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Materiality

Materiality. What Matters to Investors?. It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, . . .

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Materiality

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  1. Materiality

  2. What Matters to Investors? • It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, . . . • (b) To make anyuntrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading . . . • in connection with the purchase or sale of any security. • Rule 10b-5

  3. What Matters to Investors? • In addition to the information expressly required to be included in a statement or report, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made not misleading. • SA Rule 408 and SEA Rule 12b-20

  4. What Matters to Investors? ‘total mix’ • Information is material if there is a “substantial likelihood that the disclosure … would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” • TSC Industries, Inc. v. Northway, 426 U.S. 438 (1976) • Materiality Standard: TSC Industries

  5. Forward LookingInformation

  6. Forward Looking Information Listing Agreement Basic Inc. Merger @ $46 • Basic Inc. v. Levinson Denial 1: Oct. 21, 1977 Stock price = $20 Denial 2: Sep. 25, 1978 Denial 3: Nov. 6, 1978 Combustion Engineering

  7. Forward Looking Information • Basic Inc. v. Levinson • STANDARD: Materiality “will depend at any given time upon a balancing of both: • the indicated probability that the event will occur and • the anticipated magnitude of the event in light of the totality of the company activity.”

  8. Forward Looking Information • Basic Inc. v. Levinson • 1. Are shareholders better off if merger negotiations must be disclosed? • Not necessarily

  9. Forward Looking Information • Basic Inc. v. Levinson DUTY TO DISCLOSE 1) SEC mandated disclosure items 2) Rule 408 requirement to disclose additional information necessary to make mandated disclosures not materially misleading 3) Antifraud liability requirement against half-truths

  10. Forward Looking Information • Basic Inc. v. Levinson 2. What could Basic have done to maintain the confidentiality of its merger negotiations with Combustion? - Silence absent a duty to disclose is not misleading under Rule 10b-5.Footnote 17: no comment = silence

  11. Forward Looking Information • Basic Inc. v. Levinson 3. Is a judge or jury assessing the probability of an event after it has occurred likely to assign the same probability as the issuer and its counsel did when they were drafting the disclosure?

  12. Forward Looking Information • Basic Inc. v. Levinson 4. Was the potential merger with Basic necessarily material to Combustion shareholders?

  13. Forward Looking Information • Basic Inc. v. Levinson 5. Is the court correct to focus on the informational needs of the “reasonable investor”?

  14. Forward Looking Information • Basic v. Levinson Why not tailor disclosure to the “unreasonable” investors (who may be the majority!)?

  15. Forward Looking Information DearlyDepartedInc. SIX FEET inc. DAVIDChairman, CEO SARAHCEO DAVIDChairman, CEO SARAHCEO Chairman CEOPresident • Six Feet Inc. (Hypothetical 1) Stock-for-StockMerger

  16. Forward Looking Information X X • Oran v. Stafford American Home Products Corporation annual report press releases

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