Ann Flamm and Arnold M. Flamm, on Behalf of a Class v. Rudolph Eberstadt, Jr., and Microdot, Inc.

expressed bargaining unit had a de- on a direct chal- vant dependent ment was representa- conver- of Union Mr. Ott’s sire for termination substance of lenge to the Indeed, employees. tion. with the AWL sations that, emphasizes General Counsel regarding the Company’s argument Company and the contacts between unpersua- petition RM is also filing of the to the General Union, its answer prior to in which Company cites a case sive. Company never complaint, the filing Counsel’s an RM court held that majority question of the Union’s establishing raised is not relevant petition Furthermore, defense when the part status. good doubt on the faith existence raised, given much less atten- it was was Br. at 31 employer. Petitioner’s of the Company than the defense 225). tion How- (citing 594 F.2d Top Mfg., ego nor a successor neither an alter authority was ever, cited no Company has Adlake. file the failure to proposition that for the filing of an the belated petition, RM argument Finally, a reasonable question not relevant to petition, is RM made, again attacking the sub without its Company has fabricated of whether testimony, Mr. that the na stance of Ott’s subsequent to its faith doubt defense good given employee’s statement was ture of a bargain. Because there is no refusal Company provide with a insufficient it is question presented, authority on the employee long no that the basis to believe for the General Counsel unreasonable See, representation. e.g., er desired Union Company. disagree with the 223, 224- Top 594 F.2d Mfg. NLRB v. hold that the We evidence the record (9th Cir.1979). upon Based the letter supports this court before Board’s de- Counsel, Company sent to the General position termination that the of the General of the statements were shown to one substantially justi- Counsel in this case was insufficient, good faith doubt de Accordingly, we affirm the fied. Board’s have failed because Com fense would dismissing application order AWL’s for an showing of less than pany would have a award under the EAJA. employees. good its of its To establish 50% Affirmed.. defense, doubt AWL had to show that faith employees in the relevant majority of the no bargaining unit had indicated represented

longer desired Hotel, Em Motel & Restaurant

Union. Union, 785 F.2d at ployees & Bartenders Flamm, Ann FLAMM and Arnold M. 799; NLRB, Hosp., v. Bellwood Gen. Inc. class, on behalf of a 98, (7th Cir.1980); Orion Plaintiffs-Appellants, relevant Corp., 515 F.2d at 85. The bar employ gaining unit consisted of fourteen Rudolph EBERSTADT, Jr., and Micro Apr. Decision of 1984 at 6. ees. ALJ dot, Inc., Defendants-Appellees. named original position statement AWL’s No. made the re 86-1754. employees who had seven hearing, Mr. Ott quired statements. At the United Appeals, States Court of he had had testified as to conversations Seventh Circuit. eight employees. Id. at 15. The ALJ Argued Jan. 1987. by only made found that the statements Decided March 1987. employees provided a suffi seven of these rely to upon AWL could cient basis As Amended March 1987. If the good its faith doubt defense. assert Rehearing En Banc Rehearing and accepted the Counsel’s AU had General 30, 1987. April Denied in argument that other statements were 1, 1987. May Amended As sufficient, would have AWL’s defense could not have shown that failed because it in the rele- employees

at least 50% Mulder, Meites,

Michael M. Frackman & Mulder, 111., Chicago, plaintiffs-appel- lants. Laidlaw, Seyfarth, Shaw,

Andrew R. Geraldon, 111., Fairweather Chicago, & defendants-appellees. BAUER, Judge,

Before Chief EASTERBROOK, CUDAHY and Circuit Judges.

EASTERBROOK, Judge. Circuit Microdot, Inc., The stock of was traded Exchange on the New York Stock when H71 announced, many disposal Corp. on Decem- “resources defeat Cable General [its] intention to make a tender offer.” ber Microdot’s shares. Mi- to holders of offer Goldman, Microdot authorized Sachs to trading for $11% stock been crodot’s approach might firms that be inter- share; planned to offer per General Cable Goldman, ested. tried its hand Sachs Exchange $17; available firms; more than 100 not a one showed $17, reaching immediately topped almost through interest December 1975. Five 8, re- on December 1975. $18% persuaded were to meet with Microdot’s December, through treated toward $17 management 20; between December 12 and however, opposed as Microdot the offer. spot all told Microdot on the that five press December 5 Microdot issued On were not interested further discussions. (published as an advertisement release Industries, Northwest with which Gold- 8) on December the Wall Street Journal man, spoke on Sachs December was one was unac- stating that the offer $17 early nay-sayers, declining to meet of directors. ceptable to Microdot’s board managers. with Microdot’s Between De- It stated: “After careful consideration 30, Goldman, cember 20 and December consulting with proposed offer and Sachs could not even induce another firm Goldman, & our investment Sachs exploratory meeting to attend an Mi- bankers, have concluded that the Gener- management. crodot’s It is therefore no totally inadequate. We al Cable offer is surprise that of the stock fell disposal to employ all resources at our activity toward Goldman’s and its $17. defeat the offer.” could not lack of success have been a se- from Microdot ad- communications Other Street; cret on Wall no one contacts 100 not to sell their vised the shareholders escapes arbitrageurs firms and notice stock, on the market or to General either targets. millions in the stock of who invest Eberstadt, Jr., Rudolph presi- Cable. Goldman, however, kept trying, Sachs Microdot, and CEO of bewailed dent receiving and after more information medium-sized, companies high-tech fate of let Microdot know that it had a Northwest takeovers, complaining that if in a world of lingering discussing matters. interest American in- hostile takeovers continued January Managers of the firms met on 19. dustry less inventive. One of would be Heineman, president of Ben W. North- ads, published in the Wall Street Microdot’s west, January told Eberstadt Journal on December stated: prepared per was offer $21 Northwest growth company me- If no successful pur- offer but would not share a tender resist the raids of dium size able to Microdot an sue the matter unless made outsiders, large way there will be no take advance commitment to Northwest’s po- stockholders to realize the American made commit- offer. Microdot’sboard growth companies repre- tential these January 24. January ment on On IBM, sent. Then there will be no future offer, approved the Northwest’s board and Xerox, They no no Polaroid. will be public firms made a announcement the two as soon as choked off and smothered day. dropped General Cable on the same growth po- they start to show their real picture; acquired the out of the Northwest tential. many mar- Like another $21. stock however, Perhaps appreciating, in divorce. Northwest riage, this ended “growth potential” in the investors Microdot, once more spun off which is later growth $11% were interested was from firm on the New independent traded higher price, Microdot also decided to see Exchange. York Stock more than could be obtained. $17 whether Knight” was on. The search for a “White out, trying than to turn

As it turned I peevish ad- up publishing bid and a better by Ann and Arnold suit filed vertisements, have a nothing to hin- We Microdot did of the class representatives Flamm as bid. It did not have der General Cable’s stock investors who sold Microdot between sion no upon decision, effect [his] 5, 1975, January December and 1976. then no there was reliance and there can They search maintain that Microdot’s for a recovery. Further, be no must [Flamm] Knight was material prove that justified; reliance was [his] withheld, making that had been Microdot not intentionally did close [he] [his] 10(b) liable Section under Securities eyes and refuse to investigate, concern- Exchange Act of 78j(b), 15 U.S.C. § ing disregard the circumstances in 10b-5, and the SEC’s Rule 17 C.F.R. [him], risk known or so obvious that court 240.10b-5. district certified § taken must be to have been aware of [he] class, and the case tried to jury. it, great highly so as to make undisputed. The facts we have narrated are probable harm follow. horns, however, parties locked about In the case omissions or non-disclo- Knight whether the search for the White facts, sure of material if such an omis- was material Arnold Flamm whether sion proved, then the element of re- sold his stock reliance on belief that may presumed. liance ... The law Microdot was determined to remain inde- infers that would have relied [Flamm] pendent. parties and district judge upon facts which are to be shown materi- treated other members of the class as al intentionally and withheld. The De- Flamm, clones of Arnold that if so he loses fendants, however, may pre- rebut this the whole class loses. do We shall likewise sumption. prove, if are able to suggesting proper without that this is the evidence, preponderance of the that even approach. if disclosed, the material facts had been Flamm, investor, a veteran sold his stock decision as to the transaction [Flamm’s] on acknowledged December 1975. He would not have been from different what at trial that he Knights knew that White it was. frequently ride to the of managers rescue Flamm barrage directs a against this in- determined resist the initial bid but un- beyond struction. The two-tier was burden independent. able to remain He acknowl- jury’s ability comprehend, he main- edged appreciated as well that he sig- tains, (half- misleading because statements profession- nificance of of $18%— truths) (the and material omissions rest of al were staking investors their own wealth truth) really thing. are the same Con- behind a higher belief that a bid would compounded fusion phrase along. although come And Flamm stated “misrepresentation or omission” the first that he concluded after the December 15 paragraph, assigns which the burden to advertisement that Microdot was deter- Flamm, while the paragraph second as- stay independent, mined to he acknowl- signs the burden on omissions to defend- edged “quite it possible” that was that he paragraph ants. The first also states that had held the stock for another two weeks “justified”, reliance must means on the off chance Knight that a White both that the investor not “refuse to gallop would into view. investigate” disregard “in act jury The district court told the that un- or risk known ... so that obvious [the less Flamm showed that the failure to dis- be taken to been must have aware investor] material, close the search was and unless parts of it”. Flamm contends that both “justifiably Flamm relied” to his detriment “justified this definition of reliance” are omissions, on Microdot’s statements and wrong. the class could not recover. instruc- tion judge stated: The district used as his model the pattern jury Fifth instructions. Circuit’s In case misrepresentations pattern jury These instructions based proved must be in fact [Flamm] 551 roughly Dupuy Dupuy, F.2d upon the

relied false In statements. oth- Cir.1977), (5th words, involving a fami- you er if case find that [Flamm] trading public engaged ly corporation have in the rather than anyway, transaction disagreed holding misrepresentation and that the omis- markets. We Knights. Material facts are 282 Pension those in Teamsters Local Dupuy chances, firm-spe- (7th help evaluate Microdot’s Angelos, 762 F.2d Fund v. Trust existing cific information adds to Cir.1985), months be- decided almost eleven knowledge probability that there is a distri- Angelos case. reviews the trial of this fore of outcomes. The instruction here bution “justified reliance” is to which the extent just jury allowed the to decide for Microdot under Rule 10b-5 of an action an element because Flamm knew that some firms were that investors do have holds both Knights bailed out White investigate” “reliance” and that —even “duty to probability Mi- failure to disclose the materiality and causation means among crodot would be them was a materi- at 527-30. See also conjunction. 762 F.2d al omission. Clark, Corporate Law Robert Charles (“reliance” (1986) ana- became 8.10.5 § also about the We have some doubts in securities law when the Su- chronistic nonpersua split allocation of the risk of liability made under Rule preme Court Perhaps right sion. this is the one in some scienter). depend on Defendants 10b-5 ethereal sense. See Ute Citi Affiliated is erroneous the instruction States, concede zens v. 406 U.S. 153- United the extent it mentions a Angelos 1456, 1472, under 92 S.Ct. 31 L.Ed.2d 741 investigate” (1972); Michaels, but insist that the “duty to Michaels v. “investigation” (7th Cir.1985). is harmless because But the error They play garbled, a role in the case. de- instruction here was and even in did not portion of the in- the best of circumstances an effort to cre “known risk” fend the functionally struction, ate different burdens identi persuasively. but not things jurors’ reeling. must set cal heads in of Angelos action the teeth Under “misleading” The definition statement part known risk should be evaluated a (on burden) which Flamm had the is a materiality, not reliance. inquiry into half-truth, a statement true as far as it at 530. If an investor knows a 762 F.2d goes deceptive the omission but because of risk, demonstrating fact particular truth; yet of some other the instruction corroborating to disclose related or failure assigned the burden on omissions to de material because it does not facts is not distinguishing fendants. It be that a mix significantly affect the ability legal feature of the mind is the Knowledge of the investor acts. on which contradictory propositions simul entertain prevent recovery a risk does taneously; distinguishing fea this is not have been a additional information would jurors’ minds. The notion of a ture of significant increment to the total available enough by hard persuasion burden knowledge. for someone who encounter the itself instruction in this case not once in a lifetime. Even legal system knowledge lack of of a risk as an treats shadings Hand had trouble with Learned materiality inquiry addition to that among States v. Fein burdens. United distinguish among neglects to but also 592, (2d Cir.1944). 140 F.2d 594 Sev berg, Every of risk. investor knows kinds sug accordingly have held or eral courts abstract; risk in the there is a risk this character gested that instructions of a lie. If this sort of statement will be E.g., Sharp v. given jury trials. not be enough “justi- knowledge 175, to defeat were 188-89 649 F.2d Coopers Lybrand, & reliance”, thoughtful investor could Cir.1981); fied no 675 (3d Loftsgaarden, v. Austin Any pages (8th Cir.1982), 168, recover. reader of the business reversed 178 n. 21 F.2d newspapers grounds knows that White remand un part after on — appear significant fraction of Knights Loftsgaarden, name Randall v. der the 3143, -, 92 L.Ed.2d 525 This is not the same as 106 S.Ct. tender offers. U.S. Caylor, (1986); Carpets, Inc. v. knowledge apt that there was to be bid Cavalier (11th Cir.1984); 749, The crit- F.2d 753-57 Knight a White for Microdot. 746 Inc., Management, v. question Microdot would Waste ical was whether Grossman 395, (N.D.Ill.1984). F.Supp. 410-12 589 among acquired by those 1174 agreed “price should be avoided whenev- have instruction and structure” single in favor of a possible er burden —one Greenberg, deal. v. 672 Staffin by in light 1196, (3d Cir.1982); hard to come is not F.2d 1204-07 Reiss v.

Angelos, essentially removes re- Inc., which Pan World Airways, American 711 independent element 11, liance as an causa- (2d Cir.1983); F.2d 14 Greenfield materiality in tion and a case under Rule Heublein, Inc., 751, (3d 742 F.2d 756-58 Associates, Competitive also 10b-5. See Cir.1984); Inc., cf. Levinson v. 786 Basic Laventhal, Krekstein, Inc. v. Horwath (6th & 741, Cir.1986) (reserving F.2d 746 — (2d Cir.1975). Horwath, F.2d 811 516 issue), -, granted, cert. 107 U.S. See (1987). S.Ct. 1284, 143 L.Ed.2d assert, nevertheless, Defendants also Missouri Portland Co. v. Cement jury nothing materially instructions 388, (8th H.K. Porter injured Flamm. The concatenation of er- Cir.1976), Susquehanna Corp. v. Pan rors make a error inquiry harmless Sulphur Co., 1075, American F.2d very bypass inquiry, difficult. We (5th Cir.1970), apply sim however, ground in favor of an alternative ilar rule to the bidder’s disclosure obli See affirmance. Massachusetts Mutual gations. Microdot and did Northwest Ludwig, Insurance Co. v. 426 U.S. Life agree on the and structure of a deal 96 S.Ct. 48 L.Ed.2d 784 24, 1976, earliest, until January at the summary judgment moved Defendants day period after the in which the last mem ground that the search for a White ber of the sold. class On December Knight immaterial matter as a of law. sold, when Flamm Microdot was for motion, The district court denied this but lornly rescuer; looking for a the most that conclude the court should have can be said is that granted Microdot had authorized gone it. This case should not have sig investment bank to send jury, to the and a distress remand based errors nals. such in jury pointless.1 instructions would be Reiss treat Staffin quiries as immaterial. II From perspective one conclusion An omission is material when there simply another cause for wonderment at that, is a “substantial likelihood under all legal the looking mind. Investors were at circumstances, the fact omitted would potential prices (if from Microdot $11.75 significance have actual assumed in the bids) (if had defeated all to General $17 deliberations the reasonable sharehold (under succeeded) Cable’s bid had $21 to is, er”—that when it have “would been bid), maybe Northwest’s more a bet- viewed the reasonable investor as hav ter bid were available. This is almost a ing significantly altered the ‘total mix’ of Only range. addlepated an investor 100% information made available.” TSC Indus in consider difference 100% tries, Inc., 438, Northway, Inc. v. 426 U.S. unimportant deciding in what do. The to 449, 2126, 2132, 96 48 S.Ct. L.Ed.2d 757 range in this case is not Tender unusual. (1976) (footnote omitted). TSC dealt with compared premia offers entail substantial rules, “materiality” under the proxy but prices with before carry shares like every appeals other court of we have afterward, the offers be bids—and should taken the definition in as TSC suitable for Managers defeated. who sell firm to in appears term wherever it securities Knights gains addition obtain to Michaels, E.g., law. 767 at F.2d 1194. from the those initial bidders. available appeals Asquith, Several have The may courts held that data be found Paul Bids, public corporations arrange Merger Uncertainty, efforts and Stockhold- 51, 62-72, mergers Returns, are immaterial this stan- er 11 Financial Econ. under J. dard, law, (1983); Bradley, as a matter of 81 Anand Desai & until firms Michael accordingly questions 1. unnec- The covered in II and III several other circuits. It is Parts court, opinion essary briefs from were briefed in district a new round of ask for subject opinions parties. and the has been these aired in

1175 Kim, rationale, Inter- cases also to a The Behind allude third E. Han Rationale Syn- bright-line or Tender need create a rule that will Offers: Information firm 183, Econ. 188-98 Financial ergy?, J. plan corporate allow firms to transactions Gregg A. (1983); Frank H. Easterbrook & they with assurance that not be Jarrell, Targets Defeating Do Gain From way pro condemned no matter they which 277, N.Y.U.L.Rev. 289- Offers?, 59 Tender ceed on disclosure. (1984); Jarrell, Gregg A. 294-99 reasons, first of these disclo- Targets: Litigation by Wealth Effects sure confuse investors rather than 28 J.L. Diverge Merge?, Do in a Interests choices, illuminate their is weak. It as- (1985); Wayne H. 161-73 & Econ. nitwits, sumes that investors are unable Ruback, & S. An Em- Mikkelson Richard appreciate mergers when told—that —even Eq- Investigation pirical Interfirm risky propositions up closing. until the Process, 14 J. Financial uity Investment ventures, corporate Almost all from build- Econ. ing plant angling merger a new for a Reiss, judges Staffin, who decided partner, may go poorly, well or with a deny cases did not and similar probability attached to each To outcome. merger merger and no difference between simplicity, attribute to investors child-like They instead on substantial. drew inability grasp probabilistic signif- Supreme strand of the Court’s a different of negotiations, implies icance reasoning TSC, recognition plants, told new should not be about new sig information is of such dubious “[s]ome managers, products, new that insistence on its disclosure nificance corporation. changes in the life of good.” may accomplish more harm than potential things These new events— at 2132. Our U.S. 96 S.Ct. exactly the for boom or bust—are news have appeals on other courts of colleagues sophisticated investors make most suggested why the disclosure two reasons decisions; news, value, “old” with settled negotiations may “accomplish ongoing already is of the stock reflected good.” more than One is that disclo harm so is at all. Doubtless some no news ongoing negotiations may befuddle sure of unsophisticated negoti- think that investors investors, leading them think the merger thing are the same as a ations E.g., more than is. outcome certain Staf completed merger, babes in the but such 1206; Reiss, F.2d at 711 F.2d at fin, 672 apt are not to follow contested woods (“Such inherently fluid negotiations are day day. Disclosures to tender offers and the eventual outcome shrouded limited to the market as a whole cannot be may uncertainty. Disclosure fact be The Wall fit for rubes. Street what misleading secrecy more than so far on which in- Journal filled with rumors concerned.”); decisions are investment 230.175, act; Rule 17 C.F.R. vestors § 742 F.2d at 756. The Greenfield, encourages and even disclosure allows premature may that disclosure reason is events; “projections” about uncertain of of firm’s ob the achievement frustrate in a tender offer any Schedule 13D filed destroying source of the value jective, range plans and disclose a of contin- will sought E.g., Staffin, 672 to be disclosed. regularly gent choices. These documents (“disclosure preliminary 2d F. at 1206-07 merg- potential statements about contain would, large, merger negotiations by and ers, by accompanied disclaimers and cau- shareholders”, good to do harm than more not risks. We do doubt tions about an collecting support; “If the sources of schedules, with more haste these drafted agreement an nouncement is withheld until newly sell is- reached, prospectus used to greatest than principle ... stock, likely correspondingly more results.”); sued greatest good number for information is But some incomplete. (“considering be at 757 Greenfield, 742 F.2d to none. Inves- always preferable almost merger most discus the delicate nature of necessary omis- tors, appreciate who sions, might seriously in [early disclosure] sions, And the disclo- can with risk. acquisition ventures.”). The deal hibit such (such hiring fact as the of an sure a disclosure be will lower than bids in a up to hunt a investment banker specter world deferred disclosure. One Knight) just not invite suit does because facing any potential buyer is the winner’s poorly. turns out search prospect high curse—the bidder wins the auction he because alone has premature The effect of disclosure on placed unrealistically high an value on the probability merger is much more Negotiations glare assets. public- in the concern. Investors seek substantial mone- ity may putative returns, buyers lead to think that tary and few want disclosure they whenever bargain they locate a will its own sake. To the extent investors’ preempted depends withholding wealth on some informa- other bidder who waits tion, all favor that course. So a firm wings, they but whenever offer too working may a valuable invention much “prize”. will be left with their elect not to disclose the existence of the The heads-I-win-tails-you-lose quality of daily progress. alone project, let Much of process general either lead the value of the invention come from (to reduction in offers assure that no offer stealing rivals, march a value that high) is too to a refusal to offer the best dissipated if the firm would be turned valu- price being victory. without assured of Ei- able over its investors and way, during negotiations may ther silence inescapably to An therefore rivals. inves- Note, beneficial investors. See also day public tor who sells the before the Rule 10b-5 and Duty to Disclose disclosure complain invention cannot Merger Negotiations Corporate State- that he missed out on an in the increase ments, (1987). 96 Yale L.J. stock, price of the firm’s more than the Both New York and the American day investor sells who before a favor- Exchanges suggest Stock therefore quarterly report earnings able or an postpone listed firms announcements until increase in dividends demand to re- agreements definitive have been reached. ceive the increase. See State Re- Teachers quotes the manual of the American Staffin Corp., Board tirement v. Fluor Exchange. Stock also See 202.01 of the § Cir.1981). (2d The famous Texas manual, Exchange’s New York Stock re- Sulphur Gulf case furnishes another illus- produced appendix opinion. as to this tration. TGS biggest found the world’s reply Flamm may is not silence ben- capitalize, lode nickel. To it had to line investors, eficial all that there is a con- up rights the mineral for the whole area. flict of If interest between investors who sell assays TGS had released the immediate- (or ly, other firms before the the owners of the disclosure investors who sur- interests) hold, receiving face captured thereby could have the re- the benefits later keep wards of TGS’s search. had Gilson, TGS on. See Ronald J. The Law and while, find its secret for a and investors Corporate Acquisitions Finance who sold their stock while TGS was silent so, Perhaps although corpora- complaint. had no See SEC v. Texas required tion securities law to Gulf (en Sulphur (2d Cir.1968) 401 F.2d 833 hair-trigger favor sellers over other inves- banc). did TGS its investors a favor however, longer From perspective, tors. saying possible as little as long for as disappears. even this conflict Investors necessary. Once disclosing TGS started prescribe managers’ who wanted their lie, duty but that’s another during merger behavior discussions would (which III). problem we discuss in Part a favor rule of silence until the discussions agreement price reached and struc- Negotiations had merger present for a a sim- anytime problem. ture. Such discussions occur potential acquirers ilar Some ante, during negotiations the life of the firm. Ex each proceed demand that during selling secrecy. They may premature investor’s chance of that fear that selling may spark competition is small. The chance of for disclosure that window deprive part by them of little” offset an identical chance value of their “too is effort, a early buying bargain; every so that bids a a sale has world of at

1177 run, long arbitrageurs “speculators”, in- a seller. the transient buyer and Over — too then, selling gains for little prospect swiping “belong” the vestors—are wash, bargain leaving buying are a longer-term to the investors such as (or receiving scaring prospect the Arbitrageurs compete Flamm. must opportunities merge. to away) beneficial among buy themselves to stock. The more prefer ap- whichever All investors would likely gain Knight the from a later White anticipated their wealth.2 proach maximized bid, given arbitrageur any the more is will- legal governing disclosure is like rule ing profit pay to for stock. To make a the among bargain investors. hypothetical put arbitrageur must his hands on the firms, applies It to all to all investors be stock; acquire he to the stock must outbid sellers, all In they buyers or at times. arbitrageurs, other the who have same end rule, legal must consider selecting a a court view; competition passes ultimately the firms, in all the effects on all investors original back Flamm and the other inves- plaintiff. just effects gains probability tors from of a bid, (or investors, unlucky Knight White as of December 29 such as Even the date), Flamm, particular premium sell their stock other less the for tak- who knowing ing firm too can take comfort hands. soon risk off Flamm’s Premature gain. To they do not lose the whole could have reduced the chances disclosure appearance of White the extent acquisition Knight, of an a White Knights predictable, probability of a therefore reduced the made in the bids Knight appearing in this contest will market for Flamm’s stock. price in the of the stock. Most be reflected pending So silence settlement of the buyers during tender offer contests are and structure of a deal beneficial to arbitrageurs, professional investors who investors, time. most most of the We do knowledgable. These exceptionally think that securities laws war taking professionals money make risk— against interests of investors. best the risk that all bids will vanish take all, Rule is about after and it fraud, 10b-5 $11.75) (and in ex- price fall here to in a is not fraudulent conduct business change prospect gain from the for the way makes investors better off—that (here $17) and the chance of a offer prefer ante and that most all investors ex stock, his he higher Flamm sold bid. When SEC, prefer post. ex Cf. Dirks v. 463 even arbitrageurs risk passed 653-59, 3260-63, U.S. 103 S.Ct. $11.75, fall to or even to $17 would (1983)(liability depends on a 77 L.Ed.2d 911 $17%); (he arbitrageurs did received disclose, “duty” duty part defined in not take risk off Flamm’s shoulders for as group). of investors ensure the welfare possibili- compensated free but were too, conclusion of the agree, We with the (remote 29!) higher of a ty as of December certainty that the benefits circuits arbitrageurs price. Undoubtedly many price-and- support for the supply additional Goldman, shopping learned that Sachs If must occur at rule. disclosure structure for a deal. Their bids reflected value date, That much earlier? an earlier how deal, potential and Flamm received this ground disputation. fertile knowing prospects value without about the firm announced right reply No matter how soon himself. It is not that the entering solely eering a rule without is beneficial as 2. Our about the benefits and detri- case question. Compare particular scholarly rules. The ’34 debate ments of disclosure Gilson, Competitive Seeking Act is not concerned with Microdot’s choice Ver- Bids Ronald J. defend, accept the first Defense, tactics or its decision bid, Passivity 35 sus Tender Pure Offer higher Schwartz, bid. See Schreiber seek (1982), with Alan 51 Stan.L.Rev. Northern, Inc., Burlington U.S. S.Ct. 472 105 Auction, 2 Theory and the Tender Search Offer (1985); Panter v. Marshall 86 L.Ed.2d (1986), Organization Lu- J.L.Econ. & (7th Cir.1981); cf. Field 646 F.2d 271 & Bebchuk, Facilitating Arye Case cian Dynamics Corp. Corp., v. CTS America (?) Reply, id. at Competing 253, A Last Tender Offers: Cir.1986) (7th (analyzing defensive and F.2d 705 auctioneering Schwartz, Bebchuk on Mini- Alan and with wholly questions tactics Periods, 271. id. at mum Offer law). that auction- state We therefore assume negotiations, say investors could that it would Suppose want to be. a firm is should have so a little sooner. engaged negotiations done kept best pressure quiet, the date of advance disclosure Exchange and the asks whether new by (at time) “just a little” a would erode developments activity account for in its the benefits of deferral. No rule other stock. If says yes the firm and says why, clear staying power. than a one would have the cat is bag; out of the if the says firm no, The time at which information liability fraud; should be it faces for firm ought to readily disclosed be says ascertainable. “no comment” that thing is same price-and-structure rule saying “yes” will leave as because investors de- doubt, questions some but it is better duce corporation the truth. No follows than alternative. policy CIA’s saying “no comment” to

every inquiry; every firm regularly con- Ill rumors, firms or denies as the securities laws exchanges’ and the stock rules re- Although adopt holding we quire. exchanges’ require rules a re- public corporations and Reiss that Staffin sponse, respond, not a refusal to in- ongoing negotiations need not disclose until quiries. suddenly When firm says “no produced agreement have on the comment”, inquisitor will realize that deal, and structure that does not his suspicions have yet the produce victory immediate for the defend foundation — response may sow confusion all the same. is, ants. There at least potentially, fur If by hypothesis silence is the best course question ther may deny whether firms investors, may necessary then it ongoing negotiations existence of or shade answers, condone evasive Third Cir- the truth. cuit did in Greenfield, put pursuers off question produced This has a conflict the scent for a time. See also at Gilson among (over the circuits. holds Greenfield 978-79; Note, 96 Yale L.J. at 558-64. by a dissent the author Staffin) that a case, As Flamm may describes the must deny knowledge firm corporate new choose developments between and Levinson. stages even while in the final Greenfield opposed offer, Microdot General Cable’s is- negotiation. explicitly rejects Levinson suing press one release after' It part another. holding, 786 F.2d Greenfield’s told investors hold their stock reserving judgment at while because ^to inadequate price-and-structure pledged $17 was to resist applied rule as to silent General Cable’s all corporations. bid available means. Flamm relies on Levinson. It wolf cried the effect’ This about of tender question is difficult on which —one aggressive offers on our innovators. Flamm initially court Michaels took side insists that he deduced from these state- opin- but then amended the Greenfield ments that Microdot wanted to in- ion remain to become neutral. See 767 F.2d at cost, dependent at any even the return of 1195-96. stock’s If the state- $11.75. supported The conclusion of Levinson is ments indepen- amount to a declaration of principle speaks he who must dence, then failure to disclose that Gold- tell important the truth about matters. man, beating Sachs was bushes may silent, The firm leaving investors to higher bids an omission that made the chances, may lie; take their but the lie materially misleading, just statements like greater have adverse effect on the corporate developments” “no state- value of premature the stock than ments in and Levinson. Greenfield truth. The sup- conclusion of is Greenfield ported by reading the fact that firm implausible unless the Flamm offers negotiations, statements, entitled to conceal the a de- Microdot’s however. The test Exchange TSC, deny objective, mand confirm or of materiality atU.S. Michaels, rumor out flush the truth no matter S.Ct. at 2130: says, though what the firm even firm objectively and no reasonable reader entitled be silent and most investors of these would take them as comments

H79 bids, price no interest other asked for difference between the any denials ($17 $18%) prevailed to De- those were that between how beneficial bids matter manage- January price 5 and 23 and the firm’s cember Microdot’s investors. ($21) representing by the inter- offered Northwest. Flamm did ment claimed to investors, price pursu- not offer to that market rather than to be show ests good any influenced at that small is was the non-disclosure ing philosophy a social during If price None the offer. was cost to stockholders. time no matter the uninfluenced, must have denied that the firm was reflected the statements bids; higher implication prospect some measure the bid. searching higher for damages implies theory bid Flamm’s the statement that General Cable’s Levinson, keep got contrary. the class is what it for “inadequate” is the entitled contrast, surrendering higher opportunity five denials that of a dealt with bald price arrange a and still the full of that attempting to bid receive the firm was avoiding Microdot the while risk that merger. the materials bid—all None of desirability original return level. any view on the issued states economy gen- Knights, for the of White damages in The usual measure of particular. eral or Microdot case under Rule the difference 10b-5 gave Microdot its investors concrete advice what the stock fetched and what it between sell, low. was too $17 because was all infor have been would worth out, coun- things wise As turned mation been disclosed. Ute Citi Affiliated hardly in a to con- position Flamm is sel. zens, 154-55, 406 U.S. 92 at 1472- at S.Ct. he rejected he this advice tend that because 73; Capital Wagner, Aina Associates v. has been deceived. 562, (11th Cir.1985). (Recov F.2d 758 566 case of on the is therefore a silence Ours ery depends sometimes defendant’s all information. For subject of the omitted made none defer profit, but Microdot mum on Microdot was practical purposes, disclosure.) has ring Flamm not tried to defeating strategy General Cable’s its than the difference was other show seeking strategies include zero, bid. Defensive recovery. Harris implying no See Knights earth as well scorched Ellis, White 810 F.2d Savings Trust and Bank Micro- (7th Cir.1987); and other destructive maneuvers. 700, 706-07 Mills v. Electric involving strategy never (7th dot announced 1247-49 552 F.2d Auto-Lite moats, fences, any or tactic that Cir.1977). bidders; an- all it never announced rebuff differently, this put To little this a right Knights. tipathy to At Mills, 552 concluded in F.2d at court is for sale—even

price, corporation widely stock of the market for the say managed by people who corporation efficiently impounds publicly firms traded A illegal. should tender offers about that firm. See available sale; target just offer is not tender Esmark, Inc., Corp. v. Metlyn Realty also For If Flamm a different it is Sale. drew Cir.1985). (7th This im 763 F.2d 835 inference, unreasonable, he was adoption of the “fraud on plies the grounds on which errors are Flamm’s liability approach under Rule market” damages to pay force investors 529; F.2d at Lev Angelos, See 10b-5. awarding damages (which is the effect 749-51; inson, Speiser, 786 F.2d at Peil v. Microdot). affirm against We therefore (3d Cir.1986); 1154, 1160-63 Clark choosing between judgment without Fischel, 8.10.5; Mod R. Use Daniel § and Levinson. Greenfield Fraud Theory in Securities em Finance Actively Traded Securi Involving Cases

IV Note, (1982); ties, 38 Bus.Law. Theory, 95 Harv.L. silence, decide we Fraud-on-the-Market Lest we seem to plaintiff establish If the if Microdot’s Rev. any implication that disclaim statement, lie, omis misleading material, es that the class would omissions were stock, he affected the damages. The class sion has have been entitled establishing recover that he important corporate without of an ac- nouncement delict; of or his knew relied recov tion development. or Such incidents are ery is the difference between the actual extremely embarrassing damaging and to price price and the the market have both company Exchange and the since fully reached traders been informed. public may quickly conclude that some- theory an The fraud-on-the-market im one on acted the basis of inside informa- portant ingredient of class actions secu tion. cases, too, rities for otherwise individual Negotiations leading mergers to ac- and knowledge differences and reliance quisitions, splits, making stock ar- unmanageable. would make the class See rangements preparatory exchange or 750; Levinson, Scott, 786 F.2d at Hal S. offer, changes tender in dividend or rates Impact Class on Actions Rule 10b- earnings, calls redemption, for and new 38 U.Chi.L.Rev. contracts, products, or discoveries are the approach The fraud-on-the-market re- type developments where the risk of plaintiff lieves of the need to show that untimely and inadvertent disclosure of cor- misleading he relied on or even read the or porate plans likely are most Fre- occur. disclosures; incomplete he receives mea- quently, require these matters extensive damages premise sure of based on the study by corporate discussion and officials “right” price appropri- actual versus is the before final decisions can be Ac- made. comparison. logic ate ap- of this cordingly, extreme care must be used in however, proach, implies that widely keep order to on confi- information only traded securities fraud on the market dential basis. will establish entitlement relief. Fraud- possible Where to confine formal or on-the-plaintiff won’t do—not when the group informal discussions to a small market itself was unaffected and top management company or “right”. therefore try Flamm did not involved, companies and their individual that the show he received had been adequate confidential advisors where secur- diminished the omission of he which ity maintained, premature can be public complains. If we take the fraud-on-the- may properly announcement be avoided. limit, approach logical market to its that is regard, In this the market action of a com- dispositive against The competing po- him. pany’s closely securities should be watched sition is that just fraud on the market given at a when being time consideration is way among one many to show reliance and important corporate matters. If un- damages; plaintiff who demonstrates activity arise, particular usual market should the com- reliance still recover. Both pany respected prepared should be to make cases and an imme- scholars have vacil- diate public announcement of the matter. perspectives. lated between these We need today not and do not decide whether point At it usually some neces- becomes on recovery fraud the market allows sary persons to involve other to conduct sort, case of hope preliminary or prepa- studies assist other passed by issue silence contemplated transactions, e.g., rations litigants. future financing appraisals, ar- business tentative rangements, large hold- Affirmed attitude outside

ers, stock, availability major blocks APPENDIX analyses engineering and market studies surveys. Experience has shown that 202.00 Material Information maintaining security point at this is virtual- Handling 202.01 Internal of Confiden- ly impossible. re- Accordingly, fairness Corporate tial Matters quires company an imme- that the make public Unusual market or diate as soon as activity announcement substantial price change relating important has occasion occurred in a disclosures to such company’s shortly securities before an- matters are made outsiders. have, however, important reservations and

APPENDIX —Continued perspective require differences in me depend The extent of the disclosures will separately great length. not at to write discussions, studies, stage of upon the —but possible, negotiations. public far as So decided, price, First, be definite as to statements should I think case could ratio, timing pertinent and/or majority, reaching the same result as permit a necessary reason- and the issues of the instructions As of the matter. a mini- able evaluation parties of evidence as admission mum, they should include those disclosures There were errors presented them. outsiders. Where an an- made to initial context, but, in I am taken instructions specific complete, or nouncement cannot be they reasonably were harmless. confident from supplemented it will need to be time foisting in primarily erred The instructions to time as more definitive or different investiga- of some of erroneous burden sort determined. terms are discussed or plaintiffs. the But the evidence tion on Corporate employees, as well as directors present any real issue of investi- does not officers, regularly be reminded and should gation, and this error seems harmless. not policy they a matter of must as alleged majority does not mention they may disclose confidential information evi- and exclusion of errors of admission in of and receive the course their duties dence, I find no revers- here would also but attempt advantage take must not to ible error. themselves. such information eager, Second, willing, though I not am importance In this matter view the go presented issues as beyond involved, potential and the difficulties agree that the defendants win as parties to periodic Exchange suggests review majority feels that of law. The a matter company of in be made each the matter requires adoption of a approach being this information is which confidential price (agreement on and bright-line A organization. within its test handled own approval company’s policy structure) specific reminder notice and the (3d might help- also those in sensitive areas 672 F.2d 1196 Greenberg, Staffin ful. Cir.1982) American v. Pan and Reiss A corporate policy sound disclosure (2d Inc., Cir. Airways, World essential to the maintenance of a fair and prefer- 1983).1 majority’s I understand orderly securities It mini- market. should secrecy rule. If the bright-line ence for Exchange mize the occasions where the is in most investors’ merger negotiations necessary temporarily finds it halt trad- (a plausible premise interest ultimate best ing security in due to information leaks necessarily one carved not though significant or rumors connection with argument for certainly an stone), there is corporate transactions. prin- agreement in quiet until keeping them procedures pri- While the are directed course, (And, here we reached. ciple is marily involving at situations two or more considering only the welfare apparently are companies, they equally applicable are major- investors.) My problems with major corporate developments involving a procedural— ity’s primarily conclusion single company. have necessarily We substantive. not concurring in CUDAHY, Judge, Circuit issues important argument no heard concurring part: judgment and boldly based majority decides doubt well-informed—notions its own—no ma- well-reasoned and the clear I admire corporate world turns. of how through us leads opinion which jority might Exchange Commission and Securities required theory the economic and cases thought views, it not its given have us I us. before problem grips with come bright-line any test. price-and-structure or majority, conclude I cannot 1. Unlike Reiss, price-and- F.2d at 13-14. adopted See has the second circuit adopt a Reiss Nowhere does structure rule. Although this a case about instructions and theory. evi- their activities are not I it is necessary relevant, dence.2 do think directly tape-readers chartists and —or merely wise—to so I bold. would hold they find all need to know about securities specific that on the facts of this case there (and price their sometimes their vol- misrepresen- has been no nondisclosure ume trading). True “technicians” es- jury tation from reasonable which a could sheets, news, chew balance rumors and in- conclude that the securities laws had been formation of kind outside the as a evidence, the majority violated. has real, complete distraction from the true and it, conclusion, supports reviewed discounted attained that is all are required go to decide. To in an efficient Perhaps, market. this is the lay general applicable on to down rules right approach (al- to security analysis all failure-to-disclose cases—even when the though certainly I am not suggesting subject rules have been the of considerable majority mind). this is what the has in But litigation and academic debate—is simply the securities laws were not written for. called empha- market technicians put on telling sis the truth and the whole truth Third, I points believe at several in the Again about I securities. believe this is a majority opinion underpinnings the moral moral may may dimension which sweep of law risk of the contribute to wealth maximization in the analysis. example, economic For gen in its impor- context of an efficient market. It is erally approving discussion of Greenfield tant sight not lose of the moral Heublein, Inc., (3d v. 742 F.2d 751 Cir. underpinnings law our concern for 1984), speaks the majority kindly lying consequences. its economic maintaining secrecy the interest of merger negotiations. analysis Such an economically rational and tend to maximize investors’ wealth it does but

seem to raise few old-fashioned questions corporate morality. pursuing Without here,

the matter I do not think it is the

place courts undermine business

morality even in the name shareholder

wealth maximization.

Fourth, I majority think the opinion is

interesting generally and correct in most of

its observations about fraud-on-the-market 2. In its brief for the United States as agree- amicus ations are deemed immaterial until an support petition filed reached, curiae for certio principle corporation, ment Basic, Inc., (6th rari in Levinson v. Cir.1986), F.2d negotia- privy or its insiders who are to the — U.S.-, granted, cert. 107 S.Ct. tions, acquire corporation’s could securi- (1987) 94 L.Ed.2d 142 the Solicitor Gener ties, taking advantage of uninformed share- urged Supreme reject al price- Court by trading making any holders without disclo- adopted by and-structure rule the Third Circuit negotiations. sure of the Greenberg, (3d in v. 672 F.2d 1196 Cir. Stasff 11-13, Brief for the United States at Levinson 1982), Heublein, Inc., Greenfield (86-279). (3d Cir.1984), denied, cert. 469 U.S. course, majority, adopts Third Cir- 105 S.Ct. 84 L.Ed.2d 336 nondisclosures, cuit’s standard in the context Solicitor General stated: Staffin, as enunciated in but finds that The Third Circuit’s test could ... be read to present facts it need not decide whether fol- permit corporations freely to issue intention- adopt the low same standard in Greenfield ally misleading denying false or statements misrepresentations. the context Securi- merger talks that reasonable investor Exchange opposition ties and Commission’s important would consider to his investment price-and-structure apparently rule in both decision, misleading making investors into in- contexts should be matter of serious concern vestment decisions on the basis of incorrect to this court. Moreover, merger negoti- information----

Case Details

Case Name: Ann Flamm and Arnold M. Flamm, on Behalf of a Class v. Rudolph Eberstadt, Jr., and Microdot, Inc.

Court Name: Court of Appeals for the Seventh Circuit

Date Published: May 1, 1987

Citation: 814 F.2d 1169

Docket Number: 86-1754

Court Abbreviation: 7th Cir.