Basic, Inc. v. Levinson
485 U.S. 224 (1988)
- 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.