Wednesday, February 20, 2013

TSC Industries v. Northway, Inc. case brief

TSC Industries v. Northway, Inc. case brief summary
426 U.S. 438

SYNOPSIS: Certiorari was granted to the United States Court of Appeals for the Seventh Circuit because the standard applied by the Court of Appeals in resolving the question of materiality in the proxy rules promulgated by the Securities and Exchange Commission appeared to conflict with the standard applied by other appellate courts.

-Petitioners issued a joint proxy statement to their shareholders proposing the liquidation of Petitioner TSC’s assets and their sale to Petitioner National. The proposal was accepted and Petitioner TSC was dissolved.
-Respondent shareholder brought an action against petitioner companies claiming that their joint proxy statement was incomplete and materially misleading in violation of 15 U.S.C.S. § 78n (a). 
-Respondent's claim under 17 C.F.R. § 240.14a-3 was that petitioners failed to state in the proxy statement that the transfer of certain shareholder interests to the acquiring company had given said company control over the target company. 
-Respondent's claim under 17 C.F.R. § 240.14a-9 was that both companies omitted material facts from the proxy statement relating to the degree of control over the target company. Genuine issues of fact existed as to whether the acquisition of certain shareholder interests in the target had resulted in a change of control. Therefore, summary judgment was inappropriate under 17 C.F.R. § 240.14a-3 . 
-Certain omissions of fact were material as a matter of law under 17 C.F.R. § 240.14a-9 . 

-The Court reversed the partial summary judgment granted to respondent since the proxy statement prominently displayed the fact that the acquiring company owned a percentage of the outstanding shares in the target company.

-"Material facts include all facts which a reasonable shareholder might consider important," was rejected.  
-Instead the test became: "an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote." 

OUTCOME: The court reversed the judgment of the appellate court which granted partial summary judgment to respondent shareholder. A genuine issue of material fact existed with respect to whether there was manipulation sufficient to bar summary judgment. None of the omissions claimed to have been in violation were materially misleading as a matter of law.

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