TSC Indus., Inc. v. Northway, Inc.

Brief Fact Summary.

Northway, Inc. (Plaintiff), a TSC Indus., Inc. (TSC) (Defendant) shareholder, claimed that material facts were omitted from the proxy statement issued in connection with a liquidation and sale of Defendant’s assets to National.

Synopsis of Rule of Law.

When there is a significant possibility that a reasonable shareholder would consider the omitted information from a proxy solicitation important in deciding how to vote, the omitted fact is “material.â€

Facts.

Following National’s acquisition of 34 percent of TSC Indus., Inc.’s (TSC) (Defendant) stock, Defendant’s Board of Directors approved a proposal to liquidate and sell all of Defendant’s assets to National by way of an exchange of stock.  The National nominees to the Board did not vote.  Northway, Inc. (Plaintiff), a TSC (Defendant) stockholder, brought suit claiming the resulting proxy solicitation violated § 14a-9 of the Securities Exchange Act of 1934, which prohibits the use of proxy statements that are false or misleading with respect to the presentation or omission of material facts.  The alleged material omission in this case involved the failure to reveal the degree of National’s control over Defendant.  Plaintiff’s motion for summary judgment was denied by the district court, however the court of appeals reversed and granted partial summary judgment on the ground that the omitted facts were material as a matter of law.  The court reasoned in doing so that any fact a reasonable shareholder would possibly consider important was material.  Defendant appealed.

Issue.

Is the omitted fact determined “material†when there is a significant possibility that a reasonable shareholder would consider the omitted information from a proxy solicitation important in deciding how to vote?

Held.

(Marshall, J.)  Yes.  The proper standard for determining the materiality of a proxy statement is whether there is a significant possibility that a reasonable shareholder would consider the information important in deciding how to vote.  The “might-consider-important†test used by the court below simply sets the threshold too low to impose liability under Rule 14a-9.  The issue of materiality may be characterized as a mixed question of law and fact, involving the application of a legal standard to a particular set of facts.  The ultimate issue of materiality is appropriately resolved “as a matter of law†by summary judgment only when the established omissions are “so obviously important to an investor that reasonable minds cannot differ on the question of materiality.â€Â  This case was not an example of that, therefore, a summary judgment was improper.  Reversed and remanded.

Discussion.

The Securities and Exchange Commission (SEC) supported the “materiality†standard adopted by the Court in this case.  The courts had been split, some adopting the “facts a reasonable shareholder might consider important†standard at issue in this case and others, notably the Second and Fifth Circuits, choosing instead the conventional tort test of materiality, i.e., whether a reasonable person would attach importance to the fact.  The Court adopted a test midway between these two extremes.