Industries, Inc. v. Piper
Aircraft Corp., 480 F.2d 341, 363 (C.A.2
1973) (§ 14(e));
John R. Lewis, Inc. v. Newman, 446 F.2d 800,
804 (C.A.5 1971) (§ 10(b));
Gilbert v. Nixon,
429 F.2d 348, 355-356
(C.A.10 1970) (§ 10(b) of the Securities
Exchange Act and § 12(2) of the Securities
Act of 1933, 15 U.S.C. § 78L );
Rogen v. Ilikon Corp., 361 F.2d 260, 266
(C.A.1 1966) (§ 10(b));
SEC v. Texas Gulf Sulphur Co., 401 F.2d 833,
849 (C.A.2 1968), cert. denied Sub nom.
Coates v. SEC, 394 U.S. 976, 89 S.Ct. 1454,
22 L.Ed.2d 756 (1969) (§ 10(b));
List v. Fashion Park, Inc., 340 F.2d 457,
462 (C.A.2), cert. denied Sub nom.
List v. Lerner, 382 U.S. 811, 86 S.Ct. 23,
15 L.Ed.2d 60 (1965) (§ 10(b));
Kohler v. Kohler Co., 319 F.2d 634, 642
(C.A.7 1963) (§ 10(b)). But see Sonesta
Int'l Hotels Corp. v. Wellington Associates,
483 F.2d 247, 251 (C.A.2 1973). In
several of these cases, the courts have also
defined materiality to encompass those facts
"which in reasonable and objective
contemplation might affect the value" of the
securities involved. Rogen v. Ilikon, supra;
SEC v. Texas Gulf Sulphur, supra; List v.
Fashion Park, Inc., supra; Kohler v. Kohler
Co., supra. The standard adopted by the
Court of Appeals in this case has been
applied
Kohn v. American Metal Climax, Inc., 458
F.2d 255, 269 (C.A.3 1972) (§ 10(b)),
and
Ronson Corp. v. Liquifin Aktiengesellschaft,
483 F.2d 846, 851 (C.A.3 1973) (§
14(e)).
9 Nor is
Affiliated Ute Citizens v. United States,
406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741
(1972), also relied upon by the Court of
Appeals, dispositive. There we held that
when a Rule 10b-5 violation involves a
failure to disclose, "positive proof of
reliance is not a prerequisite to recovery.
All that is necessary is that the facts
withheld be material in the sense that a
reasonable investor might have considered
them important in the making of this
decision." Id., at 153-154, 92 S.Ct., at
1472. The conclusion embodied in the quoted
language was simply that positive proof of
reliance is unnecessary when materiality is
established, and in order to reach that
conclusion is was not necessary to
articulate a precise definition of
materiality, but only to give a "sense" of
the notion. The quoted language did not
purport to do more.
10 In defining materiality
under Rule 14a-9, we are, of course, giving
content to a rule promulgated by the SEC
pursuant to broad statutory authority to
promote "the public interest" and "the
protection of investors." See n. 2, Supra.
Cf. Ernst & Ernst v. Hochfelder,
425 U.S., at 212-214, 96 S.Ct., at 1390-1391. Under
these circumstances, the SEC's view of the
proper balance between the need to insure
adequate disclosure and the need to avoid
the adverse consequences of setting too low
a threshold for civil liability is entitled
to consideration.
Northern Indiana Public Service Co. v. Izaac
Walton League, 423 U.S. 12, 15, 96 S.Ct.
172, 173, 46 L.Ed.2d 156 (1975);
Udall v. Tallman, 380 U.S. 1, 16-17, 85
S.Ct. 792, 801, 13 L.Ed.2d 616 (1965).
The standard we adopt is supported by the
SEC. Brief for the Securities and Exchange
Commission as Amicus Curiae 13.
11 Federal Rule Civ.Proc.
56(c) permits summary judgment only when
"there is no genuine issue as to any
material fact."
12 In an analogous context,
the jury's unique competence in applying the
"reasonable man" standard is thought
ordinarily to preclude summary judgment in
negligence cases. See 10 C. Wright & A.
Miller, Federal Practice and Procedure:
Civil § 2729 (1973).
13 The quoted language is
from National's Form 13D, filed in
compliance with § 13(d) of the Securities
Exchange Act, 15 U.S.C. § 78m(d). See 17 CFR
§ 240.13d-1 (1975). Substantially identical
language appeared in TSC's Form 10-K, and
was incorporated by reference into its Form
8-K, both filed in compliance with § 13(a)
of the Securities Exchange Act, 15 U.S.C. §
78m(a). See 17 CFR §§ 240.13a-10-11 (1975).
The term "parent" is defined in SEC Rule
12b-2(a), (f), (k), 17 CFR §§ 240.12b-2(a),
(f), (k) (1975):
"Unless the context otherwise requires,
the following terms, when used in the rules
contained in this regulation or in
Regulation 13A or 15D or in the forms for
statements and reports filed pursuant to
sections 12, 13 or 15(d) of the (Securities
Exchange) Act, shall have the respective
meanings indicated in this rule:
"(a) Affiliate. An 'affiliate' of, or a
person 'affiliated' with, a specified
person, is a person that directly, or
indirectly through one or more
intermediaries, controls, or is controlled
by, or is under common control with, the
person specified.
"(f) Control. The term 'control'
(including the terms 'controlling,'
'controlled by' and 'under common control
with') means the possession, directly or
indirectly, of the power to direct or cause
the direction of the management and policies
of a person, whether through the ownership
of voting securities, by contract, or
otherwise.
"(k) Parent. A 'parent' of a specified
person is an affiliate controlling such
person directly, or indirectly through one
or more intermediaries."
The Rules and Regulations under the
Securities Act of 1933 contain the identical
definitions. 17 CFR §§ 230.405(a), (f), (n)
(1975).
14 It is the position of
National and TSC that "(s)ince National and
the old TSC management . . . never drew any
clear-cut battle lines, no one ever really
knew who could ultimately control TSC during
the entire period between the Schmidt
purchase and consummation of the
shareholder-approved purchase of TSC's
assets." Brief for Petitioners 33.
15 We emphasize that we do
not intend to imply that facts suggestive of
control need be disclosed only if in fact
there was control. If, for example, the
proxy statement in this case had failed to
reveal National's 34% Stock interest in TSC
and the presence of five National nominees
on TSC's board, these omissions would have
rendered the statement materially misleading
as a matter of law, regardless of whether
National can be said with certainty to have
been in "control" of TSC. The reasons for
this are twofold. First, to the extent that
the existence of control was, at the time of
the proxy statement's issuance, a matter of
doubt to those responsible for preparing the
statement, we would be unwilling to resolve
that doubt against disclosure of facts so
obviously suggestive of control. Second, and
perhaps more to the point, even if National
did not "control" TSC, its stock ownership
and position on the TSC board make it quite
clear that it enjoyed some influence over
TSC, which would be of obvious importance to
TSC shareholders.
16 The premium based upon
November 7, 1969, closing prices is
calculated as follows:
TSC Preferred TSC Common
National B. pfd. (at 16 5/8)..... $9.98 (.6 sh.) $8.31 (.5 sh.)
National warrant (at 5 1/4)...... 5.25 7.88 (1 1/2 war.)
______ ______
Total $15.23 $16.19
Less TSC market (pfd. 12)
(com. 13 1/4) 12.00 13.25
------- ------
Premium........................ 3.23 2.94
Premium expressed as a
percentage of TSC market...... 27% 22%
17 The body of the subsequent
Hornblower letter, dated October 31, 1969,
from Mr. Noyes to Stanley Yarmuth, president
of National, reads in full:
"You have asked for our opinion as to the
value of warrants to be issued in connection
with your proposed acquisition of TSC
Industries. We understand that these
warrants have terms identical to the
National Industries (NII) warrants listed on
the American Stock Exchange which allow the
holder to purchase one NII Common at the
price of $21.40 until October 31, 1978. We
further understand that you desire our
determination as of October 9, 1969.
"Our evaluation of these warrants was
made from the point of view of the
stockholders of TSC Industries, of which I
am a director. In advising TSC as to the
fairness of the offer from NII it was
necessary to determine whether the value of
the warrants was reflected by the market
price of the outstanding 487,000 warrants on
the day in question. We did so in the light
of the fact that approximately 2.6 million
additional warrants would be issued in
connection with the acquisition.
"After studying price relationships of
other warrants traded publicly, referring to
customary systems of warrant evaluation, and
considering the particulars of the proposed
acquisition, we concluded that the warrants
in question had a value of approximately
$3.50.
"If you have any questions concerning our
evaluation, please feel free to call." App.
519.
18 The premium based upon a
$3.50 value for the National warrants and
the closing prices of the other securities
involved on October 9, 1969, the day the
exchange ratio was set, is calculated as
follows:
TSC Preferred TSC Common
National B. pfd. (at 16)......... $9.60 (.6 sh.) $8.00 (.5 sh.)
National warrant (at 3.50)....... 3.50 5.25 (1 1/2 war.)
----- ------
Total $13.10 $13.25
Less TSC market (pfd. 11)y
(com. 11 5/8)................... 11.00 11.63
----- ------
Premium......................... 2.10 1.62
Premium expressed as a
percentage of TSC market.......... 19% 14%
19 Employed in 1967, Merkle
initially received a salary of $2,500 per
year (increased in 1968 to $12,000) and an
option to purchase 10,000 shares of National
common stock. App. 520, 522.
20 In a table entitled
"Statements of Consolidated Stockholders'
Equity," the proxy statement indicated that
National acquired approximately 83,000
shares of its own common stock in 1968 and
1969, while it sold approximately 67,000
shares under stock option plans, employment
agreements, and warrants. D., at 324, 330.
The proxy statement did not disclose that
Madison acquired approximately 170,000
shares of National common during the
two-year period, or that approximately one
year prior to the proxy solicitation Madison
acquired $2 million in National debentures
convertible to common.
21 See n. 1, Supra.
22 There has been no
suggestion that the purchases in question
would have any significance if there was in
fact no manipulation or collusion, although
there may perhaps be such a claim in another
case. Nor is there any indication that
manipulation or collusion are matters as to
whose existence National might have been
left in doubt at the time the proxy
statement was issued. Cf. n. 16, Supra.
23 In holding that the
failure to disclose the National and Madison
purchases violated Rule 14a-9 as a matter of
law, the Court of Appeals not only found it
unnecessary to consider whether there was in
fact any collusion or manipulation, but also
found it unnecessary to consider whether the
purchases had any significant effect on the
price of National common stock or, more
pertinently, the price of the National
preferred stock and warrants involved in the
proposed transaction. Since we find the
existence of a genuine issue of fact with
respect to whether there was manipulation
sufficient to bar summary judgment, it is
unnecessary to consider the remaining
aspects of the Court of Appeals' decision.
24 Of course, such a showing
may be by circumstantial as well as direct
evidence, and the purchases themselves may
be considered. |
