Petition for Writ of Certiorari — Trans World Airlines, Inc. v. Kronfeld

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IN THE

Supreme Court of the United States

OCTOBER TERM, 1987

TRANS WORLD AIRLINES, INC.;

TRANSWORLD CORPORATION,

Petitioners,

JOEL KRONFELD,

Respondent.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Of Counsel: ROBERT J. SISK*

One Wall Street

New York, New York 10005

(212) 709-7000

Attorney for Petitioner

Transworld Corporation

NORMAN C. KLEINBERG

VILIA B. HAYES

HUGHES HUBBARD & REED

Of Counsel: DENNIS J. BLOCK*

767 Fifth Avenue

New York, New York 10153

(212) 310-8000

Attorney for Petitioner

Trans World Airlines, Inc.

IRWIN H. WARREN

DUSHICA D. BABICH

WEIL, GOTSHAL & MANGES

* Counsel of Record

QUESTIONS PRESENTED

1. Whether an issuer can be held liable under the federal

securities laws for failing to disclose the existence of an

unfinished study of numerous corporate options or the uncer-

tain possibility that one such option might be the subject of

future corporate action, prior to any consideration of, or

action upon, either the study or any of the proposed options by

the issuer’s decisionmakers?

2. Whether an especially strict standard applies to motions

for summary judgment involving the issue of materiality in

federal securities actions, thereby effectively eliminating the

use of summary judgment in such actions?

PARTIES TO THE PROCEEDING

The parties to this proceeding are:

1. Petitioner Trans World Airlines.*

2. Petitioner Transworld Corporation.**

3. Respondent Joel Kronfeld, on behalf of a class ot

chasers of cumulative convertible preferred stock of Tran

World Airlines.

are or mav be considered parent companies, subsidi

aries or affiliates of TWA: AERO Limited Partnership; Mandrake

Partners Limited Partnership; O’Riole Corp.; ACF Industries Incor

justries Plan, Inc.:; Icahn Capital Corporation,

Hold Corporation: Carl C. leahn; Excalibur Partners (Gen

Partnership): GNU Corp.: Unicorn Associates Corporation; and

I ng the liquid I sworld Corporation on December

1986. TW Services, Inc. succeeded to the bulk of the businesses

ynducted by Transworld Corporation. An indirect subsidia

TW Services, Inc. is the general partner in Winchell’s Donut Houses

TABLE OF CONTENTS

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CET TER ETT TEE CTL ET Teer e rT Ee Te

STATUTES AND RULES INVOLVED...............

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a Kaa sag h 4 4 65.6s pao 0 neo ood am wes

REASONS FOR GRANTING THE WRIT

The Odyssey Proposal and Goldman Sachs Assign-

as oe ok ac gab 6 e:0 a6 wid adde ena

EE a

The Goldman Sachs September 6th Report to

a oa ew ote ak ole ug ould wide

THE SECOND CIRCUIT’S “POSSIBILITY”

STANDARD OF MATERIALITY FOR JUDG-

ING THE DISCLOSURE OF CONTINGENT

EVENTS IS INCONSISTENT WITH

NORTHWAY AND CANNOT FEASIBLY BE

MEE PEMINS ovo anc ane caccevcancenseses

. THE SECOND CIRCUIT HAS CREATED A

NEW AND IMPROPERLY STRINGENT

STANDARD FOR SUMMARY JUDGMENT IN

SECURITIES CASES INVOLVING THE ISSUE

OF MATERIALITY WHICH IS INCONSIS-

TENT WITH THIS COURT’S PRECEDENTS,

AND WHICH EFFECTIVELY ELIMINATES

THE USE OF SUMMARY JUDGMENT IN SE-

gg Bae. a ee rire ree re

A. There Was No Concrete Evidence To Support

the Claim that the Omitted Information was

sc 5 dee annua Cee kacses at

B. The Alleged Omissions Were Not Necessary to

Make The Statements Made in the Prospectus

8 PA Prrryrrrrrrer rise

CG LOE ce ccc sds lachecsdansandaces a etweaes

Pg i A AP OPES eer eT Pee ee eee

PAG

TABLE OF AUTHORITIES

Cases:

Anderson vy. Liberty Lobby, Inc., 477 U.S. 242,

06S. Ct. coe Cha ores cccpease reset

Arber v. Essex Wire Corp., 490 F.2d 414 (6th

Cir.), cert. denied, 419 U.S. 830 (1974) .......

Bose Corp. v. Consumers Union of United States,

fie, GER U3 tev Ge Cas 80s eee keewaens

Celotex Corp. v. Catrett, 477 U.S. 317, 106 S. Ct.

BSG CURNON ski sks Cen aes Rhe sa ceer tees 3,

Electronic Specialty Co. v. Int’! Controls Corp.,

SOP F.26 DST C20 Ce BSP in cc des Hossa tent

Feit v. Leasco Data Processing Equip. Corp., 332

y. eee, SOG GERI is BP eco wens whecs eee

Flamm v. Eberstadt, 814 F.2d 1169. (7th Cir.), cert.

denied, 56 U.S.L.W. 3246 (October 6, 1987)... 3n,

Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281

CO 4A) Ft ees + 600 dda ee

Greenapple v. Detroit Edison Co., 468 F. Supp.

702 (S.D.N.Y. 1979), aff’d, 618 F.2d 198 (2d

Ci CUE. voc) 0203s 5d kas padeeesee esse

Harnett v. Rvan Homes, Inc., 496 F.2d 832 (3d

ae SG Fa sie a SR eh a ee

Hassig v. Pearson, 565 F.2d 644 (10th Cir. 1977).

In Re Union Carbide Class Action Secs., 648 F.

ees Tee Cee eo ss SU onc va bkceen sone

Matsushita Elec. Indus. Co. v. Zenith Radio

Corp. 479 8S. See Cee nbd isha taeaeee ue

Mills v. Electric Auto-Lite Co., 396 U.S. 375

(1970)

PAG!

PAGE

Missouri Portland Cement Co. v. Cargill, Inc.,

498 F.2d 851 (2d Cir.), cert. denied, 419 U.S.

GES CID POR akc sc nwidetsekdustsnss eee 3n, 16n

Parsons v. Hornblower & Weeks-Hemphill,

Noyes, 447 F. Supp. 482 (M.D.N.C. 1977),

aff'd, $71 F.2d 203 (4th Cir. 1978)............ = 19n

Reiss v. Pan Am. World Airways, Inc., 711 F.2d

Te fo | reer ree 3n, 16, 17

Rodman v. Grant Found., 608 F.2d 64 (2d Cir.

POTED 0 6.6660canddcgeseceacedeciaeeee 16n

SEC v. Mize, 615 F.2d 1046 (Sth Cir.), cert.

Geta, GS CBs Fae (IPD hcncccduvedaseoes 2n-3n, 16

SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d

Cir. 1968) (in banc), cert. denied, 394 U.S. 976

(ESGRD occk.ccccaneestsntdicngneee 9,10, 14 & n, 17

Sonesta Int’! Hotels Corp. v. Wellington Assocs.,

463 F.28 B67 GG CO FOTO vi. 60nscnccuesksens l4n, 15-16

Staffin v. Greenberg, 672 F.2d 1196 (3d Cir. 1982) 3n, 16-17

Starkman v. Marathon Oil Co., 772 F.2d 231 (6th

Cir. 1985), cert. denied, 475 U.S. 1015 (1986)... 19n

Susquehanna Corp. v. Pan Am. Sulphur Co., 423

ae 8675S Goan CR TRF xacciwicccacenscess 16

TSC Indus., Inc. v. Northway, 426 U.S. 438

4. Pr rrrrrTrrrrrrrrrrrrr rr rrr errr passim

Statutory Provisions:

55 Ua. B Fee Cee < 0-0 060.0 0806808000082 19

1S U.S.C. § 78Gb) (1982)... 2... 6. eee eee 19

Rules:

o7 C.ER. § SOR TGRS CIS) vis cacdaavcasers 19

IN THI

Supreme Court of the United States

OCTOBER TERM, 1987

——a-

TRANS WORLD AIRLINES, IN¢

TRANSWORLD CORPORATION,

Petitioners,

JOEL KRONFELD,

Respondent

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Iransworld Corporation (“TWC”) and Trans World Air-

lines, Inc. (“TWA”) respectfully petition for a writ of certiorari

to review the judgment of the United States Court of Appeals

tor the Second Circuit, entered in this case on November 2,

1987, which reversed the decision of the United States District

Court for the Southern District of New York (Weinfeld, J.)

granting summary judgment to defendants

OPINIONS BELOW

The majority and dissenting opinions of the court of appeals

are reported at 832 F.2d 726 (2d Cir. 1987). Upon the denial of

the petition for rehearing, the majority issued an order amend-

ing the opinion which is unreported. The opinion of the district

court gramting summary judgment dismissing the complaint ts

reported at 631 F. Supp. 1259 (S.D.N.Y. 1986). These opinions

are reprinted in the Appendix to this Petition.

~ ’ , : ‘ \

elerence a are pare C ppend

JURISDICTION

The judgment of the court of appeals reversing the judgment

of the district court was entered on November 2, 1987. A

timely petition for rehearing and a suggestion for rehearing in

banc were denied on December 28, 1987 and December 30,

1987, respectively. The jurisdiction of this Court is invoked

under 28 U.S.C. § 1254(1).

STATUTES AND RULES INVOLVED

The statutes and rules involved in this proceeding are Section

11 of the Securities Act of 1933, 1S U.S.C. § 77k (1982),

Section 10(b) of the Securities Exchange Act of 1934, 15

U.S.C. § 78j(b) (1982), and Rule 10b-5, 17 C.F.R. § 240.10b-5

(1987). These statutes and the rule are reprinted in relevant

part in the Appendix.

STATEMENT OF THE CASE

In this case, a divided panel of the Sec@nd Circuit rejected

the holding of the district court that the federal securities laws

do not require disclosure of “mere contingencies long in

advance of the first consideration of the question by those

responsible for decisien.” (45a.) Instead, the panel ruled that

issuers Of securities can be held liable in damages if they do not

disclose in a prospectus possible future corporate action and

the existence of unfinished studies which include such action

among other possible corporate options, even though they

neither have been considered, nor acted upon, by any corpo-

rate decisionmaker. This radical change in the law cannot be

reconciled with TSC Industries, Inc. v. Northway, 426 U.S.

438 (1976), is at odds with numerous appellate holdings that

have concluded that “possibilities” need not be disclosed,” and

2. E.2., SEC v. Mize, 615 F.2d 1046, 1085 (Sth Cir.) (disclosure must

occur “[wjhere the occurrence of a proposed course of action has

is inconsistent with recent cases holding preliminary merger

negotiations immaterial as a matter of law.”

In addition to imposing a novel standard for corporate

disclosure, the majority also concluded that an especially strict

standard applies to motions for summary judgment on the

issue Of materiality under the securities laws which conflicts

with the Court’s recent decisions in Anderson v. Liberty

Lobby, Inc., 477 U.S. 242, 106 S. Ct. 2505 (1986); Celotex

Corp. v. Catrett, 477 U.S. 317, 106 S. Ct. 2548 (1986); and

Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475

U.S. 574 (1986).

if upheld, the decision below (a) would impose an extraordi-

nary burden of premature disclosure on issuers and would bury

investors under an avalanche of information about mere cor-

porate possibilities, and (b) would effectively eliminate the use

of summary judgment on the issue of materiality in litigations

involving the federal securities laws.

The Parties

Petitioner TWA has, for many years, operated one of the

nation’s largest airlines. On July 29, 1983, TWA made a public

offering of cumuiative convertible preferred stock (the “Offer-

ing’). The prospectus and the registration statement issued in

connection with the Offering are the subject of this action.

reached a stage of probability rather than mere possibility”), cert

denied, 449 U.S. 9O1 (1980) (emphasis added); Missouri Portland

Cement Co. v. Cargill, Inc., 498 F.2d 851, 872 (2d Cir.) (tender offeror

had no duty to disclose a plan to expand target's business, although it

had commissioned such a plan from an outside consultant, since there

was no evidence that any such plan in fact had been developed or

adopted), cert. denied, 419 U.S. 883 (1974)

E.g., Flamm yv. Eberstadt, 814 F.2d 1169, 1178 (7th Cir.), cert

denied, 56 U.S.L.W. 3246 (October 6. 1987): Reiss v. Pan Am. YUorld

jirways, Inc., 711 F.2d 11, 14 (2d Cir. 1983): Staffin v. Greenberg, 672

| 2d 1196. 1204 ()7 (Ad Cir 198?)

At the time of the Offering, petitioner TWC owned approxi-

mately 80% of TWA’s common stock and had four other

wholly-owned subsidiaries. Two months later, on September

28, 1983, TWC’s Board of Directors announced that it had

asked management to develop a plan for the possible separa-

tion or spinoff of TWA. A plan to spin off TWC’s TWA stock

to TWC’s stockholders was subsequently presented to and

approved by TWC’s Board of Directors and shareholders and

took effect on February 1, 1984.

Respondent Joel Kronfeld, who purchased 200 shares of

TWA cumulative convertible preferred stock in the Offering,

represents a class of persons who purchased such stock be-

tween July 29, 1983, the date the stock was issued, and

September 27, 1983, the day before TWC made its announce-

ment concerning a spinoff of TWA.

The Odyssey Proposal and Goldman Sachs Assignment

In April 1983, several months before the Offering, TWC’s

Board had recommended against, and its shareholders had

rejected, a stockholder proposal by Odyssey Partners (the

“Odyssey Proposal”) to completely restructure TWC by selling

Or spinning off its five subsidiaries. (36a-38a.) TWC had

retained Goldman, Sachs & Co. (“Goldman Sachs”) to assist in

responding to the Odyssey Proposal. TWC also asked Gold-

man Sachs to conduct an independent study of TWC’s existing

diversification strategy, as well as the other financial and

structural alternatives available to the company, and to report

its findings to the Board before August 31. (37a.)* Goldman

Sachs’ presentation to TWC’s Board was originally scheduled

for July 27. (A45, 38a.)° However, Goldman Sachs had made

little progress by the end of June, and the presentation was

4. TWC’s retention of Goldman Sachs and Goldman Sachs’ assign-

ment was widely publicized in connection with the Odyssey proxy

battle and was reported again after the stockholder vote. (6a-7a.)

References to “A * are to pages of the Joint Appendix filed in

the court of appeals. The record has not been certified to the Court at

this time, but will be done upon the Court's request.

rescheduled for September 6 (38a), since the Board did not

meet in August. (A45.)

The Goldman Sachs Study.

At the time of the Offering on July. 29, Goldman Sachs had

not completed its study,and had reached no conclusions. Frank

Salizzoni, TWC’s chief financial officer and a director of both

TWC and TWA, was in charge of monitoring Goldman Sachs’

progress. He had reached the personal view that a separation

of TWA might be desirable.° (41a.) But, TWC’s Board had not

yet even considered any of the numerous options in the still-

uncompleted Goldman Sachs study, much less decided on a

separation of TWA, or any other change in TWC’s structure.

(44a.) Indeed, unlike Salizzoni, TWC’s president and Chair-

_.man, had not made any decision that a separation of TWA, or

any other change, was desirable. (A39, A44.)

The Prospectus

The prospectus issued by TWA in connection with the

Offering painted a grim picture of TWA’s financial condition

and prospects, setting forth the large losses it had experienced

in the past and the reasons why these losses were expected to

continue. (A109.) Purchasers were advised that TWA could not

predict whether it would have sufficient cash in the future to

pay dividends or redeem the convertible preferred stock, and

that TWC had no obligation to make such payments or to

make funds available to TWA. (A109.) Immediately before

describing the existing financial relationships between TWA

and TWC, the prospectus alerted investors that the financial

support provided by TWC in the past might not continue:

6. Handwritten notes written by a junior associate at Goldman Sachs

during a meeting on July 7, 1983 with Salizzoni and members of his

staff state: “goal-build liquidity in airline & cut cord w/TWC so they

can walk away.” These words were preceded by the contradictory

statement: “TILL DEATH DO US PART.” (41a.) Although plainttt

deposed all the meeting attendees, no one, including the author of the

notes, recalled anyone ever making such statements. (A229.)

There may in the future be other arrangements between

TWA and [TWC] (or other of its subsidiaries). It is

intended that the terms of these arrangements will be

determined on an arms-length basis. There can be no

assurance, however, that these terms will be favorable to

TWA or that [TWC] will continue to provide TWA with

the same level of support for TWA’s financing and other

needs as it has in the past. ((38a-39a) (footnote omitted).)

In addition, the section titled “CONTROL BY [TWC]”

disclosed that TWC had reduced its holdings of TWA stock to

approximately 80 percent only a few months earlier (A132),

and had obtained consents from TWA’s lenders to reduce

further its holdings to 60 percent. It also specifically informed

investors that TWC might in the future reduce its holdings still

further, assuming the consents required from lenders and

stockholders were obtained. (8a-9a.)

The Goldman Sachs September 6th Report to TWC’s Board

When Goldman Sachs made its presentation to TWC’s

Board on September 6, it discussed advantages and disadvan-

tages of seven structural and financial alternatives available to

TWC, including maintaining the existing structure and corpo-

rate strategy, and Goldman Sachs made no recommendation

Goldman Sachs presented the following seven alternatives:

(1) Liquidation;

(2) Sale of TWC;

(3) Partial liquidation, through the sale of TWA or other subsidi-

aries,

(4) Additional sales of TWA shares to the public;

(5) Sale of 20 percent of a “hospitality company,” composed of

non-airline subsidiaries;

Separation of TWC and TWA by a spinoff of the airline or a

rights offering to TWA shareholders; and

_—

Continuation of the holding company structure and maximizing

operating returns under the existing diversification strateg\

(9a.)

to the Board. (39a.) Immediately following the Goldman Sachs

presentation, there was extensive discussion among TWC’s

directors of the alternative of separating the airline, with

various directors voicing opposition, surprise and concern.

(44a.) No decision on the merits of any alternative was reached

at that time. Rather, the Board referred consideration of the

Goldman Sachs report to its Finance Committee which met on

two occasions over the next three weeks. (39a.) On September

27, the Finance Committee recommended that the Board

develop a detailed program for a possible spinoff. This pro-

posal was adopted by the Board on October 26, approved by

the shareholders on December 28, and became effective on

February 1, 1984. (39a.)

Prior Proceedings

Kronfeld’s complaint alleged that the prospectus misled

investors to purchase their stock in the belief that TWC would

continue to support TWA financially (A9), by omitting to

disclose that: (1) TWC was considering a plan to “spinoff”

TWA (A9); (2) Goldman Sachs was studying structural and

financial alternatives available to TWC (A14); and (3) “Gold-

man Sachs was preparing to recommend to [TWC] the spinoff

of TWA.” (A15.)°

Following completion of discovery, the district court granted

summary judgment, holding that defendants could not be held

liable for failing to disclose additional information, beyond

that contained in the July 29 prospectus, regarding the rela-

tionship between TWC and TWA or the activities of Goldman

Sachs. (43a.) In his opinion, Judge Weinfeld emphasized that:

8. In responding to petitioners’ summary judgment motion in the

district court, respondent abandoned his claims with respect to the

second and third claimed omissions, resting exclusively on the first:

that TWC—the corporation—was considering “a plan” to spin off

TWA. (A9.) On appeal, respondent again changed gears, claiming that

“{wlhat should have been disclosed, however, were: (a) that defen-

dants’ chief financial officer and Goldman Sachs were studying the

possibility of spinning off TWA; and (b) that a proposal in this regard

would be presented to the Board in September.” (Brief of plaintiff-

appellant on appeal to the Second Circuit, dated June 24, 1986, at 32.)

The Prospectus contained a number of statements

advising investors that the existing relationship be-

tween TWC and TWA was “subject to significant

change” (43a);

As of July 29, 1983, TWC’s Board of Directors had

not considered, much less approved, a separation of

TWA (44a);

No plan or proposal to change the relationship be-

tween TWC and TWA had been presented to TWC’s

Board as of the date of the offering (44a);

TWC’s retention of Goldman Sachs to investigate

alternative structures for TWC “had been extensively

publicized by TWC” (45a); and

Goldman Sachs’ study “was directed toward the iden-

tification and analysis of options for consideration by

TWC’s Board”, and had not even been completed as

of July 29. ((44a) (emphasis in original).)

Although he observed that events occurring after July 29 are

“not determinative of the question of which matters defen-

dants had a duty to disclose on July 29” (44a), Judge Weinfeld

also noted:

— On September 6, 1983, when Goldman Saehs ulti-

mately presented the results of its study to TWC’s

Board, it outlined seven options for Board consider-

ation and “put forward no recommendation as to any

option” (39a, 44a);

The reaction of TWC’s Board to the initial presenta-

tion in September of the idea of separating TWA

“included . . . substantial expressions of ‘surprise,

concern and opposition’ ” (44a); and

After the Goldman Sachs presentation, TWC’s Board

referred the matter to its Finance Committee for

further consideration; it was not until three weeks

later that the Committee recommended that the Board

authorize development of a program to spinoff TWA.

(39a, 44a.)

Judge Weinfeld concluded that the federal securities laws do

not require disclosure of “mere contingencies long in advance

of the first consideration of the question by those responsible

for decision.” (45Sa.)

In an opinion written by Judge Mahoney, a divided panel of

the court of appeals reversed on the ground that the district

court had applied the wrong legal standard. The Court did not

find that there was any evidence in the record that, as of July

29, the study had been completed or presented to the Board, or

that the Board had reached even a tentative (much less a final)

decision on the spinoff or any other option in the study.

Nevertheless, purporting to apply the balancing test set forth in

SEC vy. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d Cir.

1968) (in banc), cert. denied, 394 U.S. 976 (1969) because the

alleged omissions concerned a prospective event, the court of

appeals held in its original opinion that a jury question was

presented because the possibility of a TWA spinoff was “more

than wholly remote.” (24a.) When defendants moved for

rehearing, arguing that the “wholly remote” standard of mate-

riality conflicted with Northway, the court amended its opin-

ion to recharacterize the spinoff as “a substantial possibility.”

((33a) (emphasis added).) The court did not suggest, however,

that there was any basis whatsoever for believing on July 29

that a spinoff was probable or even a substantial likelihood. In

addition, the majority held that a particularly “strict standard”

applies to motions for summary judgment on the issue of

materiality, and, therefore, this case should be submitted to a

jury. (23a.)

Judge Miner dissented, recognizing that the proper standard

of materiality for prospective events must be based on proba-

bility, not possibility. (30a.) Because there was no way the

undisputed evidence in the record could be viewed to permit a

finding that a spinoff was probable, or more probable than the

various other options under consideration, he concluded there

was no genuine issue of fact and summary judgment should

have been granted. (30a-3la.) Furthermore, Judge Miner re-

viewed the disclosures made in the prospectus, finding:

The information provided was full and complete, poten-

tial investors were cautioned adequately as to the prob-

lems facing the company, and there was no false

representation of any kind. A jury should not be afforded

the opportunity to speculate otherwise. (29a.)

REASONS FOR GRANTING THE WRIT

This petition should be granted because of the Significant

impact of the decision below on the disclosure obligations of

all issuers of securities, on investors’ abilities to make intelli-

gent investment decisions, and on the application of summary

judgment to securities litigation:

First, because this Court has not addressed specifically the

proper standard of materiality for contingent events, the ma-

jority purported to apply the “probability/magnitude” balanc-

ing test set forth in 7Jexas Gulf Sulphur, 401 F.2d at 849. Its

holding that a “substantial possibility” of future corporate

action not disclosed in a prospectus presents a jury question

cannot be squared with Northway or Texas Gulf Sulphur, and

the numerous holdings that have rejected the argument that

“possibilities” need to be disclosed. See discussion infra

pp. 15-16. In addition, because its holding is inconsistent with

the numerous cases holding preliminary merger negotiations

immaterial as a matter of law, the majority established two

standards of materiality governing corporate disclosure of

contingent events to distinguish this and other non-merger

cases from merger case precedent: a “constructive immaterial-

ity” standard for mergers (21a) and a “substantial possibility”

of occurrence standard for other, future events. (33a.) There is

no principled basis for treating these contingencies differently.

Indeed, the decision below would result in the anomalous rule

of law that a corporation must disclose a possible future course

of action which has not yet even been considered by the Board

of Directors, but need not disclose a probable future merger -

which the Board has already considered and authorized man-

agement to attempt to negotiate.

Issuers are continually engaged in studying possible future

corporate action—often very significant action—and properly

so. The majority’s decision creates a disclosure standard that

would be incredibly burdensome, if not impossible, for issuers

to meet. Issuers would need to disclose every unfinished study

of “possible” future action and every alternative that is being

studied, even if it has not yet been finalized, or presented for

consideration or approved by the Board, or even if there is no

Board or management consensus that it should be adopted.”

Moreover, issuers nationwide would face the risk of substan-

tial liability whenever they failed to predict an event that later

occurred, for it would be difficult indeed for an issuer to argue

to a jury that there was not at least a “substantial possibility”

that an event would occur, when it, in fact, did occur. Disclo-

sure of “possibilities” would also severely impair a company’s

ability to compete and would chill creative and constructive

identification, development and study of corporate alternatives

to the detriment of the company and its stockholders.

The direct result of the Second Circuit’s “possibility” stand-

ard would be to bury shareholders under endless carefully-

phrased and essentially meaningless disclosures about

“possible” future events. Material facts, which the securities

laws require for the investors’ and markets’ information and

informed decision-making, would be lost or their importance

diminished by the welter of possibilities, studies and proposals

9. Because the court of appeals’ holding is not narrowly limited,

Studies regarding oth.r significant future events affecting a corpora-

tion, such as new products, efforts to discover sources of raw materi

als, and new marketing or financing plans would also have to be

disclosed. Moreover, the court’s “possibility” disclosure obligation

would not appear to be confined to issuers involved in public offer-

ings, but would apply to all instances of corporate disclosure.

which would have to be publicized under the disclosure stand-

ard adopted by the Second Circuit.

This Court should settle the important question of the

standard of materiality applicable to contingent events in a way

that preserves the balance that Northway established between

too much and too little disclosure: the “possibility” standard

adopted by court of appeals must be rejected in favor of a

uniform standard that requires corporate disclosure of contin-

gencies only if their occurrence appears “probable.” Mere

studies of future options and alternatives should not have to be

disclosed unless and until they have been presented to and have

been the subject of some affirmative action by the corporate

decision-maker.

Finally, the court of appeals’ decision would sound the death

knell for summary judgment in securities actions and repre-

sents an invitation to disappointed investors further to inun-

date the courts with such litigation. If all a shareholder must

do to get to a jury is to show that an officer or outside advisor

of a corporation has considered or been asked to study a

“possible” course of action which was not disclosed at the time

of a public offering, then the courthouse doors will be opened

even wider than they presently are to shareholder suits. The

decision below removes from the arsenal of the trial court the

most effective weapon against baseless shareholder actions and

undercuts this Court’s efforts to revive summary judgment as a

meaningful alternative to the full-scale trial of every case as

enunciated in Anderson v. Liberty Lobby, Inc., 477 U.S. 242,

106 S. Ct. 2505 (1986); Celotex Corp. v. Catrett, 477 U.S. 317,

106 S. Ct. 2548 (1986); and Matsushita Electric Industrial Co.

v. Zenith Radio Corp., 475 U.S. 574 (1986).

I. THE SECOND CIRCUIT'S “POSSIBILITY” STAN-

DARD OF MATERIALITY FOR JUDGING THE

DISCLOSURE OF CONTINGENT EVENTS IS IN-

CONSISTENT WITH NORTHWAY AND CANNOT

FEASIBLY BE MET BY ISSUERS. :

In TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438

(1976), this Court stressed that the standard of materiality

under the federal securities laws must maintain “the proper

balance between the need to insure adequate disclosure and the

need to avoid the adverse consequences of setting too low a

threshold for civil liability.” Jd. at 449 n.10. See also Mills v.

Elec. Auto-Lite Co., 396 U.S. 375, 384 (1970). As the

Northway Court cautioned:

Some information is of such dubious significance that

insistence on its disclosure may accomplish more harm

than good. The potential liability for a Rule 14a-9 viola-

tion can be great indeed, and if the standard of material-

ity is unnecessarily low, not only may the corporation and

its management be subjected to liability for insignificant

Omissions Or misstatements, but also management’s fear

of exposing itself to substantial liability may cause it

simply to bury the shareholders in an avalanche of trivial

information—a result that is hardly conducive to in-

formed decisionmaking. 426 U.S. at 448-49.

Accordingly, this Court rejected the definition of a material

fact that the Seventh Circuit had adopted in Northway—“a

fact which a_ reasonable shareholder might consider

important”—as “ ‘too suggestive of mere possibility, however

unlikely.” Jd. at 449 (quoting Gerstle v. Gamble-Skogmo,

Inc., 478 F.2d 1281, 1302 (2d Cir. 1973)). It adopted instead a

standard based on probability, holding that “an omitted fact is

material if there is a substantial likelihood that a reasonable

Shareholder wou/d consider it important.” 426 U.S. at 449.

(emphasis added). “Put another way, there must be a substan-

tial likelihood that disclosure of the omitted fact wou/d have

been viewed by the reasonable investor as having significantly

altered the ‘total mix’ of information made available.” /d.

(emphasis added). Here the Second Circuit created a standard

of materiality with all of the vices of the “might” formulation

which Northway rejected.'”

Because this Court has not addressed specifically the proper

standard of materiality for contingent events, the court of

appeals looked to the “probability/magnitude” balancing test

set forth in Texas Gulf Sulphur, 401 F.2d at 849.'' Although

the Texas Gulf Sulphur standard clearly speaks in terms of

“probability” and the Texas Gulf Sulphur court specifically

stated that “educated guesses” and “predictions” need not be

disclosed, /d. at 848, the majority below reversed the district

court and held that a jury could properly find that the mere

possibility of a spinoff (and/or the fact that Goldman Sachs

10. In essence, the Second Circuit's “possibility” standard represents the

application to contingent events of the rejected “might” formulation.

Indeed, in its original opinion, the Second Circuit explicitly relied on

the “might” formulation, concluding its discussion of the appropriate

legal standard to be applied in this case by quoting the following

language from Sonesta Int’! Hotels Corp. v. Wellington Assocs., 483

F.2d 247, 253 (2d Cir. 1973):

“*The test of materiality is not whether a possible consequence of

the offer was contingent or hypothetical . . . but whether it was a

factor that might be considered of some importance by a [target]

stockholder in making his decision.” ” ((17a) (emphasis added).)

Following petitioners’ petition for rehearing, the Second Circuit

amended its opinion to delete this language; however, the majority did

not alter the analysis that flowed from its original language and

citation, (32a.)

11. In connection with an insider trading claim, the court in Jexas Gulf

Sulphur stated that “material facts include. . . facts which affect the

probable future of the company” and that an assessment of the

materiality of facts relating to prospective events requires “a balancing

of both the indicated probability that the event will occur and the

anticipated magnitude of the event in light of the totality of the

company activity.” 401 F.2d at 849 (emphasis added).

was studying that and other possible alternatives for TWC)

was material information that should have been disclosed.’

As construed by the court below, the “probability

magnitude” test would require issuers to disclose every alterna-

tive under study, at any level of the company or by any outside

consultant, and every other possible event that would be of

significance to the company if it were to occur. To say that this

standard only requires disclosure of “substantial” possibilities

is, aS a practical matter, no limitation at all. Possibilities, as

opposed to probabilities, are by definition not likely to occur.

To attempt to distinguish between future courses of action that

are only somewhat unlikely (and thus perhaps “substantial”

possibilities) and those possibilities that are very unlikely,

would be fruitless, if not metaphysical. The court below

demonstrated just how ephemeral the distinction would be,

first assessing the “possibility” of a spinoff here—not its

“probability” —as “not wholly remote” and then, without any

further review or explication of the facts, terming it as “sub-

stantial.” But under the standard the court adopted, an issuer’s

exposure to potential ruinous civil liability would turn on

precisely that distinction.

As Judge Miner recognized in his dissent, the proper stand-

ard of materiality for contingent events must be based on

“probability,” not “possibility.” (30a.) Most decisions in the

corporate disclosure context are in accord that the mere possi-

bility of future corporate action is not material and need not be

disclosed. See, e.g., Sonesta Int'l Hotels Corp. v. Wellington

Assocs., 483 F.2d 247, 251 (2d Cir. 1973) (a contingent event

may be material “provided there appears to be a reasonable

The court of appeals implicitly acknowledged that there was no basis

for beheving a spinoff was probable—or more probable than any of

the other alternatives—when the prospectus was issued. Initially, the

court merely stated that a spinoff was “more than a wholly remote

possibility.” (24a.) By amendment on motion for rehearing, the court

characterized it as a “substantial possibility.” (33a.)

likelihood of its future occurrence”) (emphasis added); SEC v.

Mize, 615 F.2d 1046, 1055 (Sth Cir.) (disclosure must occur

“Iwjhere the occurrence of a proposed course of action has

reached a stage of probability rather than mere possibility”),

cert. denied, 449 U.S. 901 (1980) (emphasis added); Arber v.

Essex Wire Corp., 490 F.2d 414, 421 (6th Cir.) (“mere specula-

tion [as to future corporate activity], however, does not pro-

vide any basis for Section 10(b) liability”), cert. denied, 419

U.S. 830 (1974); Susquehanna Corp. v. Pan Am. Sulphur

Company, 423 F.2d 1075, 1085-86 (Sth Cir. 1970) (“predictions

of future behavior” are not material); Hassig v. Pearson, 565

F.2d 644, 649 (10th Cir. 1977) (possibilities regarding a poten-

tial sale of shares are not material).'*

The court below also erroneously decided that recent cases

holding preliminary merger negotiations immaterial as a matter

of law have no relevance here. (21a-22a.) See, e.g., Flamm vy.

Eberstadt, 814 F.2d 1169, 1178 (7th Cir.), cert. denied, 56

U.S.L.W. 3246 (October 6, 1987); Reiss v. Pan Am. World

Airways, Inc., 711 F.2d 11, 14 (2d Cir. 1983); Staffin vy.

13. Similarly, courts have uniformly held that studies of such possibili-

ties and the views of individual officers are, as a matter of law, not

material. Rodman v. Grant Found., 608 F.2d 64, 72 (2d Cir. 1979) (a

director's speculative concern as to a future event is not a material

fact); Missouri Portland Cement Co. v. Cargill, Inc. , 498 F.2d 851, 872

(2d Cir.) (tender offeror had no duty to disclose a plan to expand

target's business, although it had commissioned such a plan from an

Outside consultant, since there was no evidence that any such plan in

fact had been developed or adopted), cert. denied, 419 U.S. 883

(1974); Electronic Specialty Co. v. Int'l Controls Corp., 409 F.2d 937,

951 (2d Cir. 1969) (president's personal desires do not constitute a

material corporate plan); Harnett v. Rvan Homes, Inc., 496 F.2d 832,

838 (3d Cir. 1974) (CEO's personal views are not material because thes

“must complete a circuitous course before becoming, if ever, actuality”

and because if a corporation were required to disclose the musings of

its Officers, few transactions would avoid charges of securities law

violations); Feit v. Leasco Data Processing Equip. Corp. , 332 F. Supp.

$44, 568 (E.D.N.Y. 1971) (no duty to disclose in a prospectus methods

of reorganization being “seriously investigated” by legal staff, which

kept president apprised of progress, because plans had not “crystal-

lized.”).

Greenberg, 672 F.2d 1196, 1204-07 (3d Cir. 1982). In the

majority’s view, a standard of “constructive immateriality”

applies to preliminary merger negotiations prior to an agree-

ment in principle on price and structure. (20a, 21a.) The court

held that this is a unique “policy exception ... to the

Northway and Texas Gulf Sulphur formulations of material-

ity” (22a), justified only for mergers, and inapplicable here,

for two reasons: (i) “application of a different rule [to mergers]

could scuttle corporate deals, costing shareholders desirable

merger premiums” (21a), and (ii) mergers involve “negotia-

tions with outside parties”. (22a.)

Neither reason provides a principled basis for recognizing a

different standard of materiality for preliminary consideration

of a merger (even if the concept of merger already is supported

by the Boards of both companies in principle) than for prelimi-

nary consideration of other possible corporate action (which,

here, had not even been presented to the Board). The first rests

on the assumption that shareholders benefit from mergers and,

therefore, would prefer to be kept in the dark if disclosure

would defeat the deal. See, e.g., Flamm, 814 F.2d at 1176-77.

But this Court long ago rejected the notion that judicial

appraisal of the merits of corporate action is a proper basis for

resolving disclosure questions under the federal securities laws.

See Mills v. Elec. Auto-Lite Co., 396 U.S. at 38).

As for the second reason, the fact that merger negotiations

involve third parties is relevant only because it demonstrates

that the outcome of such discussions is unpredictable. Because

the negotiations “may fail as well as succeed, or may succeed

on terms which vary greatly from those under consideration at

the suggested time of disclosure,” such negotiations do not

“definitely affect a company’s financial prospects” and prema-

ture disclosure could be “more misleading than secrecy so far

as investment decisions are concerned.” Reiss v. Pan Am.

World Airways, Inc., 711 F.2d at 14. These considerations

apply with equal force here, where the issue involved disclosure

of one prospective alternative among many that were the

subject of an unfinished study by an outside consultant and as

18a

Supp. 492, 499 (S.D.N.Y. 1983), for the propositions that

the “content of contingent speculations” and “the views

held by individual directors”'* need not be disclosed. 631

F. Supp. at 1264 and n.17.

We do not regard these decisions as controlling here.

Reiss is representative of a current trend in the courts to

hold preliminary merger negotiations immaterial as a

matter of law for purposes of Section 10(b)/Rule 10b-5

liability. These cases, and our view of their inapplicability

to the facts of this case, are discussed hereinafter. The

citation of Electronic Specialty refers to an alleged state-

ment by a corporation’s president, in response to a

financial reporter’s question, that the corporation’s

“preference” was to Sell its holdings in a potential target

at a time when he had personally decided that it would be

advisable to reactivate a tender offer for the target, but

had not yet presented that conclusion to his board of

directors, for whose authority (in Judge Friendly’s words)

he “manifested punctilious regard.” 409 F.2d at 951.

Electronic Specialty would be persuasive authority were

plaintiff’s case here based solely upon Mr. Salizzoni’s

view of the TWA-TWC relationship as of June, 1983, but

that is clearly not the case. Flum Partners states that “the

failure to disclose future business plans is also not action-

able” at 557 F. Supp. 499. To the extent that this state-

14s The reference here is to Frank L. Salizzoni, who during 1983 served

as senior vice president-finance of TWC, was a member of the TWC

and TWA boards of directors and executive committees and the TWA

finance committee, was chairman of the TWC finance committee, and

acted as the primary TWC liason with Goldman Sachs concerning its

study of TWC’s structure and finances. He testified on deposition that

in June, 1983, he had come to the conclusion that “TWA and [TWC]

both could be better off if somehow we could separate the airline

successfully in some manner.”

5832

19a

ment is invoked as a general rule of law, rather than a

disposition of the particular issues presented in that case,

we deem it overbroad in view of Texas Gulf Sulphur and

the cognate decisions cited hereinabove.

3. The Preliminary Merger Discussion Cases.

We turn next to Reiss and related cases that deal with

the question of Section 10b/Rule 10b-5 liability with

respect to preliminary merger discussions. The district

court considered this a “related context,” and deemed

Reiss highly persuasive, if not controlling, here. 631 F.

Supp. at 1264-65.

A recent line of cases has rejected arguments that

preliminary merger negotiations should be disclosed to

the investing public. For example, in Staffin v. Green-

berg, 672 F.2d 1196 (3d Cir. 1982), the Third Circuit

rejected claims that preliminary merger negotiations

should have been disclosed to tender offerees and mem-

bers of a broader class of open market sellers. It found

preliminary merger discussions immaterial as a matter of

law, finding merit in the opinions of other courts and

commentators in the related area of takeover bids that

disclosure of such discussions may do more harm than

secrecy. Jd. at 1206." It held that a disclosure obligation

The Court concluded:

Those persons who would buy stock on the basis of the occur-

rence of preliminary merger discussions preceding a merger which

never occurs, are left “holding the bag” on a stock whose value was

inflated purely by an inchoate hope. If the announcement is

withheld until an agreement in principle on a merger is reached, the

greatest good for the greatest number results. If the merger occurs,

all of the company’s shareholders usually benefit; if no merger

agreement is reached, the stock performs as it would have in any

event.

Staffin, 672 F.2d at 1207 (footnote omitted).

5833

20a

arises Once an agreement in principle is reached. 7d. at

1207.

In Reiss v. Pan American World Airways, Inc., 711

F.2d 11 (2d Cir. 1983), this court resolved a Section 10(b)/

Rule 10b-5 action brought by holders of Pan Am convert-

ible debentures who, pursuant to a call, sold their

debentures rather than convert them into capital stock.

Plaintiffs claimed that had they been aware that Pan Am

was attempting to negotiate a merger with National Air-

lines, Inc., they would have converted their debentures.

On appeal from a grant of summary judgment in Pan

Am’s favor, this Court affirmed, approving the rationale

of Staffin. We noted that merger negotiations “are inher-

ently fluid and the eventual outcome is shrouded in

uncertainty. Disclosure may in fact be more misleading

than secrecy so far as investment decisions are

concerned. . . . [Merger negotiations involve] complex

bargaining between two (and often more) parties which

may fail as well as succeed, or may succeed on terms

which vary greatly from those under consideration at the

suggested time of disclosure.” Reiss, 711 F.2d at 14.

Recently, in Flamm v. Eberstadt, 814 F. 2d 1169 (7th

Cir. 1987), the Seventh Circuit followed Staffin and Reiss

and held that a target company’s search for a white

knight was immaterial as a matter of law prior to agree-

ment on the deal” price and structure. '®

16 A related question which has produced a conflict among the circuits

concerns whether a company, while negotiating a merger, may legally

deny knowledge of new corporate developments. For example, in

Greenfield v. Heublein, Inc. , 742 F.2d 751 (3d Cir. 1984), cert. denied,

10S S. Ct. 1189-90 (1985), the Third Circuit held that a company

engaged in preliminary merger discussions could deny knowledge of

new corporate developments which might account for an unusual

upsurge in public trading in its stock in response to a query from the

5834

2la

We do not question the wisdom of the rule of “con-

structive immateriality,” as one commentator terms it, as

it has been applied in the preliminary merger context. See

generally Note, Rule 10b-5 and the Duty to Disclose

Merger Negotiations in Corporate Statements, 96 Yale

L.J. 547 (1987) [hereinafter “Note, Duty to Disclose”}.

Indeed, the application of a different rule there could

scuttle corporate deals, costing shareholders desirable

merger premiums, either because acquiring corporations

generally insist on negotiating mergers in confidence and

may terminate a deal that is disclosed prematurely, or

because early disclosure may drive the target corpora-

tion’s stock price so high as to make merger consumma-

New York Stock Exchange without running afoul of the federal

securities laws. Arguably, Greenfield’s result is limited to its facts and

does not supply a rule for all cases in this area. The Court found that

although the insiders of Heublein, Inc. “clearly knew” what might

have accounted for the increase in trading, since there was no indica-

tion that privileged information respecting its preliminary merger

discussions had leaked to the public or that insiders were trading in

Heublein stock, the company’s statement that it “was aware of no

reason that would explain the activity in its stock . . .” was not false

or misleading. Jd. at 758-59; but see id. at 763 (Higginbotham, J.,

dissenting). In Levinson v. Basic Inc., 786 F.2d 741 (6th Cir. 1986),

cert. granted, 107 S. Ct. 1284 (1987), the Sixth Circuit reversed a grant

of summary judgment in favor of a company which denied the

existence of merger discussions in response to requests for “no corpo-

rate development” statements from the New York Stock Exchange,

when in fact such discussions were taking place. See genera/ly Note,

Rule 10b-5 and the Duty to Disclose Merger Negotiations in Corporate

Statements, 96 Yale L.J. 547 (1987). In the Supreme Court of the

United States, the United States filed an amicus curiae brief in support

of the petition for certiorari recently granted in Levinson in which it

advocated application of the balancing test of Texas Gulf Sulphur. See

Brief for the United States as Amicus Curiae in Support of Petition for

Writ of Certiorari at 8-9, 15, Basic Inc. v. Levinson, No. 86-279, cert.

granted, 107 S. Ct. 1284 (1987).

5835

22a

tion economically unfeasible. See Note, Duty to Disclose

at 554-55; see also Flamm, 814 F. 2d at 1176-78.

4. The Instant Case

Similar concerns are not implicated here. Section 11 of

the 1933 Act “was designed to assure compliance with the

disclosure provisions of the Act by imposing a stringent

standard of liability on the parties who play a direct role

in a registered offering.” Herman & MacLean y.

Huddleston, 459 U.S. 375, 381-82 (1983) (footnotes omit-

ted). The defendants at bar were in control of the timing

of the TWA issue and of the response to the Odyssey

proposal to a far greater degree than were the corporate

defendants in the preliminary merger cases of the events

unfolding there as a result of negotiations with outside

parties. Here, we see no reason to carve out the policy

exception recognized by cases such as Staffin, Reiss and

Flamm to the Northway and Texas Gulf Sulphur formu-

lations of materiality.

Texas Gulf Sulphur recognizes that contingencies inex-

tricably bound up with a company’s fortunes need not be

certainties to qualify as material. Were defendants’ argu-

ments to carry the day, corporate actors would be granted

the power to render facts—objectively material facts

under the standard of Northway—immaterial as a matter

of law by steering them clear of the board room. The

Third Circuit seems to have recognized as much, even in

the merger context, noting in Staffin that circumstances

may arise where failure to disclose merger negotiations

short of agreement in principle may nonetheless be ac-

tionable where the “functional equivalent” of agreement

obtains. Staffin, 672 F.2d at 1207. As an example, the

Staffin Court cited Thomas v. Duralite Co., 524 F.2d 577

5836

23a

(3d Cir. 1975), a Section 10(b)/Rule 10b-5 case in which

an insider was found liable on a record indicating that he

deliberately postponed merger negotiations which had

already yielded the “likelihood of acquisition” in order to

purchase a large shareholder’s stock at a favorable price.

Id. at 585.

We conclude that the governing rule here is provided by

Northway and Texas Gulf Sulphur, rather than the

Staffin/Reiss/Flamm line of authority. We further con-

clude that, judged by the strict standard applicable to the

granting of motions for summary judgment, especially

concerning questions of materiality, defendants’ motion

should not have been granted in this case.

As we have stated earlier, the TWA prospectus dis-

cussed in some detail the relationship between TWA and

TWC, so the question presented is whether that discus-

sion omitted to state material facts necessary to make the

Statements therein not misleading; not whether, consid-

ered in the abstract, there was an obligation to disclose

those facts at that time.'’ Plaintiff contends, in essence,

that there should have been some reference to the ongoing

Goldman Sachs study of TWC’s structure and finances,

and to the possibility of a termination of TWA’s status as

a TWC subsidiary.

It is not our role at this juncture, of course, to decide

whether plaintiff is correct. Rather, we are to determine

whether plaintiff raised a genuine issue of material fact

concerning the matter. Fed. R. Civ. P. 56(c). In making

this determination, we take into account the Jexas Gulf

Sulphur test calling for a balancing of the likelihood of an

17 Substantially the same standard is stated in Section 11 of the 1933

Act and Rule 10b-S.

5837

24a

event’s Occurrence with its anticipated magnitude if it

occurs “in light of the totality of the company activity,”

Texas Gulf Sulphur, 401 F.2d at 849, and decline to rule

that no disclosure could be material, as a matter of law,

until any proposal for the termination of TWA’s status as

a IWC subsidiary was presented to TWC’s board of

directors.

As to the magnitude of the event, we agree with the

district court that:

It is not disputed that the nature of the relationship

between TWC and TWA, in which TWC guaranteed

much of the credit upon which TWA did business

and financed its substantial requirements for operat-

ing capital, was critical to the decisions faced by

knowledgeable investors in evaluating TWA’s value as

an investment, particularly in view of the fact that

TWA had suffered substantial losses in the period

before July 29, 1983.

631 F. Supp. at 1263. Furthermore, when TWC an-

nounced on September 28, 1983 that it was “considering

the possible separation of TWA,” the price of TWA’s

common stock went into an immediate and sharp decline.

The likelihood of the event’s occurrence cuts much less

sharply in favor of plaintiff, but there was certainly, at a

minimum, more than a wholly remote possibility of its

occurrence. Especially given the fact that the TWC-TWA

relationship was given considerable attention in the TWA

prospectus, we cannot say, in ruling on a motion for

summary judgment, that the evidence is “so one-sided

that one party must prevail as a matter of law” and does

not “present[{ ] a sufficient disagreement to require sub-

5838

25a

mission to a jury.” Anderson v. Liberty Lobby, Inc.,

iS. ‘ , 106 S. Ct. 2505, 2512 (1986).

For example, the discussion in the TWA prospectus of

various arrangements and relationships between TWA

and TWC stated that there might in the future be “other

arrangements . . . [to] be determined on an arms-length

basis,” adding that “[t]here can be no assurance, however,

that these terms will be favorable to TWA or that [TWC]

will continue to provide TWA with the same level of

support for TWA’s financing and other needs as it has in

the past.” A jury might conclude that this language, while

- anticipating revisions of the multitude of relationships

existing between TWA and TWC, did not give any fair

indication that TWA’s status as a TWC subsidiary might

be terminated.

There was no mention in the TWA prospectus of the

ongoing Goldman Sachs study. The district court noted

that Goldman Sachs’ activities in investigating alternative

structures for TWC “had been extensively publicized by

TWC in connection with the proxy solicitation by Odys-

sey Partners.” 631 F. Supp. at 1265. All of TWC’s activity

in that regard pre-dated the annual meeting of TWC

which occurred on April 27, 1983, however, and on June

23, 1983, TWC issued a press release in which its chair-

man stated that “[TWC] now has set targets that by 1987

its presently unprofitable airline subsidiary, TWC, should

become a source of $100 million in pre-tax profits. . .”

There are serious-limitations on a corporation’s ability to

charge its stockholders with knowledge of information

omitted from a document such as a proxy statement or

prospectus on the basis that the information is public

know!edge and otherwise available to them. See Spielman

v. General Host Corp., 538 F.2d 39, 40-41 (2d Cir. 1976)

5839

26a

(per curiam); Fisher v. Plessy Co. Ltd., 559 F. Supp. 442,

445-48 (S.D.N.Y. 1983). At a minimum, in any event, an

issue is presented whether purchasers of TWA’s cumula-

tive convertible preferred stock could properly be charged

with knowledge on July 29, 1983 and thereafter that

Goldman Sachs was then engaged in a study on behalf of

TWC one of the live options of which was a termination

of TWA’s status as a TWC subsidiary. That it was then

live is evidenced by Ms. Casati’s notes taken at the July 7

meeting of Goldman Sachs representatives with TWC

officials, despite her inability upon deposition to recollect

what was said or meant.

Plaintiff also points out that, although defendants

contend that it would have been inappropriate to discuss

in the July prospectus any of the options under consider-

ation by Goldman Sachs prior to their consideration by

the TWC board of directors, one of those options,

additional sales of TWA stock, was in fact so discussed.

The prospectus stated that consents had been obtained

from TWC’s lenders to allow creation of up to a forty

percent public holding of TWA’s common stock, and that

TWA and TWC might make future sales which would

increase the public holding beyond forty percent, assum-

ing any required consents of lenders and stockholders

were obtained.'* Additional sales of TWA stock was one

of the options under consideration by Goldman Sachs.

There is other evidence of record that bears upon the

ultimate issue of a material omission. For example, al-

though the Odyssey proposal called for a “disaggrega-

tion” of TWC’s five subsidiaries, there is evidence

18 We recognize the pertinence in the July prospectus of a possible

Occurrence which could dilute the common stock into which the

preferred stock offered by that prospectus was convertible.

5840

27a

indicating that Odyssey privately informed Mr. Salizzoni

that it would be satisfied if only TWA were separated

from the holding company. The record also indicates that

some significant shareholders supported the Odyssey pro-

posal, but felt it best to let management work things out

without the pressure of a shareholder resolution. Alliance

Capital Management Corporation, for example voted

over 750,000 shares owned by its pension and endowment

fund clients against the Odyssey proposal, but contempo-

raneously indicated in a letter dated April 27, 1983 to L.

Edwin Smart, TWC’s chairman, that it saw “much merit

to the Odyssey plan.”'? Nor would a jury be required to

accept at face value the testimony of defendants’ wit-

nesses that the Goldman Sachs study was not presented to

TWC’s board of directors in July, 1983, as originally

planned and prior to the TWA public offering, solely

because the study was not then ready to be presented. See

Adickes v. S.H. Kress & Co., 398 U.S. 144, 157-58

(1970).

The foregoing does not constitute an exhaustive recital

of the evidentiary points plaintiff might make at trial,

and of course, given the issue presented to us, does not

touch upon the ripostes available to defendants. Enough

19 The letter continued, in pertinent part, as follows:

Further, we thought the Odyssey proposal put management under

too much pressure for fast action on divesting or selling assets.

Finally, we saw no virtue at all to the Corporation selling assets; we

would only favor partial or total spinoff of subsidiaries to stock-

holders.

* * *

The minority divestiture of Trans World Airlines, Inc. is a step in

the right direction, and we are shareholders. We hope this is a first

move towards spinning off to shareholders more of TWA and other

subsidiaries which have “stand alone” capability.

5841

28a

has been said, however, to make it clear that, under the

standards provided by Northway and Texas Gulf Sul-

phur, plaintiff tendered genuine issues of material fact as

to whether there were material omissions in TWA’s July

29, 1983 prospectus. Accordingly, summary judgment

should not have been rendered in favor of defendants.

CONCLUSION

In the interests of caution, we wish to stress that our

discussion of certain factual issues and evidence herein,

for the limited purpose of demonstrating the existence of

genuine issues of marerial fact precluding summary judg-

ment, intimates no view whatever concerning the merits

and ultimate outcome of this litigation. The judgment of

the district court is reversed and the case remanded for

further proceedings not inconsistent with this opinion.

MINER, Circuit Judge, dissenting:

Since I cannot agree that there is any triable issue of

fact as to whether TWA’s July 29, 1983 prospectus con-

tained any untrue material fact or omitted to state any

material fact, I respectfully dissent.

Although the spin-off of TWA always was a possibility,

it was only one of a number of options available to TWC

management for dealing with its problems in regard to

TWA at the time the prospectus was issued. It seems clear

that no decision of any kind was made until Goldman

Sachs placed seven alternative choices before the TWC

Board of Directors on September 6, 1983. The Goldman

5842

29a

Sachs report was referred to the Board’s Finance Com-

mittee for-consideration, and, on September 27, 1983, the

Committee recommended one of the seven options—

development of a program to separate TWA from TWC.

The directors did not adopt a formal plan of separation

until October 23, 1983, almost three months after the

issuance of the prospectus upon which plaintiff predicates

his claim.

The prospectus gave specific notice to prospective

shareholders of TWA that TWC might not provide the

same financial support to TWA as it had provided in the

past. The shaky financial condition of TWA was apparent

from the financial information furnished to those inter-

ested in purchasing shares at the public offering, and the

prospectus gave further notice that TWC might “sell or

otherwise dispose of” its shares of TWA. The information

provided was full and complete, potential investors were

cautioned adequately as to the problems facing the com-

pany, and there was no false representation of any kind.

A jury should not be afforded the opportunity to specu-

late otherwise.

I cannot agree that the statement in the prospectus

giving notice of the possibility of withdrawal of financial

support by TWC “did not give any fair indication that

TWA’s status as a TWC subsidiary might be terminated.”

The withdrawal of financial support could be seen to lead

to a total collapse of TWA, let alone termination of its

status as a subsidiary. Moreover, another provision in the

prospectus warning that TWC might sell its shares clearly

indicated the possibility of spin-off. The risky nature of

an investment in TWA should have been apparent to all

those who took the time to examine the prospectus. Nor

do I agree that there is an issue whether stock purchasers

5843

30a

can be charged with knowledge that Goldman Sachs was

undertaking a study involving the “live” option of separa-

tion. It seems to me that there was no need to notify

prospective purchasers of the study at all, because the

study was in progress and had produced no options,

“live” or otherwise, at the time of the public offering.

The mere fact that the Odyssey proxy battle centered

on a proposal for “disaggregation” of TWC’s subsidiaries

does not create a triable issue as to whether divestiture of

TWA should have been included in the prospectus. The

Odyssey proposal was defeated, partially on the strength

of the pending Goldman Sachs review of all available

“structural and financial” alternatives. Although Mr.

Salizzoni, a senior vice-president and director of TWC,

had concluded in June 1983 that separation was desirable,

there is no indication that his opinion was imparted to

any other board member or that any other board member

held the same view. In point of fact, Odyssey’s defeat in

the proxy contest represented a corporate rejection of the

separation proposal. With regard to the Casati notes, |

fail to see how the idle scribblings of a minor functionary

of Goldman Sachs during a meeting with TWC represent-

atives could possibly be indicative of material facts re-

quired to be revealed in a prospectus.

Resolution of the question of materiality requires an

assessment of the “probability that the event will occur.”

SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 849 (2d

Cir. 1968) (in banc), cert. denied, 394 U.S. 976 (1969).

There simply is no way in which the evidence can be

viewed so as to permit a finding that spin-off was any

more probable at the time the prospectus was issued than

any of the six other options eventually considered. That

being so, and there being no genuine factual issue of any

5844

31a

kind remaining in the case, summary judgment must be

granted to the defendants. Anderson vy. Liberty Lobby,

Inc., 477 U.S. 242, 406 5. Ct. 2505, Zi, 91

L.Ed.2d 202, 213 (1986). Where summary judgment is

appropriate, it should be granted without hesitation. See

Knight v. U.S. Fire Insurance Co., 804 F.2d 9, 11-12 (2d

Cir. 1986), cert. denied, 107 S. Ct. 1570, 94 L.Ed.2d 762

(1987). See generally New York State Bar Assoc. Comm.

on Fed. Courts, Summary Judgment in the Second Cir-

cuit (Mar. 23, 1987) (unpublished manuscript). I respect-

fully suggest that it is appropriate here.

32a

Order Amending the Opinion and

Denying the Petition for Rehearing

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

At a stated term of the United States Court of Appeals, in

and for the Second Circuit, held at the United States Court-

house, in the City of New York, on the 28th day of December,

one thousand nine hundred and eighty-seven.

— +

86-7330

JOEL KRONFELD,

Plaintiff-Appellant,

oa <u

TRANS WORLD AIRLINES, INC.; TRANSWORLD CORPORATION,

Defendants-A ppellees.

A petition for rehearing, having been filed by defendants-

appellees in the above entitled case.

Upon eonsideration by the panel that heard the appeal, it is

ordered as follows:

1. The opinion of the Court filed November 2, 1987 is

amended as follows:

a. The paragraph that begins with the words “Sonesta

International” at line four of slip page 5830 and concludes

with the words “(citation omitted)” at line twenty of slip page

5831 is deleted.

33a

b. The sentence that begins on line twenty-three of slip

page 5838 is amended to read as follows:

The likelihood of the event’s occurrence cuts much less

sharply in favor of plaintiff, but there was certainly, at a

minimum, a substantial possibility of its occurrence.

c. The sentence that begins on line eleven of slip page

5839 is amended to read as follows:

A jury might conclude that this language, while anticipat-

ing revisions of the multitude of relationships existing

between TWA and TWC, did not give any fair indication

of the equally substantial possibility that TWA’s status as

a TWC subsidiary might be terminated.

d. The following sentence is added after the words “be

terminated” at line 15 of slip page 5839, concluding the

paragraph that presently ends with the words “be terminated”:

Indeed, the suggestions of diminished future support of

TWA by TWC, and of possible future sales of some TWA

stock, could both be read to imply that some continuing

relationship between TWC and TWA, although one less

favorable to the latter, was contemplated.

2. The petition for rehearing is DENIED.

/s/ JAMES L. OAKES (illegible)

James L. Oakes,

/s/ J. DANIEL MAHONEY

J. Daniel Mahoney,

Circuit Judges.

N. B. THIS SUMMARY ORDER WILL NOT

BE PUBLISHED IN THE FEDERAL REPORTER

AND SHOULD NOT BE CITED OR OTHERWISE

RELIED UPON IN UNRELATED CASES BEFORE

THIS OR ANY OTHER COURT.

isitinitneneieeiniieniamumaellll

34a

Order Denying the Suggestion for

settable Rehearing In Banc

UNITED STATES COURT OF APPEALS

SECOND CIRCUIT

At a stated term of the United States Court of Appeals, in

and for the Second Circuit, held at the United States Court-

house, in the City of New York, on the 30th day of December,

one thousand nine hundred and eighty-seven.

Docket No. 86-7330

JOEL KRONFELD,

Plaintiff-Appellant,

—

TRANSWORLD AIRLINES, INC., and

TRANSWORLD CORPORATION,

Defendants-A ppellees.

A petition for rehearing containing a suggestion that the

action be reheard in banc having been filed by the defendants-

appellees in the above entitled case and the panel that heard the

appeal having denied the petition for rehearing by order dated

December 28, 1987.

It is noted that the suggestion for rehearing in banc has been

transmitted to the judges of the court in regular active service

and to any other judge on the panel that heard the appeal and

that no such judge has requested that a vote be taken thereon.

/S/ ELAINE B. GOLDSMITH

Elaine B. Goldsmith

Clerk

35a

Opinion of the Southern District of New York

UNITED STATES DISTRICT COURT

S.D. NEW YORK

March 31, 1986

—

No. 83 Civ. 8641 (EW)

JOEL KRONFELD,

Plaintiff,

aie i

TRANS WORLD AIRLINES, INC.

and TRANS WORLD CORPORATION,

Defendants.

-Pomerantz, Levy, Haudek, Block & Grossman, Harvey

Greenfield, New York City, for plaintiff; Stanley M. Gross-

man, Bruce G. Stumpf, Shaheen Rushd, of counsel.

Hughes, Hubbard & Reed, New York City, for defendants;

Robert J. Sisk, Norman C. Kleinberg, Rebecca Northey, Janice

B. Stanton, Bradley J. Andreozzi, of counsel.

EDWARD WEINFELD, District Judge:

Plaintiff, suing on behalf of a class of purchasers of securi-

ties of Trans World Airlines (“TWA” or “the Airline’), alleges

36a

violations of § 10(b) of the Securities Exchange Act of 1934!

and § 11 of the Securities Act of 1933.° Plaintiff alleges that

the July 29, 1983 prospectus by which TWA offered a new issue

of convertible preferred stock failed to disclose that TWA’s

parent company, defendant Trans World Corporation (“TWC”

or “Trans World”), was considering a “spinoff” transaction in

which TWA would be separated from TWC. Defendants move

for summary judgment. The motion must be considered

against the background of events which preceded and led to the

spinoff of TWA from TWC.

In late 1982 and early 1983 Odyssey Partners (“Odyssey”), a

private investment partnership with holdings in TWC securi-

ties, approached TWC’s management with a proposal to “dis-

aggregate” TWC’s corporate holdings, which included, along

with TWA, Hilton International Hotels, Century 21 Real

Estate, Spartan Corporation, and Canteen Corporation. After

initial private discussions between the Odyssey group and

TWC management, Odyssey solicited sharehoider proxies for a

proposal requesting TWC’s Board to study and report to the

shareholders on the possibility of establishing TWC’s subsidi-

aries as independent corporations.’ In support of its proxy

I 15 U.S.C. § 78)(b).

2 15 U.S.C. § 77k. Plaintiff’s complaint also stated a claim under

§ 12(2) of the 1933 Act, 15 U.S.C. § 77/(2), which has been voluntarily

discontinued.

3 The proxy resolution stated, in its effective sentence, that:

the stockholders of Trans World Corporation, assembled at the 1983

Annual Meeting, request and recommend that the Board of Directors

develop and implement a program to separate [the affiliates] by

spinning off the primary subsidiaries of Trans World Corporation to

the stockholders to create independently traded public corporations or

by selling some of the primary subsidiaries, and that a committee of

non-management members of the Board of Directors report to the

stockholders by August 31, 1983 on the best means to consummate this

separation at the earliest practicable date.

Trans World Corporation Proxy Statement, March 24, 1983, Affidavit of

Frank Salizzoni, Exhibit A, at 18-19.

37a

solicitation, Odyssey argued that the securities of the disaggre-

gated subsidiaries would trade at a net premium over the

trading value of TWC stock, in large part because, in Odys-

sey’s view, the poor financial performance of TWA was ad-

versely affecting the market in TWC securities. :

In late 1982, TWC engaged the services of the investment

banking firm of Goldman, Sachs & Co. to assist it in opposing

the Odyssey proxy proposal. Goldman, Sachs prepared an

analysis of the Odyssey proposal which criticized Odyssey’s

financial projections for TWC and its subsidiaries, and which

formed the basis for TWC’s communications to its sharehold-

ers in Opposition to the Odyssey solicitation. In addition,

Goldman, Sachs was charged by TWC’s management with the

conduct of an independent review of the financial and struc-

tural alternatives available to TWC, including the spin-off of

one or more of the subsidiaries. The fact that Goldman, Sachs

was conducting such a study was announced by TWC in its

proxy materials, and was offered as an additional reason why

shareholders should vote against the Odyssey proposal:

The Company several months ago retained a leading

investment banking firm—Goldman, Sachs & Co.—

which is providing independent advice with respect to the

relative merits of the diversification of Trans World,

including the structural and financial alternatives availa-

ble to the Company. Goldman, Sachs & Co. will report

their findings to the Board well ahead of the August 31

date specified in the Odyssey Proposal. In addition, their

advice and assistance will continue to be provided on an

ongoing basis, in the light of changing conditions, both

current and prospective.*

After an undisputedly heated proxy contest, involving exten-

sive publicity by Odyssey and TWC’s management, the Odys-

4 Trans World Corporation Proxy Statement, March 24, 1983, Affida-

vit of Frank Salizzoni, Exhibit A, at 19.

38a

sey shareholder proposition was defeated at the annual meeting

held on April 27, 1983.

Despite the defeat of the Odyssey proposal, Goldman, Sachs

continued its review of alternatives with respect to TWA and

the four other TWC subsidiaries. Although it was originally

consideration by TWC’s Board at its July meeting, Goldman,

Sachs had not completed it by that time, and the presentation

was therefore scheduled for a special meeting of the Board on

September 6, 1983.

During this period, TWA continued its loss record with little

prospect of improvement. The TWA and TWC Boards were

considering the possibility of a public offering of TWA securi-

ties to meet TWA’s capital requirements. Despite the airline’s

substantial operating losses in the preceding quarters, the TWA

and TWC Boards believed that the market climate was favor-

able for an issuance of stock. TWA had, beginning in January

1983, offered some of its own securities on the public market,

as a result of which TWC’s share of TWA’s outstanding stock

had been reduced from 100% to approximately 80%, and

TWA and TWC had sought and obtained approval from their

major lenders for sale to the public of up to 40% of TWA.

On July 29, 1983, TWA filed a registration statement with

the SEC, and issued a prospectus for the sale of 4,000,000

shares of convertible preferred stock at an initial price of $25

per share. Among the subject headings in the prospectus was

one labeled “RELATIONSHIP BETWEEN TWA AND

TRANS WORLD.” Preceding the description of the existing

financial and other relationships between the parent and sub-

sidiary was the following statement:

There may in the future be other arrangements between

TWA and Trans World (or other of its subsidiaries). It is

intended that the terms of these arrangements will be

determined on an arms-length basis. There can be no

assurance, however, that these terms will be favorable to

TWA or that Trans World will continue to provide TWA

39a

with the same level of support for TWA’s financing and

other needs as it has in the past.”

Subsequent to the publication of the prospectus, on Septem-

ber 6, 1983, the results of the Goldman, Sachs study were

presented to the TWC Board of Directors. The presentation

outlined seven options for the consideration of the Board:

Liquidation of TWC through sale of all the subsidiaries; sale

of TWC as a single entity; sale of TWA or other subsidiaries

individually; continuation of offers to TWA stock to the

public; separation of TWC into two entities consisting of TWA

and all the other subsidiaries taken together; and retention of

the established corporate structure.° The Goldman, Sachs pre-

sentation was limited to the review of these options “from a

financial and market perspective only,”’ and did not recom-

mend adoption of any particular option.

After the presentation by Goldman, Sachs on September 6,

TWC’s Board referred the matter to its Finance Committee for

further consideration. The Finance Committee met on two

occasions, with other members of the Board present and

participating. On September 27, the Finance Committee unani-

mously recommended “that the Board authorize management

to develop a detailed program for a possible separation of

TWA from TWC, and to proceed with related preparations.”

This “spinoff” proposal was considered by the full Board on

September 28, at which time it was publicly announced that

TWC was considering a plan of separation. Such a plan was

formally adopted by the Board on October 26, approved by

the shareholders on December 28, and became effective on

February 1, 1984. At the time of first announcement that the

Board was considering separation, TWA’s stock dropped

sharply in the market from the $25 per share offering price

5 Prospectus, July 29, 1983. Affidavit of Frank Salizzoni, Exhibit H,

at 29.

6 Presentation to the Board of Directors, September 6, 1983. Affidavit

of Stanley Grossman, Exhibit Y, at 6.

7 Presentation Script, Affidavit of Stanley Grossman, Exhibit G, at 5.

40a

which plaintiff paid when he purchased shares of the newly-

issued preferred stock offering on July 29.

DISCUSSION

Although the spinoff took place some five months after his

purchase, plaintiff charges the defendants with fraudulent

conduct in the omission of material facts from the prospectus

issued on July 29. Plaintiff contends that TWA and TWC

misled potential purchasers by failing to disclose in the pro-

spectus that TWC was considering a spinoff of TWA, and that

“Goldman Sachs was preparing to recommend to [TWC] the

spinoff of TWA.”* Plaintiff contends that this information was

material because TWA was dependent upon the financial guar-

antees and other assistance provided by TWC, and that these

disclosures were required in order to make other statements in

the prospectus not misleading. Accordingly, plaintiff argues, he

and the other members of the class, who purchased shares of

the newly-issued preferred between July 29 and the September

28 announcement that TWC was considering a spinoff of

TWA, were fraudulently deprived of material information

upon the absence of which they relied in making their invest-

ment decisions.

Defendants, in support of their motion for summary judg-

ment, contend that the undisputed facts establish that at the

time plaintiff purchased his shares, which he did on the first

day of availability, July 29, 1983, TWC and TWA were under

no duty to disclose any facts not contained in the prospectus.

Defendants maintain that the undisputed record shows that

there were no “plans” to separate TWA from TWC on that

date, or at any time before the public announcement that the

Board was considering such a proposal on September 28.

To demonstrate that TWC planned to separate TWA from its

other holdings at the time that the July 29 offering took place,

plaintiff relies heavily upon the statements and conduct of

Frank Salizzoni, who was at all material times the Chief

8 Complaint, €€ 7, 26, 27.

4la

Financial Officer of TWC, a member of the Boards of Direc-

tors of TWC and TWA, and the officer of TWC most directly

involved with the supervision of the Goldman, Sachs study.

Salizzoni stated at his deposition that in June 1983 he had

come to the “personal opinion” that TWA and TWC “both

could be better off it somehow we could separate the airline

successfully in some manner.”” On the basis of this and similar

statements, plaintiff argues that despite a “public facade” of

continuing study, defendants “behind the scenes . . . pursued

the separation of TWA.”'° As evidence of this “behind the

scenes” determination, plaintiff offers handwritten notes taken

by a junior employee of Goldman, Sachs, Mary Anne Cassati,

of a meeting between members of the Goldman, Sachs team

and Salizzoni on July 7, 1983. Salizzoni states that this meeting

was a “status meeting,” during the course of which it was

determined that the Goldman, Sachs study had not progressed

sufficiently to be presented to TWC’s Board at its July meet-

ing, as originally planned. Cassati testified at her deposition

that she understood the meeting to be a “kick-off” meeting, at

which Goldman, Sachs would present its view of its task, and

make requests for further information.''’ Casatti’s informal

notes state, under a heading “2 AIRLINE SALE/SPINOFF”:

“ primary—goal—build liquidity in airline & cut cord w/ TWC

so they can walk away.” Elsewhere under the same heading, in

the margin, is written in large block capitals “TILL DEATH

DO US PART.”"* There is no attribution in the document of

the source of either of these potentially contradictory state-

ments. Plaintiff argues that this document confirms that be-

fore the issuance of the July 29 prospectus, at least one officer

and director of TWC had concluded that TWC should “build

liquidity” in TWA (presumably through the forthcoming stock

offering) so as to subsequently “cut [the] cord. . . and walk

away.” Defendants, while denying the inferences drawn by

9 Salizzoni Dep. Tr., at 98.

10. — Plaintiff’s Memorandum in Opposition, at 16.

11 Affidavit of Frank Salizzoni, € 6; Cassati Dep.Tr. at 20.

~ Affidavit of Stanley Grossman, Exhibit R, at 1.

42a

plaintiff, contend that even if plaintiff’s factual premises were

true, TWC was not under a duty to reveal the speculations or

plans of a single officer and director, or the direction of

Goldman, Sachs’s unfinished study of possible course of

action, and that summary judgment is appropriate.

In passing upon defendants’ motion, this Court is mindful

of the principle often expressed by our Court of Appeals that

summary judgment is a “drastic remedy” in cases such as

this;'? it is a rule too well-settled to require any further

elucidation that the Court’s only function upon such a motion

is to decide whether there are issues of fact to be tried, and not

to try them.'* Rule 56 must nonetheless be enforced where its

enforcement is justified, otherwise the Rule becomes a “dead

letter.” **

However variously stated, the essence of plaintiff’s claim is

that on July 29, 1983, when TWA issued the prospectus and

plaintiff purchased his shares, TWC had already determined

upon the separation of TWA from TWC, that TWC had a duty

to disclose its decision to its investors, and that the existence of

this decision was a material matter upon which a reasonable

investor would have relied in making his investment choices.

Materiality vel non is a mixed question of law and fact, which

should ordinarily be determined by the fact-finder upon the

13 Gary Plastic Packaging Corp..v. Merrill, Lynch, 756 F.2d 230, 236

(2d Cir. 1985); see Eastway Construction Corp. v. City of New York, 762

F.2d 243, 249 (2d Cir. 1985); Seguros Banvenez, S.A. v. S/S Oliver Drescher,

761 F.2d 855, 859 (2d Cir. 1985).

14 Meiri v. Dacon, 759 F.2d 989, 992 (2d Cir. 1985); Heyman v. Comm.

& Indus. Ins. Co., §24 F.2d 1317, 1319-20 (2d Cir. 1975).

1S See Colan v. Continental Telecom, Inc., 616 F.Supp. 1521, 1525

(S.D.N.Y. 1985), aff’d mem., 788 F.2d 2 (2d Cir. 1986); Cf. Meinrath vy.

Singer, 482 F.Supp. 457, 460 (S.D.N.Y. 1979), aff'd, 697 F.2d 293 (2d Cir.

1982); Applegate v. Top Assoc. Inc., 300 F.Supp. 51, 53 (S.D.N.Y. 1969),

aff'd, 425 F.2d 92 (2d Cir. 1970); Schwartz v. BMI, 180 F.Supp. 322, 325

(S.D.N.Y. 1959); Morgan v. Sylvester, 125 F.Supp. 380, 389 (S.D.N.Y. 1954),

aff'd, 220 F.2d 758 (2d Cir.), cert. denied, 350 U.S. 867, 76 S.Ct. 112, 100

L.Ed. 768 (1955).

43a

trial,’° but the issue of materiality arises only with respect to

facts as to which there was a duty to disclose. Upon the

undisputed factual record in this case, taking all facts in the

light most favorable to plaintiff and resolving all disputed

issues Of fact in the plaintiff’s favor, the Court is satisfied that,

as a matter of law, defendants had no duty to disclose

additional information, beyond that contained in the July 29

prospectus, regarding the relationship between TWC and

TWA, or the activities of Goldman, Sachs.

It is not disputed that the nature of the relationship between

TWC and TWA, in which TWC guaranteed much of the credit

upon which TWA did business and financed its substantial

requirements for operating capital, was critical to the decisions

faced by knowledgeable investors in evaluating TWA’s value as

an investment, particularly in view of the fact that TWA had

suffered substantial losses in the period before July 29, 1983.

The prospectus, as noted earlier, addressed itself to this rela-

tionship, and contained numerous statements which informed

investors that the existing relationship between TWC and TWA

was under review and might be subject to significant change.

Even if, as plaintiff contends, Salizzoni, an officer of TWC

and TWA and an influential member of the Boards of both

companies, had come to an individual judgment as to the

nature and advisability of such future change, and even if he

had conveyed his views to the Goldman, Sachs team which was

preparing its report to the Board, his opinions, speculations,

and plans were not matters of fact which defendants were

under any duty to disclose. The decisions on fundamental

matters of corporate ownership, organization, and governance

were not decisions committed to the judgment of a single

officer or officers of TWA and TWC; they were matters to be

determined in the first instance by the Boards of Directors of

the two companies, and ultimately by the stockholders who

were the owners of the enterprises.

16 See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450, 96 S.Ct.

2126, 2133, 48 L.Ed.2d 757 (1976); Goldman v. Belden, 754 F.2d 1059, 1967

(2d Cir. 1985).

44a

The opinions of individual officers of the corporation,

however strongly held and however disseminated to the corpo-

ration’s hired consultants, involved forecasts of future con-

tingencies whose “eventual outcome [was] shrouded in uncer-

tainty”; there is no obligation to disclose the content of such

contingent speculations, or of the views held by individual

directors.'’ There is no dispute that at the time the prospectus

was issued, TWC’s Board of Directors had not considered a

proposal to change the relationship between TWC and TWA;

indeed, it is undisputed that no such proposal had been put

forward since the defeat by the shareholders of the Odyssey

Partners proposal in April. The study which was under way

was directed toward the identification and analysis of options

for consideration by TWC’s Board; it is undisputed that

Goldman, Sachs put forward no recommendation upon pre-

sentation of its report.

Indeed, the course of events after presentation of the Gold-

man, Sachs report, while not determinative of the question

which matters defendants had a duty to disclose on July 29,

shows the highly uncertain nature of the proposal to separate

TWA from TWC. It is undisputed that the reaction of TWC’s

Board to the initial presentation of the idea of separation

included, in the words of TWC’s Chairman and Chief Execu-

tive Officer, substantial expressions of “surprise, concern, and

opposition.”'* The proposal was initially referred to the

Board’s Finance Committee, and only after further study and

discussion, in which other members of the Board also partici-

pated, was the proposal again considered and approved.

The record thus demonstrates that, even granting plaintiff’s

inferences from the facts established conterning the views of

TWC’s officers, particularly Salizzoni, in the period before

July 29, 1983, any “plans” for the separation of TWA from

17 See Reiss vy. Pan American World Airways, Inc., 711 F.2d 11, 14 (2d

Cir. 1983); Electronic Specialty Co. v. International Controls Corp., 409 F.2d

937, 951 (2d Cir. 1969); Flum Partners v. Child World, Inc., 557 F.Supp. 492,

499 (S.D.N.Y. 1983).

18 Affidavit of L. Edwin Smart, TWC Chairman & Chief Executive

Officer, € 10.

45a

TWC were the tentative views of individuals regarding the

possible outcome of future discussions and deliberations. With

the Goldman, Sachs study not completed, while individual

directors might have come to individual judgments, these did

not reflect final corporate determinations. Lndeed, such indi-

vidual views might well have yielded to contrary opinions held

by other directors following discussion at Board meetings. In

short, for example, the nature of Salizzoni’s views was not a

material fact which TWC was required to disclose. To hold

otherwise would be to require the disclosure of the views of

each of the other directors, all prior to definitive action by the

Board. As our Court of Appeals has said, in the related

context of incipient merger negotiations, “[w]e are not con-

fronted here with a failure to disclose hard facts which defin-

itely affect a company’s financial prospects”; under such

circumstances, “[d]Jisclosure may in fact be more misleading

than secrecy so far as investment decisions are concerned.”””

The activities of Goldman, Sachs in investigating alternative

structures for TWC had been extensively publicized by TWC in

connection with the proxy solicitation by Odyssey Partners; the

continuation of that investigation was a matter of prudent

business judgment in light of the strong shareholder support

which had been garnered by Odyssey in the course of its

unsuccessful campaign. But it was TWC and TWA’s Boards

which were charged with receiving the results of that investiga-

tion and weighing the seven alternatives set forth in the study;

TWC was under no obligation to anticipate the outcome of

that deliberative process, and to disclose mere contingencies

long in advance of the first consideration of the question by

those responsible for decision.

Accordingly, defendants’ motion for summary judgment is

granted. Judgment may be entered dismissing the complaint.

So ordered.

19s Reiss v. Pan American World Airways, Inc., 711 F.2d 11, 14 (2d Cir.

1983).

46a

Statutory and Regulatory Provisions Involved

United States Code

Title 15

Section 11 of the Securities Act of 1933

§ 77k. Civil liabilities on account of false registration state-

ment

(a) Persons possessing cause of action; persons liable

In case any part of the registration statement, when such

part became effective, contained an untrue statement of a

material fact or omitted to state a material fact required to be

stated therein or necessary to make the statements therein not

misleading, any person acquiring such security (unless it is

proved that at the time of such acquisition he knew of such

untruth or omission) may, either at law or in equity, in any

court of competent jurisdiction, sue—

(1) every person who signed the registration statement;

(2) every person who was a director of (or person

performing similar functions) or partner in the issuer at

the time of the filing of the part of the registration

statement with respect to which his liability is asserted;

(3) every person who, with his consent, is named in the

registration statement as being or about to become a

director, person performing similar functions, or partner;

(4) every accountant, engineer, Or appraiser, or any

person whose profession gives authority to a statement

made by him, who has with his consent been named as

having prepared or certified any part of the registration

Statement, or as having prepared or certified any report or

valuation which is used in connection with the registration

Statement, with respect to the statement in such registra-

tion statement, report, or valuation, which purports to

have been prepared or certified by him;

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(5) every underwriter with respect to such security.

If such person acquired the security after the issuer has made

generally available to its security holders an earning statement

covering a period of at least twelve months beginning after the

effective date of the registration statement, then the right of

recovery under this subsection shall be conditioned on proof

that such person acquired the security relying upon such untrue

Statement in the registration statement or relying upon the

registration statement and not knowing of such omission, but

such reliance may be established without proof of the reading

of the registration statement by such person.

(b) Persons exempt from liability upon proof of issues

Notwithstanding the provisions of subsection (a) of this

section no person, other than the issuer, shall be liable as

provided therein who shall sustain the burden of proof—

(1) that before the effective date of the part of the

registration statement with respect to which his liability is

asserted (A) he had resigned from or had taken such steps

as are permitted by law to resign from, or ceased or

refused to act in, every office, capacity, or relationship in

which he was described in the registration statement as

acting or agreeing to act, and (B) he had advised the

Commission and the issuer in writing that he had taken

such action and that he would not be responsible for such

part of the registration statement; or

(2) that if such part of the registration statement be-

came effective without his knowledge, upon becoming

aware of such fact he forthwith acted and advised the

Commission, in accordance with paragraph (1) of this

subsection, and, in addition, gave reasonable public no-

tice that such part of the registration statement had

become effective without his knowledge; or

(3) that (A) as regards any part of the registration

statement not purporting to be made on the authority of

an expert, and not purporting to be a copy of or extract

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from a report or valuation of an expert, and not purport-

ing to be made on the authority of a public official

document or statement, he had, after reasonable investi-

gation, reasonable ground to believe and did believe, at

the time such part of the registration statement became

effective, that the statements therein were true and that

there was no Omission to state a material fact required to

be stated therein or necessary to make the statements

therein not misleading; and (B) as regards any part of the

registration statement purporting to be made upon his

authority a an expert or purporting to be a copy of or

extract from a report or valuation of himself as an expert,

(i) he had, after reasonable investigation, reasonable

ground to believe and did believe, at the time such part of

the registration statement became effective, that the state-

ments therein were true and that there was no omission to

state a material fact required to be stated therein or

necessary to make the statements therein not misleading,

or (ii) such part of the registration statement did not fairly

represent his statement as an expert or was not a fair copy

of or extract from his report or valuation as an expert;

and (C) as regards any part of the registration statement

purporting to be made on the authority of an expert

(other than himself) or purporting to be a copy of or

extract from a report or valuation of an expert (other

than himself), he had no reasonable ground to believe and

did not believe, at the time such part of the registration

statement became effective, that the statements therein

were untrue or that there was an omission to state a

material fact required to be stated therein or necessary to

make the statements therein not misleading, or that such

part of the registration statement did not fairly represent

the statement of the expert or was not a fair copy of or

extract from the report or valuation of the expert; and (D)

as regards any part of the registration statement purport-

ing to be a statement made by an official person or

purporting to be a copy of or extract from a public

official document, he had no reasonable ground to believe

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ana did not believe, at the time such part of the registra-

tion statement became effective, that the statements

therein were untrue, or that there was an omission to state

a material fact required to be stated therein or necessary

to make the statements therein not misleading, or that

such part of the registration statement made by the

official person or was not a fair copy of or extract from

the public official document.

In determining, for the purpose of paragraph (3) of subsec-

tion (b) of this section, what constitutes reasonable investiga-

tion and reasonable ground for belief, the standard of

reasonableness shall be that required of a prudent man in the

management of his own property.

(d) Effective date of registration statement with regard to

underwriters

If any person becomes an underwriter with respect to the

security after the part of the registration statement with respect

to which his liability is asserted has become effective, then for

the purposes of paragraph (3) of subsection (b) of this section

such part of the registration statement shall be considered as

having become effective with respect to such person as of the

time when he became an underwriter.

(e) Measure of damages; undertaking for payment of costs

The suit authorized under subsection (a) of this section may

be to recover such damages as shall represent the difference

between the amount paid for the security (mot exceeding the

price at which the security was offered to the public) and (1)

the value thereof as of the time such suit was brought, or (2)

the price at which such security shall have been disposed of in

the market before suit, or (3) the price at which such security

shall have been disposed of after suit but before judgment if

such damages shall be less than the damages representing the

difference between the amount paid for the security (not

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exceeding the price at which the security was offered to the

public) and the value thereof as of the time such suit was

brought: Provided, That if the defendant proves that any

portion or all of such damages represents other than the

depreciation in value of such security resulting from such part

of the registration statement, with respect to which his liability

is asserted, not being true or omitting to state a material fact

required to be stated therein or necessary to make the state-

ments therein not misleading, such portion of or all such

damages shall not be recoverable. In no event shall any

underwriter (unless such underwriter shall have knowingly

received from the issuer for acting as an underwriter some

benefit, directly or indirectly, in which all other underwriters

similarly situated did not share in proportion to their respective

interests in the underwriting) be liable in any suit or as a

consequence of suits authorized under subsection (a) of this

section for damages in excess of the total price at which the

securities underwritten by him and distributed to the public

were Offered to the public. In any suit under this or any other

section of this subchapter the court may, in its discretion,

require an undertaking for the payment of the costs of such

Suit, including reasonable attorney’s fees, and if judgment

shall be rendered against a party litigant, upon the motion of

the other party litigant, such costs may be assessed in favor of

such party litigant (whether or not such undertaking has been

required) if the court believes the suit or the defense to have

been without merit, in an amount sufficient to reimburse him

for the reasonable expenses incurred by him, in connection

with such suit, such costs to be taxed in the manner usually

provided for taxing of costs in the court in which the suit was

heard.

(f) Joint and several liability

All or any one or more of the persons specified in subsection

(a) of this section shall be jointly and severally liable, and every

person who becomes liable to make any payment under this

section may recover contribution as in cases of contract from

Sla

any person who, if sued separately, would have been liable to

make the same payment, unless the person who has become

liable was, and the other was not, guilty of fraudulent misrep-

resentation.

(g) Offering price to public as maximum amount recoverable

In no case shall the amount recoverable under this section

exceed the price at which the security was offered to the public.

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Section 10b of the Securities Exchange Act of 1934

§ 78). Manipulative and deceptive devices

It shall be unlawful for any person, directly or indirectly, by

the use of any means or instrumentality of interstate commerce

or of the mails, or of any facility of any national securities

exchange—

(b) To use or employ, in connection with the purchase

or sale of any security registered on a national securities

exchange or any security not so registered, any manipula-

tive or deceptive device or contrivance in contravention of

such rules and regulations as the Commission may pre-

scribe as necessary Or appropriate in the public interest or

for the protection of investors.

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Code of Federal Regulations

Title 17

Rule 10b-5

§ 240.10b-5 Employment of manipulative and deceptive de-

vices.

It shall be unlawful for any person, directly or indirectly, by

the use of any means or instrumentality of interstate com-

merce, or of the mails or of any facility of any national

securities exchange,

(a) To employ any device, scheme, or artifice to de-

fraud,

(b) To make any untrue statement of a material fact or

to omit to state a material fact necessary in order to make

the statements made, in the light of the circumstances

under which they were made, not misleading, or

which operates or would operate as a fraud or deceit upon

any person,

in connection with the purchase or sale of any security.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.