## Facts

- Wherehouse Entertainment, Inc. issued 6¼% convertible subordinated debentures in 1986 under offering materials describing a tender right allowing debentureholders to sell the debentures back at 106.25% of par upon specified “triggering events.”
- A merger or similar transaction was a triggering event unless approved by a majority of “Independent Directors,” defined largely by formal criteria (e.g., not officers or employees).
- About 18 months later, Wherehouse entered a leveraged buyout merger that substantially increased corporate debt and allegedly impaired the debentures’ value.
- The board—comprised primarily of directors meeting the “Independent Directors” definition—approved the transaction.
- Wherehouse asserted that the Independent Directors’ approval prevented any triggering event, and it refused debentureholders’ attempts to exercise the tender right.
- Investors sued, alleging the offering materials and related sales presentations marketed the tender right as meaningful protection in takeover/LBO scenarios while failing to disclose that the Independent Directors mechanism could, in practice, defeat that protection.
- The district court granted summary judgment for defendants on federal securities claims (§§ 11 and 12 of the Securities Act of 1933; § 10(b) and Rule 10b-5) and dismissed related state claims.

## Issues

1. Whether the offering materials and related oral representations could be materially misleading by touting a protective tender right without adequately conveying that it could be neutralized through Independent Directors’ approval.
2. Whether a reasonable investor could be misled by the term “Independent Directors” and surrounding disclosures into believing the directors would function as a meaningful investor-protective check.
3. Whether materiality and reasonable-investor interpretation presented triable fact questions making summary judgment improper.

## Decision

- The Second Circuit reversed the grant of summary judgment for defendants and remanded.
- The court held plaintiffs raised genuine disputes of material fact on whether the disclosures and sales efforts created a misleading overall impression about the tender right and the role of Independent Directors.
- The court emphasized that the question of how a reasonable investor would understand the disclosure “total mix” ordinarily belongs to the factfinder where reasonable minds could differ.

## Legal Principles

- Securities disclosures are evaluated as a whole and in context; courts consider the overall impression on a reasonable investor rather than isolating literal statements.
- Literally accurate statements may be actionable if, in context, they convey a materially misleading impression.
- Materiality is generally a fact question; summary judgment is appropriate only when alleged misstatements or omissions are plainly insignificant to reasonable investors.
- Labels and structural features described as investor protections (e.g., a tender right conditioned on “Independent Directors” approval) can support liability theories when the described mechanism arguably renders the protection ineffective and the presentation could mislead reasonable investors.
- Written offering materials, together with alleged oral marketing statements, may be considered in evaluating whether communications created a deceptive overall message.

## Conclusion

The court held that investors were entitled to proceed to trial because a factfinder could reasonably conclude that the marketing and disclosure of the debentures’ tender protection—particularly the emphasis on “Independent Directors”—created a materially misleading impression that the tender right would protect debentureholders in an LBO-type transaction, even though the transaction could be approved in a way that prevented the right from being triggered.


McMahan & Co. v. Wherehouse Ent., Inc., 900 F.2d 576 (2d Cir. 1990)