My first couple of years in legal academia I focused my scholarship on the issue of materiality in securities regulation (see here and here).  More recently, however, I’ve been focusing on corporate theory (see, e.g., here).  Thus, I felt like I might have missed something when I recently noticed that the Supreme Court cited only the “total mix” definition of materiality in its Matrixx decision.

For the uninitiated, materiality is a central concept in securities regulation because it frequently determines whether a disclosure needs to be made, or constitutes a basis for liability.  In TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 499 (1976), a case involving proxy voting, the Supreme Court defined materiality as follows:

An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote…. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.

I have always thought that these alternative formulations were intended to essentially overlap.  That is to say, I don't think the Court intended to create a Venn diagram with meaningful buckets of facts capable of satisfying only one, but not the other, of the two formulations.  Having said that, I have also been under the impression that courts have at least occasionally acted like the choice of definition mattered a great deal.  In addition, the “total mix” definition appears to have moved from being secondary to being primary--with a corresponding overall increase in dismissals based on immateriality.  (All of these impressions, of course, are subject to empirical verification.)

So what am I to make of the fact that the Supreme Court cited only the “total mix” definition of materiality in Matrixx?  My sense is that the answer is, “not too much.”  Most likely, focusing on the “total mix” definition was simply consistent with the Court re-affirming the no-bright-line-rules aspect of materiality.  See Basic Inc. v. Levinson, 485 U.S. 224, 236 (1988) (“Any approach that designates a single fact or occurrence as always determinative of an inherently fact-specific finding such as materiality, must necessarily be overinclusive or underinclusive.”). That is to say, the “total mix” formulation of materiality arguably stresses the contextual nature of materiality more than the alternative formulation, so it made sense to focus on that definition in concluding that the lack of statistical significance, standing alone, could not be dispositive of materiality.  (It is interesting to note that in Matrixx the “total mix” definition was relied upon to increase--or at least not decrease--the universe of potentially material statements.)

All of which leads me to my question for those of you who teach Securities Regulation: Do you use a Venn diagram when teaching materiality?