The final explanatory memorandum proposed to support the test of the agreement in principle seems to be aimed exclusively at the comfort of company managers. A clear rule is indeed easier to follow than a standard that requires the exercise of judgment in the light of all the circumstances. But simple enforcement is no excuse to ignore the goals of the Securities Acts and congressional policy decisions. Any approach that considers that a fact or event is always decisive for an intrinsic finding of fact, such as the essential, must necessarily be too complete or too complete. In the TSC Industries case, the Court of Justice said: first of all, I note that there are parts of the Fight against Fraud of the Court of Justice with which I agree. More importantly, the Court of Justice has adopted the version of this theory adopted so far by some courts [Fn. 2/2] which equates “causation” with “trust” and allows recovery by an applicant who claims to have been harmed by a material error that altered a market price, notwithstanding the evidence that the applicant did not rely in any way on that price. Ante at 485 U. p. 248. I agree with the Court of Justice that while the obligation of confidence in Rule 10b-5 is to be maintained with any content, the presumption of market fraud can be rebutted by evidence that an applicant did not `rely` on the market price. For example, an applicant who decides to buy a share months before an alleged misrepresentation; any person who buys or sells a share for reasons that have nothing to do with its price; someone who actually sells a share “a few days” before the misrepresentation – certainly none of these people can make a valid claim under Rule 10b-5.
Nevertheless, some federal courts have allowed such claims under one or another type of fraud theory. [footnote 2/3] Summary judgment for defendants. It found that any false statements were of no legal significance: no negotiations were under way at the time of the first declaration and, although negotiations had taken place at the time of the declaration of the second and third declarations, those negotiations were not “intended, with sufficient certainty, to become in principle a contract of merger”. App. in Pet. for Zert. 103a. The petitioners are pushing us to a third test circuit to solve this difficulty. [footnote 10] See Letter for Petitioners 20-22.
None of these policy-based justifications, however, purport to explain why, under the Agreement-in-Principle, drawing the line reflects the importance of information in the investor`s decision. The first and only reasoning, related to the concerns expressed in the TSC Industries case, is even rejected by a court of appeal which, moreover, accepted the wisdom of the examination in principle. “It is assumed that investors are nitwits who are not able to recognize, even if they are said, that mergers are risky proposals until the end.” Eberstadt, 814 F.2d to 1175. Disclosure, not paternalistic retention of accurate information, is the policy chosen and expressed by Congress. We have consistently recognized that a “fundamental purpose” of the various securities laws is to “replace the Caveat Emptor philosophy with a philosophy of full disclosure and thus achieve a high level of business ethics in the securities industry.” SEK v. . . . . .
Posted Sep 9th, 2021