485 U.S. 224 (1988)
Basic Incorporated was a publicly traded company primarily engaged in manufacturing chemical refractories for the steel industry.1 As early as 1965 or 1966 Combustion Engineering expressed interest in acquiring Basic but was deterred by antitrust concerns.2 In 1976 regulatory action removed the antitrust barrier and Combustion's strategic plan listed an objective to acquire Basic for thirty million dollars.3
Beginning in September 1976 Combustion representatives met and spoke by telephone with Basic officers and directors about a possible merger.4 During 1977 and 1978 Basic issued three public statements denying that merger negotiations were under way.5 On December 18 1978 Basic asked the New York Stock Exchange to suspend trading in its shares and announced it had been approached by another company concerning a merger.6
The next day Basic's board endorsed Combustion's offer of forty-six dollars per share.7 On December 20 1978 Basic publicly announced approval of Combustion's tender offer for all outstanding shares.8 Respondents are former Basic shareholders who sold their stock after Basic's October 21 1977 public statement and before the December 1978 trading suspension.9
Respondents brought a class action against Basic and its directors alleging that the three statements violated section 10(b) and Rule 10b-5 by misleading the market and causing sales at artificially depressed prices.10 The District Court certified the class under a presumption of reliance but granted summary judgment for the defendants on the ground that any misstatements were immaterial.11 The Court of Appeals for the Sixth Circuit affirmed class certification reversed the summary judgment and remanded the case.12 The Supreme Court granted certiorari.13
Whether the TSC Industries standard of materiality applies to preliminary merger discussions under section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, or whether an agreement-in-principle as to price and structure is instead required?14
The TSC Industries standard of materiality applies to section 10(b) and Rule 10b-5 claims.15 Under this standard, an omitted fact is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision.16 It would significantly alter the total mix of information available.17
Yes. The established facts show that Basic issued statements denying merger negotiations while Combustion representatives had been meeting with Basic officers since September 1976 about a possible merger.18 The court applied the TSC Industries test rather than requiring an agreement-in-principle to find that such information could be material.19
The TSC Industries test governs the materiality of preliminary merger discussions under the securities laws.20
Whether information concerning merger discussions becomes material solely by virtue of a public statement denying the existence of such discussions?23
No. The established facts show that Basic made three public statements denying merger negotiations while discussions with Combustion were ongoing.26 The court held that the underlying information must independently satisfy the TSC Industries materiality threshold.27 It does not become material merely because of the denial.28
Information does not become material solely by virtue of a public statement denying the existence of merger discussions.29
Whether a rebuttable presumption of reliance supported by the fraud-on-the-market theory is appropriate for class certification in a Rule 10b-5 action alleging public misrepresentations in an efficient securities market?30
Yes. The established facts show that respondents sold Basic shares after the October 1977 statement and before the December 1978 suspension in an impersonal efficient market affected by Basic's public statements.33 This allowed the presumption to support class certification without individualized proof of reliance subject to rebuttal.34
A rebuttable presumption of reliance supported by the fraud-on-the-market theory is appropriate for class certification in this Rule 10b-5 action.35
Related opinions on this issue
Joined by Justice O'connor
Justice White dissented from the fraud-on-the-market holding.36 He noted that even when compared to the relatively youthful private cause-of-action under section 10(b) the fraud-on-the-market theory is a mere babe.37 The approach replaces legal analysis with economic theorization that courts are ill-equipped to assess because they lack staff economists and the ability to test empirical market studies.38
Such changes should be left to Congress rather than adopted judicially by the Court.39 He also noted that the theory conflicts with congressional policy favoring disclosure and could lead to recovery by investors who did not actually rely on market price.40