Why is the case important?
Respondents, Max Levinson et al., held shares in Petitioner Corporation, Basic Inc. Respondents brought this action after misleading statements concerning a potential merger induced them to sell their shares at a depressed price.
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.”
The issue is whether the misleading statements regarding ongoing merger discussions were material enough to alter the decision of a reasonable investor.
The court determined that determining whether misleading statements or omissions were material under Rule 10b-5 would require a fact-based assessment. The court did not adopt Petitioner’s agreement-in-principle test that would have considered only misstatements after an agreement was made in principle. The court did not think that the probability of a failed merger outweighed the importance of providing the information to the investor. The court instead took a fact-based approach, reasoning that the probability would be weighed against the magnitude of the facts. In this case, a merger has a high magnitude on investor decisions and therefore the probability of a successful merger does not have to be as absolute as more trivial topics. The misstatements would still need to be material.
The judgment of the court of appeals was vacated, and the case was remanded for further proceedings. The Court held that an omitted fact was material if a reasonable shareholder would consider it important in making his or her vote and this standard should be applied to all § 10(b) and Rule 10b-5 actions. The Court also held that materiality required a case by case review of the facts and that a rebuttable presumption existed that stockholders relied on available information when buying or selling securities.
- Case Brief: 1988
- Petitioner: Basic, Incorporated, et al.
- Respondent: Max L. Levinson, et al.
- Decided by: Rehnquist Court
Citation: 485 US 224 (1988)
Argued: Nov 2, 1987
Decided: Mar 7, 1988
Granted Feb 23, 1987