full disclosure

Upjohn Co. manufactures and sells pharmaceuticals in the United States and abroad. In January 1976, independent accountants conducting an audit of one of Upjohn's foreign subsidiaries discovered that the subsidiary had made payments to or for the benefit of foreign government officials in order to secure government business. The accountants informed Gerard Thomas, Upjohn's Vice President, Secretary, and General Counsel. Thomas is a member of the Michigan and New York Bars and had served as General Counsel for twenty years. Thomas consulted with outside counsel and R. T. Parfet, Jr., Upjohn's Chairman of the Board. It was decided that the company would conduct an internal investigation of what were termed questionable payments. As part of this investigation, the attorneys prepared a letter containing a questionnaire that was sent to all foreign general and area managers over the Chairman's signature. The letter noted recent disclosures that several American companies had made possibly illegal payments to foreign government officials. It stated that Thomas had been asked to conduct an investigation to determine the nature and magnitude of any such payments. Managers were instructed to treat the investigation as highly confidential and to send responses directly to Thomas. Thomas and outside counsel also interviewed the recipients of the questionnaire and thirty-three other Upjohn officers or employees. On March 26, 1976, Upjohn voluntarily submitted a preliminary report to the Securities and Exchange Commission on Form 8-K disclosing the questionable payments. A copy of the report was simultaneously submitted to the Internal Revenue Service. The IRS immediately began an investigation to determine the tax consequences of the payments. On November 23, 1976, the Service issued a summons pursuant to 26 U.S.C. § 7602 demanding production of the records described in the summons. The records included written questionnaires sent to managers of the Upjohn Company's foreign affiliates. They also included memorandums or notes of the interviews conducted in the United States and abroad with officers and employees of the Upjohn Company and its subsidiaries. Upjohn declined to produce the documents specified in the summons on the grounds that they were protected by the attorney-client privilege and constituted attorneys' work product prepared in anticipation of litigation. On August 31, 1977, the United States filed a petition in the United States District Court for the Western District of Michigan seeking enforcement of the summons under 26 U.S.C. §§ 7402(b) and 7604(a). The district court adopted a magistrate's recommendation that the summons should be enforced. Upjohn appealed to the Court of Appeals for the Sixth Circuit. The Sixth Circuit rejected the magistrate's finding of a waiver of the attorney-client privilege. However, it held that the privilege did not apply to the extent the communications were made by officers and agents not responsible for directing Upjohn's actions in response to legal advice. The court remanded to the district court for a determination of who was within the control group. In a footnote, the court stated that the work-product doctrine is not applicable to administrative summonses issued under 26 U.S.C. § 7602. The Supreme Court granted certiorari.

In 1936 Santa Fe Industries, Inc. acquired control of 60 percent of the stock of Kirby Lumber Corp., a Delaware corporation. Through a series of purchases between 1968 and 1973 Santa Fe raised its ownership to 95 percent at prices ranging from $65 to $92.50 per share. In 1974 Santa Fe decided to obtain 100 percent ownership. It invoked Delaware's short-form merger statute. The statute allows a parent owning at least 90 percent of a subsidiary to merge upon board approval and pay cash to the remaining shareholders without their consent or advance notice. Santa Fe obtained independent appraisals valuing Kirby's physical assets at $320 million, or $640 per share. It retained Morgan Stanley & Co. to appraise the stock. Morgan Stanley valued the shares at $125 each. Santa Fe offered the minority $150 per share. The merger became effective on July 31, 1974. The minority received notice within ten days together with an information statement containing the asset appraisals, Morgan Stanley's valuation, and other financial data. The information statement advised minority shareholders of their statutory right to petition the Delaware Court of Chancery for an appraisal of fair value. Respondents, minority stockholders of Kirby, filed a petition for appraisal on August 21, 1974. They withdrew it on September 9. The next day they commenced this federal action on behalf of the corporation and other minority shareholders. The amended complaint alleged that Kirby stock was worth at least $772 per share based on the pro rata value of physical assets. It alleged that the merger lacked any justifiable business purpose. It alleged that the merger occurred without prior notice. It alleged that Santa Fe obtained a fraudulent appraisal from Morgan Stanley to lull minority shareholders into accepting an inadequate price. The complaint asserted that this conduct violated Rule 10b-5 by employing a device, scheme, or artifice to defraud and by engaging in an act or practice that operated as a fraud or deceit in connection with the purchase or sale of securities. The District Court for the Southern District of New York dismissed the complaint for failure to state a claim. The Court of Appeals for the Second Circuit reversed. The Supreme Court granted certiorari.

Basic Incorporated was a publicly traded company primarily engaged in manufacturing chemical refractories for the steel industry. As early as 1965 or 1966 Combustion Engineering expressed interest in acquiring Basic but was deterred by antitrust concerns. In 1976 regulatory action removed the antitrust barrier and Combustion's strategic plan listed an objective to acquire Basic for thirty million dollars. Beginning in September 1976 Combustion representatives met and spoke by telephone with Basic officers and directors about a possible merger. During 1977 and 1978 Basic issued three public statements denying that merger negotiations were under way. 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. The next day Basic's board endorsed Combustion's offer of forty-six dollars per share. On December 20 1978 Basic publicly announced approval of Combustion's tender offer for all outstanding shares. Respondents are former Basic shareholders who sold their stock after Basic's October 21 1977 public statement and before the December 1978 trading suspension. 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. 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. The Court of Appeals for the Sixth Circuit affirmed class certification reversed the summary judgment and remanded the case. The Supreme Court granted certiorari.