## Facts

- National Industries, Inc. acquired 34% of TSC Industries, Inc.’s voting securities from TSC’s founder and his family.
- After the purchase, the founder and his son resigned from TSC’s board; five National nominees joined the board, including National’s president and executive vice president, who became TSC’s board chair and executive-committee chair.
- TSC’s board approved a plan to liquidate and sell all TSC assets to National by exchanging TSC common and preferred shares for National preferred stock and warrants to buy National common stock.
- TSC and National issued a joint proxy statement recommending shareholder approval; shareholders approved and the liquidation and share exchange were completed.
- A TSC shareholder (Northway) sued, alleging the proxy statement was materially misleading by omission regarding (1) National’s control over TSC (including disclosures suggesting National might be deemed TSC’s “parent”) and (2) the transaction’s fairness (including an allegedly unfavorable investment banker letter and alleged manipulative purchases of National common stock).

## Issues

1. What is the proper materiality standard for misstatements or omissions in proxy solicitations under § 14(a) and SEC Rule 14a-9?
2. Whether the challenged omissions were so clearly important that they were material as a matter of law, justifying summary judgment on liability.

## Decision

- The Supreme Court rejected the court of appeals’ “might consider important” standard as too broad.
- The Court held that an omitted fact is material if there is a substantial likelihood a reasonable shareholder would consider it important in deciding how to vote.
- The Court explained that materiality does not require showing the disclosure would have changed the vote; it requires showing the fact would likely have assumed actual significance in the shareholder’s deliberations and significantly altered the total mix of information.
- The Court reversed the court of appeals’ ruling that the omissions were material as a matter of law and indicated materiality ordinarily presents a fact question for the trier of fact on this record.

## Legal Principles

- Under Rule 14a-9, a proxy statement is actionable for omissions only as to “material” facts—those substantially likely to matter to a reasonable shareholder’s voting decision.
- Materiality is assessed objectively from the standpoint of a reasonable shareholder and by whether the omitted fact would significantly alter the “total mix” of available information.
- Courts should avoid materiality standards that either (a) force disclosure of trivial details that overwhelm shareholders or (b) tolerate omissions of information likely to matter in voting decisions.
- Materiality commonly involves fact-bound judgments about what inferences reasonable shareholders would draw and the significance of those inferences; summary disposition is appropriate only when reasonable minds could not differ.

## Conclusion

The Court set the controlling proxy-fraud materiality test under § 14(a) and Rule 14a-9—requiring a substantial likelihood that a reasonable shareholder would find the omitted fact important—and reversed the determination that the alleged omissions were material as a matter of law.


TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976)