426 U.S. 438 (1976), 74-1471, TSC Industries, Inc. v. Northway, Inc.
|Docket Nº:||No. 74-1471|
|Citation:||426 U.S. 438, 96 S.Ct. 2126, 48 L.Ed.2d 757|
|Party Name:||TSC Industries, Inc. v. Northway, Inc.|
|Case Date:||June 14, 1976|
|Court:||United States Supreme Court|
Argued March 3, 1976
CERTIORARI TO THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
Rule 14a-9, promulgated under § 14(a) of the Securities Exchange Act of 1934, provides that no proxy solicitation shall be made "which . . . is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading." The dispute in this case centers on the acquisition of petitioner TSC Industries (TSC) by petitioner National Industries (National). National purchased 34% of TSC's voting securities from TSC's founder and principal shareholder and his family. The founder and his son promptly resigned from TSC's board of directors, and five National nominees were placed on the board, including National's president and executive vice-president, who subsequently became, respectively, chairman of the board and chairman of TSC's executive committee. Thereafter, the TSC board approved a proposal to liquidate and sell all of TSC's assets to National by exchanging TSC common and preferred stock for National preferred stock and warrants to purchase National common stock. TSC and National then issued a joint proxy statement to their shareholders recommending approval of the proposal. The proxy solicitation was successful, TSC was placed in liquidation and dissolution, and the exchange of shares was effected. Respondent, a TSC shareholder, brought this action for damages, restitution, and other relief against TSC and National, claiming that their joint proxy statement was incomplete and materially misleading in violation of § 14(a) and Rule 14a-9 in that it omitted material facts relating to the degree of National's control over TSC (i.e., it failed to disclose the positions in TSC held by National's president and executive vice-president, and reports filed with the Securities and Exchange Commission by National and TSC indicating that National "may be deemed a `parent' of TSC") and the favorability of the proposed acquisition to TSC shareholders (i.e., it failed to disclose certain unfavorable information about the proposal contained in a letter from an investment banking firm whose earlier favorable opinion of the
proposal was reported in the proxy statement, and also recent substantial purchases of National's common stock, suggestive of manipulation, by National and a mutual fund). The District Court denied respondent's motion for summary judgment, but the Court of Appeals reversed, holding that the claimed omissions of fact were material as a matter of law, and defining material facts as "all facts which a reasonable shareholder might consider important."
[96 S.Ct. 2128] 1. The general standard of materiality best comporting with Rule 14a-9's policies is not the standard applied by the Court of Appeals, but is as follows: an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. This standard is fully consistent with the general description of materiality as a requirement that "the defect have a significant propensity to affect the voting process." Mills v. Electric Auto-Lite Co., 396 U.S. 375, 384. It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote, but contemplates a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the reasonable shareholder's deliberations. Pp. 444-449.
2. The issue of materiality is a mixed question of law and fact, involving as it does the application of a legal standard to a particular set of facts, and only if the established omissions are "so obviously important to an investor that reasonable minds cannot differ on the question of materiality" is the ultimate issue of materiality appropriately resolved "as a matter of law" by summary judgment. P. 450.
3. Under the standard set forth in ¶ 1, supra, none of the omissions claimed to have been in violation of Rule 14a-9 in this case were, so far as the record reveals, materially misleading as a matter of law, and hence respondent was not entitled to summary judgment. Pp. 450-463.
512 F.2d 324, reversed and remanded.
MARSHALL, J., delivered the opinion of the Court, in which all Members joined except STEVENS, J., who took no part in the consideration or decision of the case.
MARSHALL, J., lead opinion
MR. JUSTICE MARSHALL delivered the opinion of the Court.
The proxy rules promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934 bar the use of proxy statements that are false or misleading with respect to the presentation or omission of material facts. We are called upon to consider the definition of a material fact under those rules, and the appropriateness of resolving the question of materiality by summary judgment in this case.
The dispute in this case centers on the acquisition of petitioner TSC Industries, Inc., by petitioner National Industries, Inc. In February, 1969, National acquired 34% of TSC's voting securities by purchase from Charles E. Schmidt and his family. Schmidt, who had been TSC's founder and principal shareholder, promptly resigned, along with his son, from TSC's board of directors. Thereafter, five National nominees were placed on TSC's board, and Stanley R. Yarmuth, National's president and chief executive officer, became chairman of the TSC board, and Charles F. Simonelli, National's executive vice-president, became chairman of the TSC executive committee. On October 16, 1969, the TSC board, with
the attending National nominees abstaining, approved a proposal to liquidate and sell all of TSC's assets to National. The proposal in substance provide for the exchange of TSC common and Series 1 preferred stock for National Series B preferred stock and warrants.1 On November 12, 1969, TSC and National issued a joint proxy statement to their shareholders, recommending approval of the proposal. The proxy solicitation was successful, TSC was [96 S.Ct. 2129] placed in liquidation and dissolution, and the exchange of shares was effected.
This is an action brought by respondent Northway, a TSC shareholder, against TSC and National, claiming that their joint proxy statement was incomplete and materially misleading in violation of § 14(a) of the Securities Exchange Act of 1934, 48 Stat. 895, 15 U.S.C. § 78n(a),2 and Rules 14a-3 and 14a-9, 17 CFR §§ 240.14a-3, 240.14a-9 (1975), promulgated thereunder.3 The basis
of Northway's claim under Rule 14a-3 is that TSC and National failed to state in the proxy statement that the transfer of the Schmidt interests in TSC to National had given National control of TSC.4 The Rule 14a-9 claim, insofar as it concerns us,5 is that TSC and National omitted from the proxy statement material facts relating to the degree of National's control over TSC
and the favorability of the terms of the proposal to TSC shareholders.6
Northway filed its complaint in the United States District Court for the Northern District of Illinois on December 4, 1969, the day before the shareholder meeting on the proposed transaction, but, while it requested injunctive relief, it never so moved. In 1972, Northway amended its complaint to seek money damages, restitution, and other equitable relief. Shortly thereafter, Northway moved for summary judgment on the issue of TSC's and National's liability. The District Court denied the motion, but granted leave to appeal pursuant to 28 U.S.C. § 1292(b). [96 S.Ct. 2130] The Court of Appeals for the Seventh Circuit agreed with the District Court that there existed a genuine issue of fact as to whether National's acquisition of the Schmidt interests in TSC had resulted in a change of control, and that summary judgment was therefore inappropriate on the Rule 14a-3 claim. But the Court of Appeals reversed the District Court's denial of summary judgment to Northway on its Rule 14a-9 claims, holding that certain omissions of fact were material as a matter of law. 512 F.2d 324 (1975).
We granted certiorari because the standard applied by the Court of Appeals in resolving the question of materiality appeared to conflict with the standard applied by other Courts of Appeals. 423 U.S. 820 (1975).
We no hold that the Court of Appeals erred in ordering that partial summary judgment be granted to Northway.
As we have noted on more than one occasion, § 14(a) of the Securities Exchange Act
was intended to promote "the free exercise of the voting rights of stockholders" by ensuring that proxies would be solicited with "explanation to the stockholder of the real nature of the questions for which authority to cast his vote is sought."
Mills v. Electric Auto-Lite Co., 396 U.S. 375, 381 (1970), quoting H.R.Rep. No. 1383, 73d Cong., 2d Sess., 14 (1934); S.Rep. No. 792, 73d Cong., 2d Sess., 12 (1934). See also J. I. Case Co. v. Borak, 377 U.S. 426, 431 (1964). In Borak, the Court held that § 14(a)'s broad remedial purposes required recognition under § 27 of the Securities Exchange Act, 15 U.S.C. § 78aa, of an implied private right of action for violations of the provision. And, in Mills, we attempted to clarify to some extent the elements of a private cause of action for violation of § 14(a). In a suit challenging the sufficiency under § 14(a) and Rule 14a-9 of a proxy statement soliciting votes in favor of a merger, we held that there was no need to...
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