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June 14, 1976



Burger, Brennan, Stewart, White, Marshall, Blackmun, Powell, Rehnquist; Stevens took no part in the consideration or decision of the case.

Author: Marshall

[ 426 U.S. Page 440]

 MR. JUSTICE MARSHALL delivered the opinion of the Court.

The proxy rules promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934 bar the use of proxy statements that are false or misleading with respect to the presentation or omission of material facts. We are called upon to consider the definition of a material fact under those rules, and the appropriateness of resolving the question of materiality by summary judgment in this case.


The dispute in this case centers on the acquisition of petitioner TSC Industries, Inc., by petitioner National Industries, Inc. In February 1969 National acquired 34% of TSC's voting securities by purchase from Charles E. Schmidt and his family. Schmidt, who had been TSC's founder and principal shareholder, promptly resigned along with his son from TSC's board of directors. Thereafter, five National nominees were placed on TSC's board; and Stanley R. Yarmuth, National's president and chief executive officer, became chairman of the TSC board, and Charles F. Simonelli, National's executive vice president, became chairman of the TSC executive committee. On October 16, 1969, the TSC board, with

[ 426 U.S. Page 441]

     the attending National nominees abstaining, approved a proposal to liquidate and sell all of TSC's assets to National. The proposal in substance provided for the exchange of TSC common and Series 1 preferred stock for National Series B preferred stock and warrants.*fn1 On November 12, 1969, TSC and National issued a joint proxy statement to their shareholders, recommending approval of the proposal. The proxy solicitation was successful, TSC was placed in liquidation and dissolution, and the exchange of shares was effected.

This is an action brought by respondent Northway, a TSC shareholder, against TSC and National, claiming that their joint proxy statement was incomplete and materially misleading in violation of § 14(a) of the Securities Exchange Act of 1934, 48 Stat. 895, 15 U.S.C. § 78n (a),*fn2 and Rules 14a-3 and 14a-9, 17 CFR §§ 240.14a-3, 240.14a-9 (1975), promulgated thereunder.*fn3 The basis

[ 426 U.S. Page 442]

     of Northway's claim under Rule 14a-3 is that TSC and National failed to state in the proxy statement that the transfer of the Schmidt interests in TSC to National had given National control of TSC.*fn4 The Rule 14a-9 claim, insofar as it concerns us,*fn5 is that TSC and National omitted from the proxy statement material facts relating to the degree of National's control over TSC

[ 426 U.S. Page 443]

     and the favorability of the terms of the proposal to TSC shareholders.*fn6

Northway filed its complaint in the United States District Court for the Northern District of Illinois on December 4, 1969, the day before the shareholder meeting on the proposed transaction, but while it requested injunctive relief it never so moved. In 1972 Northway amended its complaint to seek money damages, restitution, and other equitable relief. Shortly thereafter, Northway moved for summary judgment on the issue of TSC's and National's liability. The District Court denied the motion, but granted leave to appeal pursuant to 28 U.S.C. § 1292(b). The Court of Appeals for the Seventh Circuit agreed with the District Court that there existed a genuine issue of fact as to whether National's acquisition of the Schmidt interests in TSC had resulted in a change of control, and that summary judgment was therefore inappropriate on the Rule 14a-3 claim. But the Court of Appeals reversed the District Court's denial of summary judgment to Northway on its Rule 14a-9 claims, holding that certain omissions of fact were material as a matter of law. 512 F.2d 324 (1975).

We granted certiorari because the standard applied by the Court of Appeals in resolving the question of materiality appeared to conflict with the standard applied by other Courts of Appeals. 423 U.S. 820 (1975).

[ 426 U.S. Page 444]

     We now hold that the Court of Appeals erred in ordering that partial summary judgment be granted to Northway.



As we have noted on more than one occasion, § 14(a) of the Securities Exchange Act "was intended to promote 'the free exercise of the voting rights of stockholders' by ensuring that proxies would be solicited with 'explanation to the stockholder of the real nature of the questions for which authority to cast his vote is sought.'" Mills v. Electric Auto-Lite Co., 396 U.S. 375, 381 (1970), quoting H.R. Rep. No. 1383, 73d Cong., 2d Sess., 14 (1934); S. Rep. No. 792, 73d Cong., 2d Sess., 12 (1934). See also J.I. Case Co. v. Borak, 377 U.S. 426, 431 (1964). In Borak, the Court held that § 14(a)'s broad remedial purposes required recognition under § 27 of the Securities Exchange Act, 15 U.S.C. § 78aa, of an implied private right of action for violations of the provision. And in Mills, we attempted to clarify to some extent the elements of a private cause of action for violation of § 14(a). In a suit challenging the sufficiency under § 14(a) and Rule 14a-9 of a proxy statement soliciting votes in favor of a merger, we held that there was no need to demonstrate that the alleged defect in the proxy statement actually had a decisive effect on the voting. So long as the misstatement or omission was material, the causal relation between violation and injury is sufficiently established, we concluded, if "the proxy solicitation itself... was an essential link in the accomplishment of the transaction." 396 U.S., at 385. After Mills, then, the content given to the notion of materiality assumes heightened significance.*fn7

[ 426 U.S. Page 445]


The question of materiality, it is universally agreed, is an objective one, involving the significance of an omitted or misrepresented fact to a reasonable investor. Variations in the formulation of a general test of materiality occur in the articulation of just how significant a fact must be or, put another way, how certain it must be that the fact would affect a reasonable investor's judgment.

The Court of Appeals in this case concluded that material facts include "all facts which a reasonable shareholder might consider important." 512 F.2d, at 330 (emphasis added). This formulation of the test of materiality has been explicitly rejected by at least two courts as setting too low a threshold for the imposition of liability under Rule 14a-9. Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1301-1302 (CA2 1973); Smallwood v. Pearl Brewing Co., 489 F.2d 579, 603-604 (CA5 1974). In these cases, panels of the Second and Fifth Circuits opted for the conventional tort test of materiality - whether a reasonable man would attach importance to the fact misrepresented or omitted in determining his course of action. See Restatement (Second) of Torts § 538(2)(a) (Tent. Draft No. 10, Apr. 20, 1964). See also American Law Institute, Federal Securities Code § 256(a) (Tent. Draft No. 2, 1973).*fn8 Gerstle

[ 426 U.S. Page 446]

     v. Gamble-Skogmo, supra, at 1302, also approved the following standard, which had been formulated with reference to statements issued in a contested election: "whether, taking a properly realistic view, there is a substantial likelihood that the misstatement or omission may have led a stockholder to grant a proxy to the solicitor or to withhold one from the other side, whereas in the absence of this he would have taken a contrary course." General Time Corp. v. Talley Industries, Inc., 403 F.2d 159, 162 (CA2 1968), cert. denied, 393 U.S. 1026 (1969).

In arriving at its broad definition of a material fact as one that a reasonable shareholder might consider important, the Court of Appeals in this case relied heavily upon language of this Court in Mills v. Electric Auto-Lite Co., supra. That reliance was misplaced. The Mills Court did characterize a ...

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