TSC INDUSTRIES, INC. v. NORTHWAY, INC.

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Argument of Joseph N. Morency

Chief Justice Warren E. Burger: We will hear arguments next in 74-1471, TSC Industries against Northway.

Mr. Morency, you may proceed whenever you are ready.

Mr. Joseph N. Morency: Mr. Chief Justice and may it please the Court.

I shall not try to maintain the level of interest or even to make comparisons with respect to the very challenging patent case, the Court has just heard.

Although I will admit my colleagues and I have thought of several ways in which it might be done.

I would also state that I have made arrangements with the marshal to reserve approximately ten minutes for rebuttal.

This case began in 1969, on December 4th in the afternoon preceding the December 5, 1969.

Stockholder’s meetings of TSC Industries, Inc. and National Industries, Inc.

That was a swap of the assets of TSC for securities of National Industries which were passed through the holders of the TSC stock.

The issue now, before this Court is whether on the summary judgment record and under the limitations of Rule 56 of the Federal Rules of Civil Procedure, the Seventh Circuit could properly find that the omission of four factual matters from the 80 page proxy statement was so serious, so important, as to make the entire proxy statement violative of Rule 14a-9.

14a-9 is a rule promulgated by the SEC which prohibits the making of a misleading or false statement of a material fact and likewise --

Justice William H. Rehnquist: It does seem to me that there maybe one common element.

Although, perhaps you may not see it the way between the prior case and yours and that is – an inquiry perhaps is to – what is the question of fact and what is the question of law.

Is there any generally accepted standard in the Courts of Appeal or in this Court as to whether a question of materiality such as the Court of Appeals and the District Court passed on here is generally a question of law or a question of fact?

Mr. Joseph N. Morency: Mr. Justice, I think that is rather well understood and I think a question of materiality is a question of fact.

It may become a question of law when the Court finds that all reasonable men would agree on whether a matter is so important or not..

And, this is the basis on which the Seventh Circuit decided these various questions on the summary judgment record.

Justice William H. Rehnquist: Judge McLaren’s holding was in a fact that it was reasonably debatable so he denied summary judgment.

Mr. Joseph N. Morency: That is true.

Judge McLaren found that certain important facts were missing as to some matters, he found that key facts were hopelessly in dispute as to other matters and therefore he concluded that the requisite summary judgment finding could not be made.

That is that there were no material disputed issues of fact.

He could not make such a finding and therefore he concluded he could not give plaintiff its partial summary judgment on issue of liability.

Plaintiff sought that partial summary judgment on the issue of liability solely on the basis of Rule 14 or rather Section 14 of the 1934 Act in the SEC Proxy Rules promulgated there under.

Now, you are right Mr. Justice, I did not think of that connection, but primarily I think because the various Courts of Appeals who have considered the issue have so decided it.

We cited a number of cases to that effect.

One of which is the Johns Hopkins case, another which is Rogen against Ilikon.

When this case was filed, the complaint charged that this was a steal.

That National Industries inclusion with TSC Directors dominated by National Industries and had conspired together to sell off this valuable business of TSC at a grossly inadequate price.

However, there was no motion for a temporary restraining order in this case filed the day before the Shareholder’s meetings.

After two and a half years of discovery, apparently, no fraud could be found and established and the plaintiff, a private holding company called Northway, Inc., filed a motion for partial summary judgment on the issue of liability only, predicated entirely on omissions from the proxy statement with a single exception no longer material here and charged it under the proxy rule, as the proxy statement was rendered faintly defective because of these omissions.

The Court of Appeals found and so did the District Court, that all of the required disclosures had been made.

So the case was considered below on the question whether the omissions were of such magnitude and such seriousness as to render the proxy statement disclosures actually made on the required matters false or misleading.

Once again, reference to Rule 14a-9.

These alleged omissions, serious omissions which really fell in to two areas.

One area related to the alleged control which plaintiff said National had over TSC and its influence over TSC in 1969.

The other related to an alleged manipulation of prices of the common stock of National Industries which by the way was not involved in the transaction at all of the national securities that were given to the TSC holders where the National Series B preferred stock and National warrants.

Now, the Seventh Circuit in deciding the case followed almost religiously the position of an SEC Amicus brief filed with it.

They followed religiously on the omissions.

They did not follow the plaintiff’s claim that there was a failure to properly report control or a change in control but they did say that four omissions are serious.

The circuit still found within some finding, I think the circuit discovered that it had to redefine materiality and depart from the teaching of this Court in Mills and the holdings of other circuits such as the Second and Fifth.

And they went ahead and defined materiality by reference to relevancy of a factual matter saying that it was sufficient as a required disclosure even if it was relevant only for some Stockholders.

Now, it is our position and we believe that the legislative history and the deciding cases support the position that Rule 14 a 9 which is the catch all is violated only when the omitted fact itself is material and its omission makes the disclosures in the proxy statement itself false or misleading in a material respect.

There are certain key facts which we refer to in our reply brief in which we believe put this case in a context which makes it much easier to analyze.

Admittedly, an 80 page proxy statement is not an easy document to digest or to analyze.

It is reproduced in full text in the appendix.

We have 20 copies which do not meet the Court’s pending rule but which were printed for the Shareholders in ’69 which we are perfectly willing to deposit with the clerk in the interest of avoiding eyes drain for the Justices and their clerks.

But, let us go back to the transaction and see what actually happened.

Unlike the finding in the Seventh Circuit and counter the position of the respondent here, this transaction was actually determined and defined by Blancke Noyes.

Blancke Noyes was an old TSC Director.

His history with TSC had edited by several years.

The first interest that National Industries ever had in I think February of ’69.

He is a partner in a prestigious investment banking firm and was is an investment banker of ability himself.

Both he and his wife were Stockholders in TSC.

It was his firm and he who analyzed proposed transaction as outlined by National Industries and its proposal and said it was not good enough.

He made a counter proposal which National Industries accepted without further discussion.

And it was his counter proposal which became the exchange ratio in the transaction.

It was his firm that handled a 195,000-share public offering in the Spring of 1969 and it was his firm in the Fall of that year that handled the review of the transaction at the request of TSC and for the benefit of TSC Directors and Shareholders.

Now, how was the transaction adopted by this Court?

Once again, we find that total absence of influence by National Industries, National had five Directors on this Board.None of those Directors voted on the October 16th meeting, the three who were present abstained.

The transaction and the resolutions in respect of it were adopted by the vote of four independent disinterested Directors, none of whom had any connection with National here I refer to Mr. Noyes, Mr. Schaeffer who was the Chief Executive Officer of the company, in fact although not in title, and Directors Deforrest and Charthman (ph).

Now, what is the context in which these so called omissions must be viewed?

These ones that were so serious that they should allow the transaction to be upset.

First of all, it is clear that National Industries was not in control of TSC in the fall of 1969.

The District Court said that National’s alleged control was not established.

The Court of Appeals agreed.

Therefore, on this summary judgment record, we say it is clear cut that National is not in control of TSC.

Secondly, the terms of exchange were determined not by National but by Blancke Noyes, the investment banker and TSC Director.

Certainly, the transaction itself as far as TSC is concerned is initiated as a result of resolutions adopted after the report of Mr. Noyes is received both in writing and orally by his fellow Directors at TSC with all the National nominees abstaining.

Now, what is in the proxy statement?

Well, at appendix 267, you will find that it is prominently and plainly disclosed that National owned 34% of the TSC stock.

That five of the ten Directors were National’s nominees.

Who these five persons were and what their jobs were at National Industries is also prominently and plainly disclosed.

The two of the omissions which the Court below said has a matter of law on the summary judgment record were so serious that reasonable matter would not differ on their importance related to the titles of Stanley Yarmuth and Charles Simonelli.

Yarmuth was the President and Chief Executive Officer of National Industries and Simonelli was the Director and Executive Vice President of National.

They became Directors of TSC.

When first elected, there were four National Directors out of a total board of ten.

And Yarmuth became the Chairman of the Board and Simonelli became the Chairman of the Executive Committee at TSC.

Yarmuth’s position is Chairman of the Board as per the bylaws Chief Executive Officer.

On the record here, it is plain that he never functioned as such.

His affidavit and the testimony made it perfectly clear that he did not even know he was the “Chief Executive Officer” until after the lawsuit was filed and discovery had begun.

As to Simonelli, the record is perfectly clear that this transaction was one in which the executive committee of this Board had no part whatever.

So, his title as Chairman of an Executive Committee on which he and Yarmuth served along with a majority of three old TSC Directors could not be very important to anyone.

Yet, that is the kind of thing which at the urging of the SEC’s Lawyers, the Seventh Circuits had in disagreement with the District Judge who analyze this record carefully said was so serious, so material, so important that the proxy statement thereby violated the basic proxy rule as to omitted material.

Now, we think that the Seventh Circuit arrived at its misconstruction of 14 a 9 fundamentally in three steps.

First of all, they said correctly, we submit that the alleged control of TSC by National was not established on the summary judgment records, point one.

Then they said that certain facts are persuasive indicators, and the phrases there is persuasive indicators of control.

Then they concluded that the proxy statement should have disclosed those suggestive facts which indicated a “substantial likelihood of control”.

In brief, we suggested the Court that what they did was to confuse suggestive facts, soft information with the kind of hard information which the legislative history and the SEC’s own rules tell us is to be sought, printed and understood in a proxy statement.

Proxy statements are supposed to tell the facts the way they are.

Facts which are known, facts which are ascertainable not matter which is suggestive of a fact when the ultimate fact control has already been postulated by the Court as being not established on the summary judgment record.

This is the kind and quality of nitpicking, frankly—

Unknown Speaker: Mr. Morency, you refer to a couple as to the summary judgment record.

Is it all you have to maintain I suppose, is that your opponents were not entitled to have summary judgment granted?

Do you go further and contend that on the summary judgment record you would have been entitled to summary judgment or that it was a fact question that should have been resolved by trial of facts?

Mr. Joseph N. Morency: Mr. Justice, we did not make a cross motion.

The reason we did not is evident from Judge McLaren’s order in memorandum opinion.

There are frankly, some undisposed, undecided, unresolved important factual questions in this record today.

There are questions on which despite the fact that counsel for both sides are here in full battle array, nobody can answer with accuracy and completeness.

So, we do not feel we are entitled of the summary judgment and we certainly submit they were not.

But the Court of Appeals held they were in disagreement with Judge McLaren.

And the reason that we think the Court of Appeals made this confusing set of holdings lies in the fact that they gave the SEC’s Amicus brief a whole lot more credit than it was due.

It was prepared by the Commission’s Lawyers who knew the least of all about the review of proxy statements.

Unknown Speaker: The Court of Appeals did not accept the test that the Commission proposed, did they?

Mr. Joseph N. Morency: Well, Commission did not really propose a test in its Amicus brief below.

Unknown Speaker: Well, it did not but it does here.

Mr. Joseph N. Morency: Oh, it does here and as I read it—

Justice Byron R. White: There was this significant propensity test which the Court of Appeals have rejected.

Is that right?

Mr. Joseph N. Morency: That is true.

Well Mr. Justice White, if you can tell exactly what it is that the SEC brief in this Court says this test should be, you will have succeeded where all of my colleagues have tried and failed because we cannot make sense out of it.

Justice Byron R. White: I have thought that they suggested a significant propensity case.

Mr. Joseph N. Morency: They do suggest significant propensity and they changed the wording of Justice Harlan in the famous Mills opinion just a little bit.

Justice Byron R. White: At least they did not embrace, they might have test this Court of Appeals of the Seventh Circuit used?

Mr. Joseph N. Morency: No Mr. Justice and they do not embrace the relevancy idea that the Seventh Circuit as follows and said relevancy for some was enough.

Justice Byron R. White: We agreed with whatever it is the SEC proposes, assume we agreed with it and that it is different than what the Court of Appeals in the Seventh Circuit uses.

What would we do?

Mr. Joseph N. Morency: I think you ought to --

Justice Byron R. White: We would vacate and remand, we used the right test I suppose?

Mr. Joseph N. Morency: I think what the Court would probably do would be to use these four omissions as examples of things which are not material as a matter of law on the summary judgment record, announced a correct test, and remands so that the District Court could go ahead with the trial.

Justice Byron R. White: The commission says that under any test including its test, the judgment should be affirmed.

Mr. Joseph N. Morency: Yes and the commission speaks for the Fourth—

Justice Byron R. White: As a matter of law.

Mr. Joseph N. Morency: The commission as we point out in our reply brief speaks for the fourth term.

They speak to us in October of 1975 and they tell us in their comprehensive release on materiality which we cite and quote at some length what their rules are and what they follow and yet their Lawyers file briefs in this Court but they do not even mention that release.

Chief Justice Warren E. Burger: Why do not we reach the first suggestion you make?

Why if we were to decide to remand it, why would it not be enough simply to clarify what is the proper basis of the evaluation on --

Mr. Joseph N. Morency: I think this case --

Chief Justice Warren E. Burger: I am confused with the use of the word test here.

Mr. Joseph N. Morency: Mr. Chief Justice, I think the confusion that you have in the Seventh Circuit and the confusion evident from the Amicus brief of the SEC here is a good enough for reason to show you that you are going to have to use very strong language in formulating your test of materiality or your materiality standard and stated in such terms that Commission Lawyers, Plaintiff’s Lawyers, we, will all understand you, merely reversing and remanding on the ground that they did not say it right when they said relevancy for some is enough will not do the trick.

I think frankly some judicial leadership is called for here and we are hopeful this Court will provide it.

We know it is needed.

It has never been decided.

I would like to reserve the balance of my time if I may.

Argument of Harry B. Reese

Mr. Harry B. Reese: Mr. Chief Justice, may it please the Court.

The questions raised by the Court during Mr. Morency’s argument require for background perhaps somewhat for exploration of what these for admitted documentary uncontroverted facts omitted from the proxy statement are and what their importance maybe in the decisional process of the ordinary average and reasonable shareholder.

What is the first question which comes to mind to a Shareholder when he is invited to accept or reject an exchange of securities?

How will the value of my investment be affected?

Justice William H. Rehnquist: Let me ask you this if I may Mr. Reese on the same kind of fact law distinction, is it not that the average juror probably in his good position to evaluate what is the first thing that will come to a Stockholder’s mind as the average Lawyer or the average Judge?

Mr. Harry B. Reese: Yes Mr. Justice Rehnquist, we certainly agree and we believe that he should be afforded the opportunity to make the decision, to make the judgments about whether this is a good deal, the underlying statutory policy as explained by this Court unanimously in Mills is not to substitute a judicial appraisal of the mergers merits for the Shareholder’s actual informed vote.

I think it is perhaps not too much to say that the Shareholder has the right to be wrong to turn down a bad deal.

Justice William H. Rehnquist: Well, but if that is so, would not materiality normally be a question of fact for the finder of fact rather than the question of law?

Mr. Harry B. Reese: I think as Mr. Justice Rehnquist’s question identified in the course of the last argument, matter of law is used in two distinct and very different senses.

There is first, the question of fact, the question of what happened, what occurred?

Yes, and we say that when the evidence is so overwhelming that reasonable minds cannot differ, that is a matter of law.

We also say it is a matter of law when it is a question of law as here when there is no dispute about what happened.

The facts are admitted, the question is --

Justice William H. Rehnquist: I do not regard that that is an entirely convincing answer because certainly in a typical negligence case or typical common law fraud case, you can have a stipulated documents, admitted facts and it still regard as a question for the trial of fact was the man negligent?

Was it material?

Was it misleading?

Why should not the same principles obtain here?

Mr. Harry B. Reese: Perhaps, Mr. Justice Rehnquist I can suggest that when we commit a question of that kind to a jury in a negligence case, we are saying our highest expectations in this field of behavior is the normal behavior of reasonable people.

That is not the expectation under the securities laws.

The morales of the market place, the generally accepted standards of ordinary man had led us into a debacle which led—

Justice William H. Rehnquist: These questions of fraud in a fraud case to the jury thinking that properly charged as they should be, they will be able to make the assessment for themselves.

Mr. Harry B. Reese: The certain kinds of question of fraud, common law deceit are ordinarily submitted to juries.

When we impose a higher standard, an equitable standard imposed upon a fiduciary requiring disclosure of all material information and all conflicts of interest, the question is decided by the Judge under traditional equitable principles.

The point, I think your Honor is perhaps demonstrated most clearly by precedent whether a fact is material, is insignificant part or question of law if indeed summary judgment could never be granted on the question of materiality, then this Court’s unanimous decision in Mills would not have been handed down.

There the Court did indeed direct the entry of summary judgment on question of nondisclosure in a proxy statement.

The Mills case --

Chief Justice Warren E. Burger: Do you think that the Court of Appeals have uniformly and literally applied Justice Harlan’s language since then?

Mr. Harry B. Reese: Mr. Chief Justice, I think there is not the need for a revision of principles which this Court laid down clearly six years ago which it reconfirmed without question in the subsequent decision in Affiliated Ute Citizens versus United States and I think that the question --

Chief Justice Warren E. Burger: I thought that was my question?

Mr. Harry B. Reese: Well, what I hoped to lead in to was the question of the Seventh Circuit’s decisions in this case and its relationship with for example the Gerstle opinion which used somewhat different phrasing.

In the first place, if I may before addressing that particular question, I would note that there are in the record here, and in the briefs offered a variety of tests or standards or measures for evaluation of materiality.

The Government in this situation has not I think, and this is in partial response to a question of Mr. Justice White, has not adopted the test that was rejected by the Seventh Circuit.

There is a critical difference.

The Government is speaking of a significant propensity to affect the judgment of a reasonable Shareholder.

The test, the significant propensity test which the Seventh Circuit was rejecting was a significant propensity to change the outcome of the vote.

I think that the Court of Appeals opinion must be read in the light of that Court’s experience with these questions and the arguments which were presented which the Court was addressing in the terms in which those arguments were made.

Chief Justice Warren E. Burger: Justice Harlan’s language was directed primarily at other Judges or was it cast in terms to be used as an aid to triars of fact?

Mr. Harry B. Reese: In cases where there is an issue of what occurred, an issue of fact in the historic sense, perhaps, that formulation would be inappropriate instruction to be submitted to the jury along with the determination of what occurred.

But, I think it serves both as a guide to Lower Courts.

And in appropriate cases where there are fact issues for instructions to a jury.

The Court of Appeals Seventh Circuit had been reversed in Mills; Judge Swygert was a member of that panel.

The reason for reversal was that panel’s holding that liability was not established without a factual determination of the probability that a truthful proxy statement would have produced a different result.

Justice William H. Rehnquist: Getting back to Mills for a moment Mr. Reese I sent forth and I noticed that at least as I read footnote four on page 381 of Justice Harlan’s opinion, he says that the respondents asked the Court to review the conclusion of the Lower Courts that a proxy statement was misleading and a material effect but this Court refused to pass on it because it was not raised by the petitioner.

Is that consistent with your answer earlier that the Court must have decided that the statement was materialism matter of law?

Mr. Harry B. Reese: Yes I think it is, Mr. Justice Rehnquist, on this ground, there is a difference between this Courts scouring the record to determine whether the facts omitted from the proxy statement and found to be established without genuine controversy in the Lower Courts, whether those facts were properly found and existed without genuine controversy.

This Court declined to consider that question but this Court did directly address the question of what is the test?

What is the standard?

That was an essential step in the Court’s concluding that the Seventh Circuit erred in denying summary judgment and in this Court’s remanding the case with the direction that summary judgment must be entered.

The Court was laying down if you will, a formula saying these are the elements that must be established to impose liability in a proxy case.

One of those elements is the omission of facts which are material in the sense that they might have been considered important to a reasonable Shareholder.

This propensity, excuse me—

Justice William H. Rehnquist: This Court did not review that holding in Mills.

Mr. Harry B. Reese: This Court made that determination.

I was quoting the language of Mr. Justice Harlan’s opinion for—

Unknown Speaker: (Inaudible)

Mr. Harry B. Reese: I think not, Mr. Justice White.

Unknown Speaker: (Inaudible)

Mr. Harry B. Reese: Oh in that case—

Justice Byron R. White: (Inaudible) that the Court of Appeals had used the wrong standard?

Mr. Harry B. Reese: Yes, yes.

Justice Byron R. White: And opposed the standard which you just recited.

Mr. Harry B. Reese: That is right.

A standard which requires and I can take it directly from the --

Justice Byron R. White: And the Court of Appeals in this case, at least purported to follow that rule that you stated from Mills.

Mr. Harry B. Reese: Yes, they were careful to put aside any possibility of a requirement of a showing an independent proof of reliance or causation or probability.

Justice Byron R. White: They thought they were differing whether they were or not.

But at least they thought they were differing with the Second Circuit.

Mr. Harry B. Reese: I think, perhaps although Judge Finley in the Gerstle case had granted summary judgment even though he chose to state it somewhat differently.

Justice Byron R. White: (Inaudible) different with him.

Mr. Harry B. Reese: I think yes..

I think that is clear.

What they were principally rejecting Your Honor was the argument which was presented, advanced in terms of significant propensity.

That those were that phrase was used as the catch phrase and the building block for an argument, you had to look to whether the case would -- vote would have come out the other way.

Unknown Speaker: Do you accept what the Securities and Exchange Commission suggests in their Amicus brief in this Court?

Mr. Harry B. Reese: Yes, we do your Honor.

We have no quarrel with any of the tests, the standards, the phrasings of materiality which have been offered except one which plainly invites this Court simply to overrule Mills on page 14 of petitioner’s reply brief.

They asked this Court to announce a standard that imposes a heavy burden, this is at the top of page 14 to show that the fact omitted, because of its obvious significance almost certainly would have turned the Shareholder’s vote the other way.

That is almost precisely what the Seventh Circuit said in Mills.

Unknown Speaker: Let us see what the Securities and Exchange Commission says here.

To the contrary it believes, and I guess the commission believed, that Mills announced the following criterion for determining when facts submitted from the proxy statement or material, whether the omitted facts have a significant propensity to affect the judgment of a reasonable Shareholder in deciding how to vote.

Now, do you accept that?

Mr. Harry B. Reese: Yes we do your Honor.

It is a significant propensity to affect the judgment of the reasonable Shareholder.

We think that it is for all practical purposes and decision of concrete cases the equivalent of this Court’s formulation in Mills.

Unknown Speaker: Mr. Reese, I think you have answered the question I was going to put but I will put it more specifically.

Do you perceive any distinction at all between the standard applied by the Court of Appeals and that proposed by the SEC?

Mr. Harry B. Reese: I do not.

I do not rather the—

Justice Lewis F. Powell: Do you see any difference between the standard applied by the Court of Appeals in the Seventh Circuit and that proposed by Judge Finley in the Second Circuit?

Mr. Harry B. Reese: I must confess Mr. Justice Powell that I think that that distinction between wood and mite is in indeed gossamer as both Courts considered that it might be.

Justice Lewis F. Powell: As I recall it, presented a question before this Court largely as a factual issue whereas the question that we took the case to the side as stated in petition related to the proper standard.

What you are telling us now is that it really does not matter which of these formulations we adopt suppose you can say you are entitled to affirmance of the judgment on the facts in this case.

Mr. Harry B. Reese: Yes Mr. Justice Powell, I might say of course, we took that position in opposition to certiorari from the beginning.

We think that the facts uncontradicted, admitted, established are so obviously important under the circumstances that they are beyond the reach of any nice adjustment, refinement in—

Justice Lewis F. Powell: If we adopted the formulation of the Second Circuit, your position is that the judgment of the Seventh Circuit should be affirmed?

Mr. Harry B. Reese: Yes Mr. Justice Powell, with these --

Justice Lewis F. Powell: (Inaudible) adopting that standard—

Mr. Harry B. Reese: With this specific understanding, which I think was plainly understood by the Author of the Gerstle opinion who chose to use “would” that is that “would” does not introduce an element of probability which must be determined at a trial.

That was the concern that Judge Swygert had with the use of “would”, footnote 13 in Judge Swygert’s opinion becomes very refined on that question and that it makes it plain that what he is concerned about is the possible connotation that “would” means or has to be a trial of the probability, Mills directly rejected that.

Justice Lewis F. Powell: Mills was I thought was dealing not with the question of materiality but with the question of causation?

Mr. Harry B. Reese: That is correct Mr. Justice Stewart but the—

Justice Lewis F. Powell: And purported to make a distinction between the two as my brother Rehnquist just pointed out footnote 3 and 4, footnote 4 on page 381 of the Mills opinion.

Mr. Harry B. Reese: Yes, but I believe that the basic question confronting this Court was not to write an essay on causation but to determine what elements were necessary to make a case of liability.

And the Court expressly said, it is not necessary and would be destructive of the statutory purpose.

And the congressional purpose would substitute a judicial appraisal of the merits for the Shareholders actual and informed vote, if that requirement were imposed.

Unknown Speaker: That materiality and causation kind of come together and end up to be very much the same question?

Mr. Harry B. Reese: I believe under in cases where a selling document is broadcasted to the public at large in the light of a statutory policy requiring full disclosure seeking to encourage reliance, I think in practice --

Unknown Speaker: (Inaudible) to be in cases like Mills and associated (Inaudible), so long as one does not have to show actual reliance of any kind, then materiality and causation are very much the same thing right?

Justice Byron R. White: (Inaudible) answer that a defensive no causation would never work?

If someone said that look I just did not, let us say the defendant said I am going to prove that there was no reliance, no causation; the Judge should say that is irrelevant.

Unknown Speaker: It might have been.

Mr. Harry B. Reese: If I may answer this Court has not confronted the question as yet which has been decided in a number of circuits—

Justice Byron R. White: How about Trial Courts?

Do you know what they say in that circumstance?

Mr. Harry B. Reese: There is some authority that if they do not need the votes, if they have enough votes, half the vote, half the shares so they can put it through without a proxy statement.

There is some authority that in that situation, the proxy statement will not have any cause or relationship with the merger that has been expressed and rejected in the Second Circuit in the (Inaudible).

Unknown Speaker: What if you were one who voted for it and your votes were critical in passing?

Mr. Harry B. Reese: I am sorry.

Perhaps, I did not make the factual premise..

It is the situation where the defendant has their shares.

Unknown Speaker: In general, are there some District Courts or some Courts of Appeals that say that causation is a relevant issue in trials of these cases?

Mr. Harry B. Reese: Yes.

That in no situations where the defendant already has the votes and does not need any proxy votes then causation will bar any civil action.

There is authority to that effect, yes.

It is minority.

Unknown Speaker: But if the plaintiff sues and the defendant says well, look now, that plaintiff just was never hurt by this.

It is not an individual question.

It is a question of causation on the --

Mr. Harry B. Reese: I should have made plainer Mr. Justice White, I apologize.

There is a whole line of cases which says that if the proxy statement did not authorize the action which caused the injury of which the plaintiff complains, there is no cause or relationship.

If the proxy statement merely failed to reveal some prior wrong doing, which is not the subject of the proxy vote, there is no cause or relationship.

The four admitted facts were not speaking to the question of the basis of the District Court’s decision.

And whether the District Court denied summary judgment on the ground that it found that there were factual issues.

The grounds on which the District Court chose not to grant summary judgment, I think a careful reading will disclose do not rest on a general proposition that there are genuine issues of material fact.

First, there is the substantial premium over current market values represented by the securities being offered to the TSC shareholders.

He found that that violation did not warrant summary judgment because he said there was no evidence in the record to show that the corrected value of the warrants and Mr. Noyes opinion fully explained, said those warrants were not worth the $5.00 and a quarter market value that was listed in the proxy statement.

It was his opinion that with the issuance of six times as many warrants, $3 million and instead of less than half a million, there would be a substantial decline to $3.50.

That decline abolished any substantial premium and we asserted that half the opinion had been presented.

The good news had been presented, the bad news had been held back.

Judge McLaren rejected that ground because he said there was no evidence in the record to show that this revised warrant value would substantially destroy the premium.

We, I think we are at fault in not making it clear that all that was required was simple arithmetic as applied to the exchange ratio plugging in the market values.

When it came to the Madison National purchases of $260,000.00 shares of National common stock during the two year period for which the market values are nicely set forth conveniently in the proxy statement, when Edward Merkle was on the payroll of National receiving $12,000.00 a year for one day a month, $1,000.00 a day for such services as the TSC Board might call upon him to perform.

The reason for denial of summary judgment in the District Court on that ground was as matter of law.

He said there is no necessity for disclosure here unless there was collusion, unless National and Mr. Merkle for Madison got together and agreed that they should do this.

We took the position which we again perhaps, failed to make clear that whether Mr. Merkle was acting in consultation with National officers or purely unilateral, his actions were called in to question by his relationships with National as an employee and there was a duty to disclose regardless of whether a substantive violation of some other provision, some provision forbidding market rigging was involved or not.

We were not saying that the purchasers were unlawful in themselves.

We were simply saying that they should be disclosed and --

Unknown Speaker: (Inaudible) the respondent owned 200 shares if I recall, what is the market value of those shares at the time of the merger?

Mr. Harry B. Reese: At the time of the merger, the preferred shares were—

Unknown Speaker: (Inaudible) shares that your client own.

Mr. Harry B. Reese: I would have to add it up; the shares were selling in at about 12 so I guess that would be about $2500.00.

Unknown Speaker: And what is the market value of the securities obtaining value of client, say a month or a year later?

Mr. Harry B. Reese: If the market with the elimination of the premium would have been --

Unknown Speaker: Leave that elimination of premium.

I am talking now about the securities your client received in the merger.

Mr. Harry B. Reese: The value of the warrant was five and a quarter as less than the proxy statement, Mr. Noyes said that value will not hold that market price is not a fair indicator of the value of that warrants.

He will in fact receive that will drop to 350.

Mr. Noyes was right.

It did drop to 350.

Within—

Unknown Speaker: (Inaudible) --

Mr. Harry B. Reese: Yes your Honor?

Unknown Speaker: What are their worth today on the market?

Mr. Harry B. Reese: The warrants are worth about $2.00, they are up with the recent market search.

The B preferred is worth about $14.00.

The National common into which the B preferred is convertible at a discount three quarters of a share of common is most recently, I believe, quoted at $11.00.

I should explain your Honor that those are all outside the record.

Unknown Speaker: But if you take the current market of these securities today as compared to the market pre-merger of the whole stock, what is the theoretical loss to your client if you sold that today?

Mr. Harry B. Reese: The theoretical loss, the client in a sense, I do not mean to evade the question, the suit is derivative.

The particular loss to Northway would, I am sorry Your Honor I cannot answer it directly because we had not tried the damage question.

But the --

Unknown Speaker: (Inaudible)

Mr. Harry B. Reese: I would think substantially more Your Honor.

Our expert has analyzed the value of TSC and its shares and the value of the National securities that were received, he has concluded that the TSC securities were undervalued and depressed after National obtained control and that their true value was not $12.00 or $13.00 but perhaps, somewhere in the 20s, so we would be talking about a matter of $10.00 or more per share.

Unknown Speaker: (Inaudible) Holding Corporation?

Mr. Harry B. Reese: I think that is probably a grand description for a family, personal corporation of a retired businessman established simply as a part of his state planning and to handle his personal investments.

The grounds of Judge McLaren’s opinion, if I may resume and try to put that one to rest, he held as a matter of law that there was no duty to disclose unless there was in fact manipulation and that is not a determination and adjudication as to a question of fact but as to what the law requires.

My time has expired.

Chief Justice Warren E. Burger: (Inaudible)

Rebuttal of Joseph N. Morency

Mr. Joseph N. Morency: Just a very limited matter to if the Court please.

I would like to say first of all that I think we deal effectively with this matter of the Hornblower opinion in our reply brief in which we point out to Court that in refrain to a substantial premium over current market values, the Hornblower firm and Noyes referred to a premium measured by market prices at the time, the exchange ratio was determined in early October and the premium was certainly there.

We point out in our reply brief that there was a premium of 22% for one class of stock and 17% for another or 19% and 17%.

Secondly, I think that in the discussion, insufficient attention has been given to the SEC definitional effort in their brief.

Admittedly, as the Justices had brought out, they do espouse essentially a Mills test at page 4.

But look at page 14, there they say they reject the Restatement of Torts test which is essentially the same thing as the Mills test.

That is why it was not in there for to be coy or facetious, that I suggest it so strongly to the Court that that brief be read with great care because it needs itself coming around the corner.

Justice Byron R. White: (Inaudible) that if it rejects the statement that a reasonable man would attach importance?

Mr. Joseph N. Morency: No, I do not think so Mr. Justice White.

I think if you go to page 14 of the SEC brief, you will find them saying that they reject the idea that the test of materiality which the Gerstle opinion, the Smallwood opinion, the Lewis case and others have adhered to, that is whether or not a reasonable man would attach importance to it in determining his choice of action or transaction—

Justice Byron R. White: Would attach.

That is the word that they disagree with.

Mr. Joseph N. Morency: I read --

Justice Byron R. White: What they embrace is that if a reasonable man might have or would there be a significant propensity that a reasonable man would, not that he would as a matter of fact.

Mr. Joseph N. Morency: Let me suggest to the Court that --

Justice Byron R. White: Well at least that is only a difference I see in the test they propose and the test that they reject.

Mr. Joseph N. Morency: I am hopeful that this Court will announce the standard of materiality on which the members of the Court and the members of the bar can agree as to its meaning, whatever your standard may be.

You are well able to phrase and assemble one for yourselves.

I do not purport to suggest that to you.

But I do suggest that you got to stick with the reasonable Shareholder test.

And that you got to be extremely careful in allowing the Courts of Appeals to determine as a matter of law that certain facts are so critical as to warrant upsetting an entire 80 page proxy statement.

And that is what the Seventh Circuit did in rejecting item after item after item, the judgments made by the District Judge who went over this record with great care.

Justice Byron R. White: Well, the District Judge (Inaudible)

Mr. Joseph N. Morency: On those nitpicking items, yes Your Honor we would.

Justice Byron R. White: We just do not want; just think Judges are making mistakes.

Mr. Joseph N. Morency: Judges makes mistakes. Lawyers make mistakes but I think the number of mistakes made in this area can be substantially diminished once this Court lays down a test of materiality in plain language that we can all read and perhaps even use as a nitpicking omissions in this case as illustrations of that which is not sufficient as a matter of law.

Thank you.

Chief Justice Warren E. Burger: Thank you.

Unknown Speaker: (Inaudible)

Chief Justice Warren E. Burger: Yes.

Unknown Speaker: Thank you(Inaudible)

Chief Justice Warren E. Burger: (Inaudible)

Unknown Speaker: None, none your Honor.

Chief Justice Warren E. Burger: Will you leave that with the clerk?

Mr. Joseph N. Morency: We will leave 20 copies of the proxy statement in full print with the clerk Mr. Chief Justice.

Chief Justice Warren E. Burger: Thank You gentleman.

The case is submitted.