RESPONDENT: Max L. Levinson, et al.
LOCATION: Basic, Incorporated
DOCKET NO.: 86-279
DECIDED BY: Rehnquist Court (1988-1990)
CITATION: 485 US 224 (1988)
ARGUED: Nov 02, 1987
DECIDED: Mar 07, 1988
GRANTED: Feb 23, 1987
Joel W. Sternman - for the petitioners
Wayne Alan Cross - for the respondents
Facts of the case
Basic, Inc. (Basic) was a publicly-traded company engaged in manufacturing related to the steel industry. Combustion, Inc. (Combustion), a similar company, had expressed interest in merging with Basic but had not done so because of antitrust concerns. Beginning in 1976, Combustion representatives had conversations with Basic representatives regarding the possibility of a merger. Throughout 1977 and 1978, Basic made several public statements denying rumors that these conversations were taking place. On December 18, 1978, Basic asked the New York Stock Exchange to suspend trading of its stocks because it had been approached about a merger, and on December 19 Basic’s board approved the offer from Combustion.
The respondents in this case are former Basic stockholders who sold their stock after Basic’s first denial of merger conversations. They sued Basic and its director for making false or misleading statements in violation of Section 10(b) of the Securities and Exchange Act of 1934, which has to do with material facts relating to the purchase or sale of stocks. The plaintiffs argued that these statements artificially depressed the market for Basic’s stock, which injured the sellers. The district court certified the plaintiffs as a class and granted summary judgment for the company. The court held that the statements were immaterial because the conversations were not necessarily destined to become a merger agreement. The U.S. Court of Appeals for the Sixth Circuit reversed and held that a company cannot disclose misleading information and that the conversations, although they might not have been material on their own, became so because they made the company’s statements untrue.
(1) Did the statements in question meet the standard for materiality defined by Section 10(b) of the Securities and Exchange Act of 1934?
(2) Did the district court use the proper standard to certify the class?
Media for Basic Inc. v. LevinsonAudio Transcription for Oral Argument - November 02, 1987 in Basic Inc. v. Levinson
Audio Transcription for Opinion Announcement - March 07, 1988 in Basic Inc. v. Levinson
William H. Rehnquist:
The opinion of the Court in 86-279, Basic Incorporated versus Levinson will be announced by Justice Blackmun.
Harry A. Blackmun:
Well, this case comes to us from the United States Court of Appeals for the Sixth Circuit.
The Securities and Exchange Commission’s Rule 10b-5 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 the material fact.
In 1978, Basic Incorporated and another firm agreed to merge, and during the two years immediately preceding the merger, there were various meetings and conversations between the two companies.
And during that same time, however, Basic made three public statements denying that merger or merger negotiations were underway or that in knew of any corporate developments that would account for heavy trading activity in its stock.
The respondents are former Basic shareholders who sold their stock between the first public denial and the suspension of trading in Basic's stock just prior to the merger announcement.
And they filed suite against Basic and some of its directors alleging that the statements had been false or misleading in violation of Section 10 of the 1934 Securities Exchange Act and of the Rule 10b-5 and that they had been injured by selling their shares at prices artificially depressed by those statements.
The District Court certified the plaintiff's class but granted summary judgment for the defendants on the merits.
The Court of Appeals affirmed the class certification but reversed the summary judgment and it rejected specifically the District Court's view of the preliminary merger discussions were immaterial as a matter of law.
But we vacate that judgment and remand the case.
We hold that the standard set forth in a case recently here called TSC Industries 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 to be expressly adopted for the 10-b and Rule 10-b(5) contexts.
We reject the so-called agreement-in-principle test under which preliminary disclosure does not become material until the would-be merger partners have reached an agreement as to price and structure of the transition.
Materiality in the merger context depends on the probability that the transaction will be consummated and its significance to the issue of the securities.
Materiality therefore depends on the facts and is to be determined on a case-by-case basis. The courts below properly applied the presumption of reliance and that presumption is also supported by common sense and probability in our view.
An investor who trades stock at the price set by an impersonal market does so on the reliance on the integrity of that price.
And because most publicly available information is reflected in market price, an investor's reliance on any public material representations may be presumed for purposes of a Rule 10-b(5) action.
But that presumption of reliance, however, may be rebutted.
Justices Brennan and Marshall and Stevens joined the opinion in full and create a majority.
Justices White and O'Connor joined parts one, two and three thereof.
Justice White joined by Justice O'Connor has filed an opinion concurring in part and dissenting in part and taking no part in the consideration or decision of the case or the Chief Justice and Justices Scalia and Kennedy.