The Federalist Society

Optional Login

Have an account?

Sign in

Email

Password


Forgot password?

Proceed as Guest

Continue
Our website is currently undergoing updates, some links may no longer work and content may change. Please check back soon.

Basic v. Levinson

Facts of the Case

Provided by Oyez

Basic, Inc. (Basic) was a publicly-traded company engaged in manufacturing related to the steel industry. Combustion, Inc. (Combustion), a similar company, had expressed interest in merging with Basic but had not done so because of antitrust concerns. Beginning in 1976, Combustion representatives had conversations with Basic representatives regarding the possibility of a merger. Throughout 1977 and 1978, Basic made several public statements denying rumors that these conversations were taking place. On December 18, 1978, Basic asked the New York Stock Exchange to suspend trading of its stocks because it had been approached about a merger, and on December 19 Basic’s board approved the offer from Combustion.

The respondents in this case are former Basic stockholders who sold their stock after Basic’s first denial of merger conversations. They sued Basic and its director for making false or misleading statements in violation of Section 10(b) of the Securities and Exchange Act of 1934, which has to do with material facts relating to the purchase or sale of stocks. The plaintiffs argued that these statements artificially depressed the market for Basic’s stock, which injured the sellers. The district court certified the plaintiffs as a class and granted summary judgment for the company. The court held that the statements were immaterial because the conversations were not necessarily destined to become a merger agreement. The U.S. Court of Appeals for the Sixth Circuit reversed and held that a company cannot disclose misleading information and that the conversations, although they might not have been material on their own, became so because they made the company’s statements untrue.

Questions

  1. Did the statements in question meet the standard for materiality defined by Section 10(b) of the Securities and Exchange Act of 1934?

  2. Did the district court use the proper standard to certify the class?

Conclusions

  1. Yes, yes. Justice Harry A. Blackmun delivered the opinion of the 4-2 plurality. The Supreme Court held that there was no reason to artificially exclude merger conversations from the definition of materiality simply because they do not include specific prices. Instead, the materiality of a fact depends on its significance to “the reasonable investor.” The Court also held that it was impractical to require individuals to show a specific reliance on misleading information within an impersonal market. Therefore, it is reasonable for courts to use a presumption of reliance for the purpose of adjudicating such cases, though the presumption can be rebutted.

    Justice Byron R. White wrote an opinion concurring in part and dissenting in part in which he argued that the majority opinion’s support for the presumption of reliance, or “fraud-on-the-market” theory, represented the Court taking a stance on economic policies that were beyond its purview. He also argued that, because Congress has not addressed the issue, the majority opinion should have refrained from doing so. Additionally, the facts of the case in question make it a poor candidate for such analysis because they indicate that the plaintiffs did not believe the supposedly misleading statements. Justice Sandra Day O’Connor joined in the opinion concurring in part and dissenting in part.

    Chief Justice William H. Rehnquist, Justice Antonin Scalia, and Justice Anthony Kennedy did not participate in the discussion or decision of the case.