High Court Says Firms Must Tell of Merger Talks

WASHINGTON —  The Supreme Court, in an important victory for investors, today ruled that companies must tell their stockholders when they are engaging in merger talks or potentially be liable for investors’ unwise stock trades based on wrong or incomplete information.

By a 4-2 vote, the court said that if companies withhold important information affecting stock prices, it must be presumed that investors who bought and sold the securities were relying on that information.

“An investor who buys or sells stock at the price set by the market does so in reliance on the integrity of that price,” Justice Harry A. Blackmun said for the court. “Because most publicly available information is reflected in market price, an investor’s reliance on any public material misrepresentations, therefore, may be presumed.”

Important Repercussions

The absence of a five-vote majority in the case raises the possibility that the issue could be reconsidered by the justices in another case with a different result. But, for now at least, today’s decision is likely to have important repercussions on Wall Street.

Justice Anthony M. Kennedy, who joined the court last month, did not take part in considering the case. Chief Justice William H. Rehnquist and Justice Antonin Scalia disqualified themselves from participating without explanation.

The court ordered further hearings in a dispute involving Basic Inc. of Cleveland.

The company merged with CEBAS Inc., a subsidiary of Combustion Engineering based in Connecticut, in December, 1978.

False Denials for 14 Months

Stockholders said Basic executives falsely denied for 14 months before the merger that at least preliminary talks were under way between the two companies.

As a result, many investors said they sold their stock at far less than its value.

The stock of Basic was selling at well under $20 a share when merger rumors began surfacing in late 1977. There was a dramatic increase in the volume of activity in the stock accompanied by a sharp run-up in price. The eventual merger price of the stock was $46 a share.

Company officials repeatedly said they could not account for the activity and denied that merger negotiations were under way.