TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976)

Rule 14a-9, promulgated under § 14 (a) of the Securities Exchange Act of 1934, provides that no proxy solicitation shall be made “which ... is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading.” The dispute in this case centers on the acquisition of petitioner TSC Industries (TSC) by petitioner National Industries (National). National purchased 34% of TSC’s voting securities from TSC’s founder and principal shareholder and his family. The founder and his son promptly resigned from TSC’s board of directors, and five National nominees were placed on the board, including National’s president and executive vice president, who subsequently became, respectively, chairman of the board and chairman of TSC’s executive committee. Thereafter, the TSC board approved a proposal to liquidate and sell all of TSC’s assets to National by exchanging TSC common and preferred stock for National preferred stock and warrants to purchase National common stock. TSC and National then issued a joint proxy statement to their shareholders recommending approval of the proposal. The proxy solicitation was successful, TSC was placed in liquidation and dissolution, and the exchange of shares was effected. Respondent, a TSC shareholder, brought this action for damages, restitution, and other relief against TSC and National, claiming that their joint proxy statement was incomplete and materially misleading in violation of § 14 (a) and Rule 14a-9 in that it omitted material facts relating to the degree of National’s control over TSC (i. e., it failed to disclose the positions in TSC held by National’s president and executive vice president, and reports filed with the Securities and Exchange Commission by National and TSC indicating that National “may be deemed a ‘parent’ of TSC”) and the favorability of the proposed acquisition to TSC shareholders (i. e., it failed to disclose certain unfavorable information about the proposal contained in a letter from an investment banking firm whose earlier favorable opinion of the p. 439438 Syllabus

Joseph N. Morency, Jr., argued the cause for petitioners. With him on the briefs were James T. Otis, p. 440Wesley S. Walton, Milton V. Freeman, and Werner J. Kronstein.

This is an action brought by respondent North way, a TSC shareholder, against TSC and National, claiming that their joint proxy statement was incomplete and materially misleading in violation of § 14 (a) of the Securities Exchange Act of 1934, 48 Stat. 895, 15 U. S. C. § 78n (a),2 and Rules 14a-3 and 14a-9, 17 CFR §§240.14a-3, 240.14a-9 (1975), promulgated thereunder.3 The basis p. 442of Northway’s claim under Rule 14a-3 is that TSC and National failed to state in the proxy statement that the transfer of the Schmidt interests in TSC to National had given National control of TSC.4 The Rule 14a-9 claim, insofar as it concerns us,5 is that TSC and National omitted from the proxy statement material facts relating to the degree of National’s control over TSC p. 443and the favorability of the terms of the proposal to TSC shareholders.6

The Court of Appeals in this case concluded that material facts include “all facts which a reasonable shareholder might consider important.” 512 F. 2d, at 330 (emphasis added). This formulation of the test of materiality has been explicitly rejected by at least two courts as setting too low a threshold for the imposition of liability under Rule 14a-9. Gerstle v. Gamble-Skogmo, Inc., 478 F. 2d 1281, 1301-1302 (CA2 1973) ; Smallwood v. Pearl Brewing Co., 489 F. 2d 579, 603-604 (CA5 1974). In these cases, panels of the Second and Fifth Circuits opted for the conventional tort test of materiality—whether a reasonable man would attach importance to the fact misrepresented or omitted in determining his course of action. See Restatement (Second) of Torts §538 (2) (a) (Tent. Draft No. 10, Apr. 20, 1964). See also American Law Institute, Federal Securities Code § 256 (a) (Tent. Draft No. 2, 1973).8 Gerstle p. 446v. Gamble-Skogmo, supra, at 1302, also approved the following standard, which had been formulated with reference to statements issued in a contested election: “whether, taking a properly realistic view, there is a substantial likelihood that the misstatement or omission may have led a stockholder to grant a proxy to the solicitor or to withhold one from the other side, whereas in the absence of this he would have taken a contrary course.” General Time Corp. v. Talley Industries, Inc., 403 F. 2d 159, 162 (CA2 1968), cert, denied, 393 U. S. 1026 (1969).

In arriving at its broad definition of a material fact as one that a reasonable shareholder might consider important, the Court of Appeals in this case relied heavily upon language of this Court in Mills v. Electric Auto-Lite Co., supra. That reliance was misplaced. The Mills Court did characterize a determination of materiality as at least “embod[ying] a conclusion that the p. 447defect was of such a character that it might have been considered important by a reasonable shareholder who was in the process of deciding how to vote.” 396 U. S., at 384. But if any language in Mills is to be read as suggesting a general notion of materiality, it can only be the opinion’s subsequent reference to materiality as a “requirement that the defect have a significant propensity to affect the voting process.” Ibid. (Emphasis in original.) For it was that requirement that the Court said “adequately serves the purpose of ensuring that a cause of action cannot be established by proof of a defect so trivial, or so unrelated to the transaction for which approval is sought, that correction of the defect or imposition of liability would not further the interests protected by §14 (a).” Ibid. Even this language must be read, however, with appreciation that the Court specifically declined to consider the materiality of the omissions in Mills. Id., at 381 n. 4. The references to materiality were simply preliminary to our consideration of the sole question in the case—whether proof of the materiality of an omission from a proxy statement must be supplemented by a showing that the defect actually caused the outcome of the vote. It is clear, then, that Mills did not intend to foreclose further inquiry into the meaning of materiality under Rule 14a-9.9

We are aware, however, that the disclosure policy embodied in the proxy regulations is not without limit. See id., at 384. Some information is of such dubious significance that insistence on its disclosure may accomplish more harm than good. The potential liability for a Rule 14a-9 violation can be great indeed, and if the standard of materiality is unnecessarily low, not only may the corporation and its management be subjected to liability for insignificant omissions or misstatements, but also management’s fear of exposing itself to substantial liability may cause it simply to bury the shareholders in an avalanche of trivial information—a result that is p. 449hardly conducive to informed decisionmaking. Precisely these dangers are presented, we think, by the definition of a material fact adopted by the Court of Appeals in this case—a fact which a reasonable shareholder might consider important. We agree with Judge Friendly, speaking for the Court of Appeals in Gerstle, that the “might” formulation is “too suggestive of mere possibility, however unlikely.” 478 F. 2d, at 1302.

The omissions found by the Court of Appeals to have been materially misleading as a matter of law involved two general issues—the degree of National’s control over TSC at the time of the proxy solicitation, and the p. 451favorability of the terms of the proposed transaction to TSC shareholders.

The Court of Appeals concluded that two omitted facts relating to National’s potential influence, or control, over the management of TSC were material as a matter of law. First, the proxy statement failed to state that at the time the statement was issued, the chairman of the TSC board of directors was Stanley Yarmuth, National’s president and chief executive officer, and the chairman of the TSC executive committee was Charles Simonelli, National’s executive vice president. Second, the statement did not disclose that in filing reports required by the SEC, both TSC and National had indicated that National “may be deemed to be a ‘parent’ of TSC as that term is defined in the Rules and Regulations under the Securities Act of 1933.” App. 490, 512, 517.13 The p. 452Court of Appeals noted that TSC shareholders were relying on the TSC board of directors to negotiate on their behalf for the best possible rate of exchange with National. It then concluded that the omitted facts were material because they were “persuasive indicators that the TSC board was in fact under the control of National, and that National thus ‘sat on both sides of the table’ in setting the terms of the exchange.” 512 F. 2d, at 333.

The proxy statement prominently displayed the facts that National owned 34% of the outstanding shares in TSC, and that no other person owned more than 10%. App. 262-263, 267. It also prominently revealed that 5 out of 10 TSC directors were National nominees, and it recited the positions of those National nominees with National—indicating, among other things, that Stanley Yarmuth was president and a director of National, and that Charles Simonelli was executive vice president and a director of National. Id., at 267. These disclosures clearly revealed the nature of National’s relationship with TSC and alerted the reasonable shareholder to the fact that National exercised a degree of influence over TSC. In view of these disclosures, we certainly cannot p. 453say that the additional facts that Yarmuth was chairman of the TSC board of directors and Simonelli chairman of its executive committee were, on this record, so obviously important that reasonable minds could not differ on their materiality.

trol. If, for example, the proxy statement in this case had failed to reveal National’s 34% stock interest in TSC and the presence of five National nominees on TSC’s board, these omissions would have rendered the statement materially misleading as a matter of law, regardless of whether National can be said with certainty to p. 455things, the current market prices of the securities of both corporations, the high redemption price of the National Series B preferred stock, the dividend and debt service requirements of both corporations, the substantial premium over current market values represented by the securities being offered to TSC stockholders, and the increased dividend income.” App. 267.

It would appear, however, that the subsequent communication from the Hornblower firm, which the Court of Appeals felt contained “bad news,” contained nothing new at all. At the TSC board of directors meeting held on October 16, 1969, the date of the initial Hornblower opinion letter, Blancke Noyes, a TSC director and a partner in the Hornblower firm, had pointed out the likelihood of a decline in the market price of National warrants with the issuance of the additional warrants involved in the exchange, and reaffirmed his conclusion that the exchange offer was a fair one nevertheless. The subsequent Hornblower letter, signed by Mr. Noyes, purported merely to explain the basis of the calculations underlying the favorable opinion rendered in the p. 457October 16 letter. “In advising TSC as to the fairness of the offer from [National],” Mr. Noyes wrote, “we concluded that the warrants in question had a value of approximately $3.50.”17 On its face, then, the subsequent letter from Hornblower does not appear to have contained anything to alter the favorable opinion rendered in the October 16 letter—including the conclusion that the securities being offered to TSC shareholders represented a “substantial premium over current market values.”

The real question, though, is not whether the subsequent Hornblower letter contained anything that altered the Hornblower opinion in any way. It is, rather, p. 458whether the advice given at the October 16 meeting, and reduced to more precise terms in the subsequent Hornblower letter—that there might be a decline in the market price of the National warrants—had to be disclosed in order to clarify the import of the proxy statement’s reference to “the substantial premium over current market values represented by the securities being offered to TSC stockholders.” We note initially that the proxy statement referred to the substantial premium as but one of several factors considered by Hornblower in rendering its favorable opinion of the terms of exchange. Still, we cannot assume that a TSC shareholder would focus only on the “bottom line” of the opinion to the exclusion of the considerations that produced it.

TSC and National insist that the reference to a substantial premium required no clarification or supplementation, for the reason that there was a substantial premium even if the National warrants are assumed to have been worth $3.50. In reaching the contrary conclusion, the Court of Appeals, they contend, ignored the rise in price of TSC securities between early October 1969, when the exchange ratio was set, and November 7, 1969—a rise in price that they suggest was a result of the favorable exchange ratio’s becoming public knowledge. When the proxy statement was mailed, TSC and National contend, the market price of TSC securities already reflected a portion of the premium to which Hornblower had referred in rendering its favorable opinion of the terms of exchange. Thus, they note that Hornblower assessed the fairness of the proposed transaction by reference to early October market prices of TSC preferred, TSC common, and National preferred. On the basis of those prices and a $3.50 value for the National warrants involved in the exchange, TSC and National contend that the premium was substantial. p. 459Each share of TSC preferred, selling in early October at $11, would bring National preferred stock and warrants worth $13.10—for a premium of $2.10, or 19%. And each share of TSC common, selling in early October at $11.63, would bring National preferred stock and warrants worth $13.25—for a premium of $1.62, or 14%.18 We certainly cannot say as a matter of law that these premiums were not substantial. And if, as we must assume in considering the appropriateness of summary judgment, the increase in price of TSC’s securities from early October to November 7 reflected in large part the market’s reaction to the terms of the proposed exchange, it was not materially misleading as a matter of law for the proxy statement to refer to the existence of a substantial premium.

11.63 1.62 p. 460market prices and a $3.50 value for the National warrants—19% on TSC preferred and 14% on TSC common—are certainly less than those that would be derived through use of the November 7 closing prices listed in the proxy statement—27% on TSC preferred and 22% on TSC common. But we are unwilling to sustain a grant of summary judgment to North way on that basis. To do so we would have to conclude as a matter of law, first, that the proxy statement would have misled the TSC shareholder to calculate his premium on the basis of November 7 market prices, and second, that the difference between that premium and that which would be apparent from early October prices and a $3.50 value for the National warrants was material. These are questions we think best left to the trier of fact.

The final omission that concerns us relates to purchases of National common stock by National and by Madison Fund, Inc., a mutual fund. Northway notes that National’s board chairman was a director of Madison, and that Madison’s president and chief executive, Edward Merkle, was employed by National pursuant to an agreement obligating him to provide at least one day per month for such duties as National might request.19 Northway contends that the proxy statement, having called the TSC shareholders’ attention to the market prices of the securities involved in the proposed transaction, should have revealed substantial purchases of National common stock made by National and Madison during the two years prior to the issuance of the proxy p. 461statement.20 In particular, Northway contends that the TSC shareholders should, as a matter of law, have been informed that National and Madison purchases accounted for 8.5% of all reported transactions in National common stock during the period between National’s acquisition of the Schmidt interests and the proxy solicitation. The theory behind North way’s contention is that disclosure of these purchases would have pointed to the existence, or at least the possible existence, of conspiratorial manipulation of the price of National common stock, which would have had an effect on the market price of the National preferred stock and warrants involved in the proposed transaction.21

The Court of Appeals agreed with the District Court that “collusion is not conclusively established.” 512 F. 2d, at 336. But observing that “it is certainly suggested,” ibid., the court concluded that the failure to disclose the p. 462purchases was materially misleading as a matter of law. The court explained:

The Court of Appeals’ approach would sanction the imposition of civil liability on a theory that undisclosed information may suggest the existence of market manipulation, even if the responsible corporate officials knew that there was in fact no market manipulation. We do not agree that Rule 14a-9 requires such a result. Rule 14ar-9 is concerned only with whether a proxy statement is misleading with respect to its presentation of material facts. If, as we must assume on a motion for summary judgment, there was no collusion or manipulation whatsoever in the National and Madison purchases—that is, if the purchases were made wholly independently for proper corporate and investment purposes, then by Northway’s implicit acknowledgment they had no p. 463bearing on the soundness and reliability of the market prices listed in the proxy statement,22 and it cannot have been materially misleading to fail to disclose them.23

In summary, none of the omissions claimed to have been in violation of Rule 14a-9 were, so far as the record reveals, materially misleading as a matter of law, and North way was not entitled to partial summary judgment. p. 464The judgment of the Court of Appeals is reversed, and the case is remanded for further proceedings consistent with this opinion.

We have already decided that the relevant boundary between the States of Texas and Louisiana is the p. 466geographic middle of Sabine Pass, Sabine Lake, and Sabine River from the mouth of the Sabine in the Gulf of Mexico to the thirty-second degree of north latitude. 410 U. S. 702 (1973). We have also held that all islands in the east half of the Sabine River when Louisiana was admitted as a State in 1812, or thereafter formed, belong to Louisiana. Delimitation of the boundary and decision as to ownership of the islands in the west half of the Sabine were deferred pending further proceedings before the Special Master in which the United States was invited to participate. Id., at 712-714.

All parties agree that the lateral seaward boundary is to be constructed by reference to the median line, or equidistant principle, recognized in the 1958 Geneva Convention on the Territorial Sea and the Contiguous Zone, [1964] 15 U. S. T. (pt. 2) 1606, T. I. A. S. No. p. 4695639.2 Texas, however, excepts to the Special Master’s determination that the equidistant principle is to be applied to the coastlines of the States as affected by jetties at the mouth of the Sabine River.3 Texas urges that the relevant coastline is the coastline that existed in 1845 when it was admitted to the Union. Texas argues that this is a domestic dispute involving historical precedents and that the States’ offshore boundary should be constructed as Congress would have done in 1845 had it considered the matter.

The short answer to Texas’ argument is that no line was drawn by Congress and that the boundary is being described in this litigation for the first time. The Court p. 470should not be called upon to speculate as to what Congress might have done. We hold that the Special Master correctly applied the Convention on the Territorial Sea and Contiguous Zone to this suit. As we previously have recognized, “the comprehensiveness of the Convention provides answers to many of the lesser problems related to coastlines which, absent the Convention, would be most troublesome.” United States v. California, 381 U. S. 139, 165 (1965). When read together, Arts. 12 and 8 of the Convention clearly require that the median line be measured with reference to the jetties.4