Basic Inc. v. Levinson

485 U.S. 224 (1988)

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Nature of the Case

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Facts

Basic Incorporated (D) was a publicly traded company engaged in the business of manufacturing chemical refractories for the steel industry. Combustion Engineering, Inc. expressed some interest in acquiring D but was deterred from pursuing because of antitrust concerns. Regulatory action opened the way, and Combustion representatives had meetings and telephone conversations with D officers and directors. During 1977 and 1978, Basic made three public statements denying that it was engaged in merger negotiations. On December 18, 1978, D asked the New York Stock Exchange to suspend trading in its shares and issued a release stating that it had been 'approached' by another company concerning a merger. On December 19, D's board endorsed Combustion's offer of $46 per share for its common stock, and on the following day publicly announced its approval of Combustion's tender offer for all outstanding shares. Levinson (Ps) are former D shareholders who sold their stock after D's first public statement of October 21, 1977, and before the suspension of trading in December 1978. Ps brought a class action asserting that D and its directors issued three false or misleading public statements and thereby were in violation of § 10(b) of the 1934 Act and Rule 10b-5. The District Court adopted a presumption of reliance that enabled the court to conclude that common questions of fact or law predominated over particular questions pertaining to individual plaintiffs. The District Court, therefore, certified Ps' class. On the merits, it then granted summary judgment for Ds. It held that, as a matter of law, any misstatements were immaterial: there were no negotiations ongoing at the time of the first statement, and although negotiations were taking place when the second and third statements were issued, those negotiations were not 'destined, with reasonable certainty, to become a merger agreement in principle.' The Court of Appeals for the Sixth Circuit affirmed the class certification, but reversed the summary judgment, and remanded the case. It held that Ds were under no general duty to disclose their discussions with Combustion, any statement the company voluntarily released could not be '`so incomplete as to mislead.'' D's statements that no negotiations were taking place, and that it knew of no corporate developments to account for the heavy trading activity were misleading. The court rejected the argument that preliminary merger discussions are immaterial as a matter of law, and held that 'once a statement is made denying the existence of any discussions, even discussions that might not have been material in absence of the denial are material because they make the statement made untrue.' It accepted the 'fraud-on-the-market theory' to create a rebuttable presumption that Ps relied on petitioners' material misrepresentations, noting that without the presumption it would be impractical to certify a class under Federal Rule of Civil Procedure 23(b)(3). The Supreme Court granted certiorari, to resolve the split among the Courts of Appeals as to the standard of materiality applicable to preliminary merger discussions, and to determine whether the courts below properly applied a presumption of reliance in certifying the class, rather than requiring each class member to show direct reliance on D's statements.