Basic Inc. v Levinson

Brief Fact Summary.

Levinson (Plaintiff), representing a class of shareholders, brought an action against Basic, Inc. (Defendant) and its directors, claiming they violated § 10(b) of the Securities and Exchange Act by issuing three public statements that were false and misleading.

Synopsis of Rule of Law.

If a public statement issued by a corporation is materially misleading, it violates § 10(b) of the Securities and Exchange Act.

Facts.

Before December 20, 1979, Basic Inc. (Defendant) was a publicly traded company mainly involved in the business of manufacturing chemical refractors for the steel industry.  Beginning in 1976, Combustion Engineering, Inc., a company producing aluminum refractors, sought a merger with Basic (Defendant).  During 1977 and 1978, Defendant made three public statements denying it was engaged in merger negotiations.  On December 18, 1978k, Defendant asked the New York Stock Exchange to suspend trading in its shares and issued a release stating it had been “approached†by another company regarding a merger.  On December 20, 1978, Defendant announced publicly its approval of Combustion’s tender offer for all outstanding shares of Basic (Defendant).  Levinson (Plaintiff), a shareholder of Basic (Defendant), then brought a class action against Defendant and its directors claiming that Defendant had violated S 10(b) of the Securities and Exchange Act as it had issued three false or misleading public statements.  Plaintiff argued that the class was injured because class members sold Basic (Defendant) shares at artificially depressed prices in a market affected by Defendant’s misleading statements and in reliance thereon.  The district court granted summary judgment for Defendant, holding that as a matter of law, any misstatements made by Defendant were immaterial.  The court of appeals reversed, holding that Defendant’s statements were misleading.  Defendant appealed.

Issue.

If a public statement issued by a corporation is materially misleading, does it violate § 10(b) of the Securities and Exchange Act?

Held.

(Blackmun, J.)  Yes.  If a public statement issued by a corporation is materially misleading, it violates § 10(b) of the Securities and Exchange Act.  It will depend on the facts whether merger discussions in any particular case are material.  To assess the magnitude of the transaction to the issuer of the securities allegedly manipulated, a fact-finder will need to consider facts such as the size of the two corporate entities and of potential premiums over market value. Short of closing the transaction, no particular event or factor needs to be either necessary or sufficient by itself to render merger discussions material.  Materiality depends on the significance the reasonable investor would place on the misrepresented information.  In the merger context in this case, materiality depended on the probability that the transaction would be consummated and its significance to the issuer of securities, Basic Inc. (Defendant).  The court of appeals adopted the argument, with respect to materiality, that once Defendant made a statement denying the existence of merger discussions, even discussions that might not have been material in the absence of denial were material because they made the statement untrue.  This Court rejects the proposition that information becomes material by virtue of a pubic statement denying it, and therefore remands the matter to that court to decide the issue of materiality consistent with this opinion.  Vacated and remanded.

Dissent.

(White, J.)  A congressional policy that the majority’s opinion ignores is the strong preference the securities laws display for widespread public disclosure and distribution to investors of material information regarding securities.  This congressionally adopted policy is expressed in the numerous and varied disclosure requirements found in the federal securities law scheme.  This Court should limit its role in interpreting § 10(b) and Rule 10b-5 to that of giving effect to such policy decisions by Congress.

Concurrence.

(White, J.)  A congressional policy that the majority’s opinion ignores is the strong preference the securities laws display for widespread public disclosure and distribution to investors of material information regarding securities.  This congressionally adopted policy is expressed in the numerous and varied disclosure requirements found in the federal securities law scheme.  This Court should limit its role in interpreting § 10(b) and Rule 10b-5 to that of giving effect to such policy decisions by Congress.

Discussion.

Determining an appropriate remedy to a private action under § 10(b) and Rule 10b-5 is a difficult problem and the solution depends on a number of variables.  These include whether the corporation is closely or publicly held, whether the plaintiff is a buyer or a seller, and whether the wrong is a misrepresentation or a wrongful disclosure.  Rules governing analogous tort often provide a good framework of analysis, as in many Rule 10b-5 problems, especially since Rule 10b-5 cases often rely on tort concepts in the area of remedies.