Citation. Basic Inc. v. Levinson, 485 U.S. 224, 108 S. Ct. 978, 99 L. Ed. 2d 194, 56 U.S.L.W. 4232, Fed. Sec. L. Rep. (CCH) P93,645, 24 Fed. R. Evid. Serv. (Callaghan) 961, 10 Fed. R. Serv. 3d (Callaghan) 308 (U.S. Mar. 7, 1988)
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Brief Fact Summary.
Basic Incorporated (Defendant) argued that due to merger conversations not attaining the agreement-in-principle stage that public renunciations of those conversations were per se irrelevant.
Synopsis of Rule of Law.
The fact that merger conversations have failed to attain the agreement-in-principle stage will not make public renunciations of those conversations per se irrelevant.
Facts.
Combustion Engineering, Inc. started covert merger conversations with target Basic Incorporated, and at three different times the management of Basic supplied public renunciations of merger reports. After an arrangement was attained, a declaration was made and Basic’s stock rose. Levinson (Plaintiff) and other Basic shareholders who sold between the disavowals and the declaration brought suit, claiming a — 10(b) violation of the Securities and Exchange Act. The district court, ruling that until the time that agreement-in-principle had been attained that the data involving the mergers was irrelevant as a matter of law, entered summary judgment in favor of Basic. The Sixth Court reversed, holding that although the data may have been irrelevant if suspended, a public renunciation made the data significant as a matter of law. The Supreme Court granted review.
Issue.
Are public renunciations of merger conversations per se irrelevant due to the conversations not attaining the agreement-in-principle stage?
Held.
(Blackmun, J.) No. Public renunciations of merger conversations are not per se irrelevant due to the conversations not attaining the agreement-in-principle stage. Relevance of a fact or absence is present if the probability is great that a sensible shareholder would utilize the information in determining how to vote or whether to trade. A bright-line test of relevance has been embraced by some circuits where such information is irrelevant per se preceding the attainment of agreement-in-principle and per se material after. It is justified by the investor not being overcome by extremely comprehensive and insignificant information, that previous revelations may endanger the conversations and the appeal of a bright-line rule. The first element is excluded due to it presuming that investors are stupid and fail to understand that up until they close, that mergers are dicey propositions while the second element is erroneous due to the issue being the accuracy of a revelation, not the timing. If management lacks the desire to speak up, — 10(b) is not involved. The last element is also irrelevant because it seems to exist for the advantage of corporate managers, though — 10(b) safeguards investors instead of managers. A different, yet similarly impervious to the difference between relevance and the other essentials of a Rule 10b-5 action, rule has been embraced by other circuits, as evidenced in this case. The Sixth Circuit here ruled that “once a statement is made denying the existence of any discussions, even discussions that might not have been material in absence of the denial are material because they make the statement untrue.†This method does not acknowledge that to prevail in a Rule 10b-5 claim, the statements were deceiving regarding a substantial fact must be demonstrated by the plaintiff. The statement being false or incomplete is not sufficient if the distorted fact is otherwise unimportant. Regarding pre-declaration statements, relevance is contingent upon a balance of the possibility that the event may happen and that the expected significance of the event with regard to the entirety of business action. Relevance is an essentially changeable study and always relies on the facts of the particular case. Here, the district court and the Sixth Circuit both embraced per se tests and both were incorrect to do so. This issue must be dealt with by a fact finder and cannot be recognized as a matter of law. Remanded.
Discussion.
It is significant to recall that this action included distortions. Silence, lacking a duty to disclose, is not actionable. Thus, a “no comment†will generally not be held to be actionable, although it has been contended that “no comment†replies may be equivalent to confessions, but only a handful of courts agree.
