Law School Case Brief
Basic Inc. v. Levinson - 485 U.S. 224, 108 S. Ct. 978 (1988)
To fulfill the materiality requirement there must be 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 information made available.
The Securities and Exchange Commission's Rule 10b-5 of the Securities Exchange Act of 1934 (Act), prohibited,in connection with the purchase or sale of any security, the making of any untrue statement of a material fact or the omission of a material fact that would render statements made not misleading. In December 1978, Combustion Engineering, Inc., and Basic Incorporated ("Basic") agreed to merge. During the preceding two years, representatives of the two companies had various meetings and conversations regarding the possibility of a merger. During that time Basic made three public statements denying that any merger negotiations were taking place or that it knew of any corporate developments that would account for heavy trading activity in its stock. Respondents, former Basic shareholders who sold their stock between Basic's first public denial of merger activity and the suspension of trading in Basic stock just prior to the merger announcement, filed suit against Basic and some of its directors, alleging that Basic's statements had been false or misleading, in violation of § 10(b) and Rule 10b-5, and that they were injured by selling their shares at prices artificially depressed by those statements. The district court certified respondents' class, but granted summary judgment for petitioners on the merits. On appeal, the court of appeals affirmed the class certification, agreeing that under a "fraud-on-the-market" theory, respondents' reliance on petitioners' misrepresentations could be presumed, and thus that common issues predominated over questions pertaining to individual plaintiffs. Nevertheless, the court of appeals reversed the grant of summary judgment and remanded, rejecting the district court's view that preliminary merger discussions are immaterial as a matter of law, and holding that even discussions that might not otherwise have been material become so by virtue of a statement denying their existence.
Was the appellate court's decision proper?
The United States Supreme Court held that an omitted fact was material if a reasonable shareholder would consider it important in making his or her vote and this standard should be applied to all § 10(b) and Rule 10b-5 actions. The Court also held that materiality required a case by case review of the facts and that a rebuttable presumption existed that stockholders relied on available information when buying or selling securities. The judgment of the court of appeals was accordingly reversed and remanded.
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