Decision TSC Industries, Inc. v. Northway, Inc.

1 decision

1.1 previous standards of materiality
1.2 marshall s new formulation of materiality
1.3 application of new rule facts of case

decision

justice marshall, writing majority, first examined underlying policy behind §14a of securities exchange act. stockholders need understand questions voting on, , misstatements or omissions in proxy materials prevent them doing so. court had held defect in proxy statement need not decisive in actual vote: long misstatement or omission material, there causal link between violation of law , injury shareholder.

previous standards of materiality

marshall examined various standards of materiality had been used lower courts. seventh circuit used test of “all facts reasonable shareholder might consider important”, marshall held not stringent enough test. second , fifth circuits used more conventional tort-based test: whether reasonable person attach importance fact misrepresented or omitted in determining course of action.

marshall s new formulation of materiality

marshall wanted test materiality of misstatement or omission serve remedial purposes of §14a, without creating liability companies allowing minor or trivial defect create liability. if test stringent, cause dismissal of otherwise meritorious lawsuits; if lenient, corporate officers inclined overwhelm shareholders such large volume of information valuable facts might escape them. formulated test follows: omitted fact material if there substantial likelihood reasonable shareholder consider important in deciding how vote. in other words, court must determine whether under circumstances, omitted fact have assumed actual significance in decision of shareholder. thus, materiality mixed question of fact , law.

application of new rule facts of case

the 2 facts national omitted respect proxy solicitation fact national’s chief executive officer chairman of tsc’s board of directors, , national had indicated sec parent company of tsc. marshall held these omissions of questionable materiality , inappropriate summary judgment because other disclosures within proxy materials have led shareholders similar conclusions degree of control national exercised on tsc. furthermore, there genuine issue of fact whether national in control of tsc @ time of proxy solicitation anyway.

the 2 facts national omitted respect fairness of transaction statements of investment banking firm involved in deal , purchase of national’s stock mutual fund. investment bank rendered opinion high redemption price of national’s stock substantial premium on current market value of tsc’s shares. bank later revised opinion when discovered warrants national stock being offered @ lower price expected. since bank still felt transaction fair , tsc shareholders still receiving premium, marshall held omission immaterial.

northway accused national of collusion manipulate market prices engaging in series of transactions madison fund, inc., mutual fund. 1 of national’s directors had seat on madison’s board, , in period prior national’s acquisition of tsc, madison’s purchases of national’s common stock accounted 8.5% of reported transactions company’s securities. northway failed demonstrate evidence of unlawful manipulation @ trial, , marshall found national had no duty disclose information might suggest market manipulation, rather honest in disclosures. marshall overturned decision of court of appeals , remanded case.