## Facts

- Michael J. Healey, Jr. served as president of Catalyst Regeneration Services, Inc. (CRS) and owned 20% of its stock; the remaining 80% was held by Texas investors.
- CRS, a Texas corporation, operated its only plant in Pennsylvania, regenerating catalysts used in oil refining.
- In 1975, Baltimore investors formed SCR, Inc. and sought to acquire CRS, negotiating to buy the 80% block for $5.25 per share; no agreement was reached with Healey for his 20%.
- Healey indicated he would consider selling if he received information about SCR’s board, shareholders, and business plans; he did not receive some of the requested information.
- SCR purchased the 80% block in March 1976 and sought to eliminate Healey’s minority position.
- SCR caused the formation of Catalyst Recovery of Pennsylvania, Inc. (CRPa) in April 1976 to serve as the successor corporation in a merger.
- Healey received notice on April 12, 1976 of a proposed merger of CRS into CRPa, with a shareholder vote scheduled for May 3, 1976.
- Healey alleged the nondisclosure prevented him from seeking timely state-court relief (including an injunction) to stop or modify the merger, and he sued under Exchange Act § 10(b) and SEC Rule 10b-5.

## Issues

1. Whether withholding requested information about the acquirer and its plans, in the setting of a freeze-out merger, constituted a material omission or deceptive practice actionable under § 10(b) and Rule 10b-5.
2. Whether the evidence supported the elements of a Rule 10b-5 omission claim, including materiality, reliance (or a substitute showing), causation, and damages.
3. Whether the jury’s $189,400 damages award was supported by the record and a permissible measure of recovery.

## Decision

- The Third Circuit affirmed the judgment for Healey entered on a jury verdict.
- The court held the jury could find a Rule 10b-5 violation based on the failure to provide material information requested by a minority shareholder facing a squeeze-out merger.
- The court concluded the “in connection with” requirement was satisfied because the omissions occurred in the course of a merger effecting a forced disposition of the shareholder’s interest.
- The court accepted that, in an omission case, reliance may be treated functionally where proof of reliance on nondisclosed facts is impracticable.
- The court held the evidence supported causation on the theory that disclosure would have enabled timely pursuit of state-law injunctive relief, and supported the damages award.

## Legal Principles

- Materiality in a Rule 10b-5 omission case turns on whether there is a substantial likelihood a reasonable shareholder would view the withheld information as important in deciding how to respond to the transaction.
- Conduct may satisfy § 10(b)’s “in connection with the purchase or sale” requirement when it occurs in the course of a merger that forces a shareholder to relinquish or alter a securities interest.
- In omission cases, the fact-finder may infer or presume reliance where the omission is material, because direct proof of reliance on undisclosed information is often not feasible.
- Causation may be shown where nondisclosure deprives a shareholder of a timely and meaningful chance to pursue available legal remedies affecting the transaction’s outcome or terms, and the resulting economic loss is supported by evidence.

## Conclusion

The Third Circuit upheld a jury verdict imposing § 10(b)/Rule 10b-5 liability for material omissions in a squeeze-out merger, accepting a causation theory based on loss of a timely opportunity to seek state-court injunctive relief and affirming a damages award supported by the record.


Healey v. Catalyst Recovery of Pa., Inc., 616 F.2d 641 (3d Cir. 1980)