426 U.S. 438, 96 S. Ct. 2126, 48 L. Ed. 2d 757 (1976)
In February 1969 National Industries, Inc. acquired 34% of TSC Industries, Inc.'s voting securities from Charles E. Schmidt and his family.1 Schmidt, TSC's founder and principal shareholder, resigned from the board along with his son.2 Five National nominees then joined TSC's board.3 Stanley R. Yarmuth, National's president and chief executive officer, became chairman of the TSC board.4 Charles F. Simonelli, National's executive vice president, became chairman of the TSC executive committee.5
On October 16, 1969, the TSC board, with the National nominees abstaining, approved a proposal to liquidate and sell all of TSC's assets to National in exchange for National Series B preferred stock and warrants.6 On November 12, 1969, TSC and National issued a joint proxy statement to their shareholders recommending approval of the proposal.7 The proxy solicitation succeeded.8 TSC entered liquidation and dissolution, and the share exchange was completed.9
Northway, Inc., a TSC shareholder, filed suit on December 4, 1969, in the United States District Court for the Northern District of Illinois against TSC and National.10 The complaint alleged that the joint proxy statement violated section 14(a) of the Securities Exchange Act of 1934 and Rules 14a-3 and 14a-9.11 It claimed the statement failed to disclose that the Schmidt interests transfer had given National control of TSC.12 It also claimed the statement omitted material facts concerning the degree of National's control over TSC and the favorability of the transaction terms to TSC shareholders.13
The District Court denied Northway's motion for summary judgment on liability.14 The Court of Appeals for the Seventh Circuit affirmed that a genuine issue of fact existed regarding whether National had acquired control through the Schmidt purchase.15 This precluded summary judgment on the Rule 14a-3 claim.16 But the court reversed on the Rule 14a-9 claims and ordered partial summary judgment for Northway.17 It held that certain omissions were material as a matter of law.18 The Supreme Court granted certiorari to address the standard of materiality applied by the Court of Appeals.19
Whether the Court of Appeals applied the correct standard of materiality under Rule 14a-9?20
An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.21 This standard requires a showing that the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder.22 It would also have significantly altered the total mix of information made available.23
No. The dispute in this case centers on the acquisition of TSC Industries, Inc., by National Industries, Inc.24 In February 1969 National acquired 34% of TSC's voting securities by purchase from Charles E. Schmidt and his family. Schmidt resigned from TSC's board along with his son.25 Five National nominees joined the board.26 Stanley R. Yarmuth became chairman of the TSC board.27 Charles F. Simonelli became chairman of the TSC executive committee.28 On October 16, 1969, the TSC board approved a proposal to liquidate and sell all of TSC's assets to National in exchange for National Series B preferred stock and warrants.29
On November 12, 1969, TSC and National issued a joint proxy statement recommending approval of the proposal.30 The solicitation succeeded and the transaction closed.31 Northway, Inc., a TSC shareholder, filed suit on December 4, 1969, in the United States District Court for the Northern District of Illinois alleging that the proxy statement violated section 14(a) of the Securities Exchange Act of 1934 and Rules 14a-3 and 14a-9 by omitting material facts concerning National's control over TSC and the favorability of the transaction terms to TSC shareholders.32 The District Court denied Northway's motion for summary judgment on liability. The Court of Appeals for the Seventh Circuit reversed in part and ordered partial summary judgment for Northway on the Rule 14a-9 claims, holding certain omissions material as a matter of law.33 The Supreme Court granted certiorari to address the standard of materiality.34
The Court of Appeals applied an incorrect standard when it held that material facts include all facts which a reasonable shareholder might consider important. The proper standard under Rule 14a-9 is whether there is a substantial likelihood that a reasonable shareholder would consider the omitted fact important in deciding how to vote.35 The Court of Appeals' reversal rested on the erroneous might formulation when it deemed the control and favorability omissions material as a matter of law on the basis of the established facts concerning the 34% acquisition, board composition, Hornblower opinion, and stock purchases.36
The Court of Appeals did not apply the correct standard of materiality under Rule 14a-9.37
Whether the omissions relating to National's control over TSC were material as a matter of law?38
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 requires a showing that the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. It would also have significantly altered the total mix of information made available.
No. The proxy statement disclosed that National owned 34% of TSC's outstanding shares and that no other person owned more than 10%.39 It also revealed that five of ten TSC directors were National nominees.40 It recited the positions those nominees held with National, including that Yarmuth was president and a director of National and that Simonelli was executive vice president and a director of National.41 These disclosures revealed the nature of National's relationship with TSC and alerted shareholders to National's influence over the company.42
The additional facts that Yarmuth was chairman of the TSC board and Simonelli chairman of its executive committee were not so obviously important that reasonable minds could not differ on their materiality when viewed against the existing disclosures.43 There was also a genuine issue of fact as to whether National actually controlled TSC at the time of the proxy solicitation.44
The omissions relating to National's control over TSC were not material as a matter of law.45
Whether the omissions relating to the favorability of the terms of the proposed transaction to TSC shareholders were material as a matter of law?46
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 requires a showing that the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. It would also have significantly altered the total mix of information made available.
No. The proxy statement reported Hornblower's favorable opinion on the fairness of the exchange.4748 It referenced a substantial premium over current market values among the factors considered.49 The subsequent Hornblower communication explained the basis for the original opinion by valuing the warrants at approximately $3.50 rather than the $5.25 market price.50 The opinion itself remained favorable.51
The existence of a substantial premium could still be shown using early October market prices.52 The Court of Appeals erred in requiring disclosure of the National and Madison purchases on the theory that they suggested possible market manipulation.53 There remained a genuine issue of fact as to whether any collusion or manipulation occurred.54
Without a showing of manipulation the purchases had no bearing on the soundness of the market prices listed in the proxy statement.55
The omissions relating to the favorability of the terms of the proposed transaction to TSC shareholders were not material as a matter of law.56
Whether the issue of materiality was appropriately resolved by summary judgment in this case?57
No. The determination of materiality requires delicate assessments of the inferences a reasonable shareholder would draw from a given set of facts and the significance of those inferences.6061 The underlying objective facts are merely the starting point.62 On the established facts the omissions concerning control and favorability were not so obviously important that reasonable minds could not differ.63 The Court of Appeals therefore erred in ordering partial summary judgment for Northway on the Rule 14a-9 claims.64
The issue of materiality was not appropriately resolved by summary judgment in this case.65