Flamm v. Eberstadt

United States Court of Appeals for the Seventh Circuit · 1987 · Corporations

814 F.2d 1169 (7th Cir. 1987)

Updated August 22, 2026

CorporationsSecurities fraudTender offersMaterialityMerger negotiationsDisclosure dutiesRule 10b-5Section 10(b)

Facts

After General Cable announced a tender offer for Microdot at $17 per share, Microdot publicly stated that the offer was inadequate and said it would use all available resources to defeat it. At the same time, Microdot authorized Goldman, Sachs to seek a higher bidder, contacting more than 100 firms without success through December 1975; plaintiff Arnold Flamm sold his stock on December 29, 1975. Not until January 19 did Northwest express readiness to offer $21, contingent on Microdot's commitment, and the firms did not reach that commitment until January 24, after the class period. Plaintiffs claimed Microdot's failure to disclose its search for a white knight made its public statements misleading under Rule 10b-5.

Issue

Whether Microdot's undisclosed effort to find a white knight during a hostile tender offer was material under Rule 10b-5 before any agreement had been reached on the price and structure of a transaction, and whether Microdot's public opposition to the $17 bid objectively misled investors into thinking the company would remain independent rather than seek a higher offer.

Rule

An omission is material only if there is a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of a reasonable shareholder by significantly altering the total mix of information available. In the context of public-corporation merger negotiations, ongoing negotiations or efforts to arrange a transaction are immaterial as a matter of law until the parties have agreed on the price and structure of the deal. A corporation may remain silent about such negotiations, but if it speaks it may not make materially misleading statements; whether a statement is misleading is judged objectively from the standpoint of a reasonable investor.

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Lakeview Devices, Inc., a publicly traded company based in Milwaukee, receives an unsolicited tender offer at $24 per share from Redstone Holdings. Lakeview's board publicly says the offer is inadequate and quietly hires Birch Harbor Advisors to contact dozens of possible alternative acquirers, but no one has yet agreed to any transaction terms when shareholder Elena Torres sells her stock.

If Elena sues under Rule 10b-5 based on Lakeview's failure to disclose its search for an alternative buyer, what is the strongest argument for the company?

Explanation. Under the majority rule, ongoing efforts to arrange a merger or white-knight transaction are immaterial as a matter of law until there is agreement on the price and structure of the deal. The fact that the company explored alternatives and contacted many firms does not itself trigger disclosure.