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Howing Co. v. Nationwide Corp.

Brief Fact Summary. Nationwide Corp. (Defendant) wanted to eradicate all public ownership of its common stock via a presented tender offer by two of its companies.

Synopsis of Rule of Law. A private cause of action for damages is permitted by Section 13(c) of the Securities and Exchange Act of 1934.

Points of Law - Legal Principles in this Case for Law Students.

In Radol, the Court recognized the special problems of going-private transactions and the need for full disclosure: the more extensive legal disclosure requirements which apply to freeze-out merger proxy statements are therefore justified by the fact that the law has given the majority the power to foreclose the ownership rights of the minority and has thereby eliminated the market as a correcting mechanism, leaving the minority shareholders with only the option of dissent and appraisal, an option which cannot rationally be exercised unless the majority is compelled to make full disclosure regarding appraisals, earnings projections and other information that sheds light on the value of the firm.

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Facts. A life insurance company, Nationwide, issued Class B, a special class of common stock, which was held by two Nationwide companies, Nationwide Mutual Insurance Company and Nationwide Mutual Fire Insurance Company. The Class A common stock was held by individual shareholders, while the possession of the class B stock provided Nationwide Mutual and Nationwide Mutual Fire authority over Nationwide. Nationwide Mutual and Nationwide Mutual Fire composeda tender offer of $20.00 per share of the Class A stock, and bought $4,074,695.00 Class A shares. Nationwide Mutual and Nationwide Mutual Fire kept buying Class A shares on the open market up to the point of obtaining 85.6% of the Class A common stock. Nationwide’s board of directors then consented to a proposalessentially eradicating public ownership where the remainder of the Class A stock would be procured by Nationwide Mututal and Nationwide Mutual Fire at $42.50 per share. On behalf of Nationwide’s shareholders, shareholderEfros(Plaintiff) initiated a class action suit and wanted a preliminary injunction stopping the vote on the projected merger. The motion was denied, and the merger was approved. Nationwide moved for summary judgment, and a cross-motion for partial summary judgment was filed by shareholders. The district court granted Nationwide’s motion, and dismissed.

Issue. Is a private cause of action for damages permitted by § 13(c) of the Securities and Exchange Act of 1934?

Held. (Merritt, J.) Yes. A private cause of action for damages is permitted by §13(c) of the Securities and Exchange Act of 1934. A four point test to ascertain the existence of a private right of action has been created by the Supreme Court. (1) The plaintiff needs to berepresentative of the class that the statute aides (2) There needs to be an express or inferredsuggestion of the legislatures intention to deliver a resolution of this type (3) A private right of action must be consistent with the legislative objective and (4) the right of action is not usually decided by state law. In this case, the aforementioned conditions must be used within the legal framework under which § 13(c) was enacted. §13(e) was passed via the Williams Act of 1968, which was enacted to protect investors against tender offers and corporate repurchases of stock. Here, the test is met, the first element of which is – the Williams Act was enacted for safeguarding investors, all of the plaintiffs involved here are members of the appropriate class. Congress modeled the language of § 13(e) after §14(a), which favored a private right of action, in fact the legal framework under which the Williams Act was enacted fervently reinforced right of action and therefore, the Williams Act’s silence regarding this issue established an inferred acknowledgment of this right. Also, the inferred private right of action is coherent with the legislature’s objective of in presenting investors with a way of safeguarding their investment. Finally, seeing as regulation of the securities industry is usually regulated by federal law, consequently, the shareholders in this case meet the obligations endorsing a private right of action under § 13(e). Reversed.

Discussion. The shareholders also brought claims based on the antifraud stipulations of Rules 10-b5, 13e-(b)(1), and 14a-9, contending that failing to divulge information  inviolation of § 13e-3 established a per se violation of these stipulations. Assessment under these stipulations is comparable to those of common law fraud and deceit. Such actions may be initiated in the case of distortion and dishonesty, but not regarding omissions, so omissions are only actionable under antifraud stipulations where admission is needed for avertingdishonesty.

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