Prior to December 20, 1978, Basic Inc. was a publicly traded company primarily engaged in the business of manufacturing related to the steel industry. As early as 1965, Combustion Engineering, a company in the same industry, expressed some interest in acquiring Basic, but was deterred from pursuing this inclination because of antitrust concerns. Beginning in 1976 Combustion had meetings with Basic concerning the possibility of a merger. During 1977 and 1978 Basic made three public statements denying merger negotiations. On December 19, 1978, Basic’s board endorsed the merger. Respondents were former Basic shareholders who had sold their stock after Basic’s first public denial in 1977 but before the December 1978 announcement. They asserted that the defendants issued three false or misleading public statements in violation of Section 10(b) and of Rule 10b-5, and further that they were injured by selling Basic shares at artificially depressed prices in a market affected by petitioners’ misleading statements and in reliance thereon. 

Questions 

1. When is an item of undisclosed information about a company “material” for Rule 10b-5 purposes? 

2. Is reliance on a misrepresentation essential in a Rule 10b-5 action? 

3. a. Why would it be difficult for a plaintiff to demonstrate actual reliance on a material omission? 

b. What solution did the courts create to deal with this problem?