Rumors were circulating that
Basic was in negotiations to merge with Combustion Engineering. The
directors of Basic issued three public statements saying that they were
not engaged in merger negotiations.
This was untrue, Basic and
Combustion Engineering had been negotiating for several years.
Eventually, the directors of
Basic announced that they had endorsed Combustion's offer and that the
merger would take place.
Of course, once the merger
was announced, the price of Basic's stock rose significantly.
A group of former
shareholders, led by Levinson sued.
Levinson argued that the
three public statements were false and misleading, and where therefore a
violation of Exchange Act of 1934 Rule 10b-5.
Levinson argued that the
shareholders were injured because they sold their stock at a low price in
reliance of Basic's misleading statements.
The Trial Court found for
Basic in summary judgment. Levinson appealed.
The Trial Court found that
the negotiations were just negotiations and were not destined with
reasonable certainty to result in a merger. Therefore any
misrepresentations or omissions made by Basic were not material and therefore not a violation of Rule 10b-5.
The Appellate Court reversed.
Basic appealed.
The Appellate Court found
that while the directors were under no general duty to disclose the
negotiations, any statement the company voluntarily released could not be
so incomplete as to mislead.
The US Supreme Court reversed
and remanded.
The US Supreme Court looked
to TSC Industries, Inc. v. Northway, Inc. (426 U.S. 438 (1976)) and found that a misrepresentation or
omission is material if there is a substantial likelihood
that the disclosure of the omitted fact would have been viewed by the
reasonable investor as having significantly altered the total mix of the
information made available.
The Court found that whether
the public statements actually did affect the stock price was a question
of fact for a jury to decide. So they remanded the case.
