Legal Definitions - special-facts rule

The special-facts rule is a legal principle in corporate law that requires a director or officer of a company to disclose important, non-public information to a shareholder before buying or selling shares from that shareholder. This duty to disclose only arises when certain "special circumstances" exist, making it an exception to the general idea that corporate insiders don't always have to reveal all internal information when trading stock with individual shareholders.

Essentially, the rule applies when an insider possesses crucial, confidential information that would significantly impact a shareholder's decision to buy or sell their shares, and the shareholder is at a disadvantage due to factors like a lack of business knowledge, the shares not having a clear market value, or the insider initiating the transaction.

Here are some examples illustrating the special-facts rule:

• Example 1: Vulnerable Shareholder in a Private Company

  Imagine a small, privately held manufacturing company. The CEO learns that a major competitor is about to acquire the company for a price significantly higher than its current valuation. Before this news is made public or even shared with all shareholders, the CEO approaches an elderly, retired shareholder who inherited a small stake in the company and has little involvement in its operations. The CEO offers to buy the shareholder's shares at their current book value, without disclosing the impending acquisition that would dramatically increase their worth. In this scenario, the special-facts rule would likely apply because the shareholder lacks business acumen, the shares have no readily ascertainable market value, and the CEO possesses material inside information while instigating the transaction, creating a duty to disclose the acquisition talks.

• Example 2: Closely Held Shares with Undisclosed Breakthrough

  Consider a cutting-edge biotechnology startup whose shares are not publicly traded, meaning there's no open market to determine their daily value. The Chief Scientific Officer (CSO) discovers a groundbreaking new drug compound that promises to revolutionize treatment for a widespread disease, a discovery that will undoubtedly skyrocket the company's valuation. Before this news is announced to the board or the public, the CSO contacts an early-stage investor, offering to purchase their shares at the valuation from the last funding round. The investor is unaware of the new drug compound. Here, the special-facts rule would compel the CSO to disclose the breakthrough discovery before buying the shares, as the shares are closely held with no market value, and the CSO holds critical, non-public information that fundamentally changes their worth.

• Example 3: Insider Instigates Transaction with Negative Information

  Suppose the Chief Financial Officer (CFO) of a publicly traded company learns that the company's largest contract, representing 40% of its revenue, has just been unexpectedly terminated. This information is highly material and will cause a significant drop in the company's stock price once announced. Before the public announcement, the CFO contacts a specific individual shareholder, offering to sell their own shares in the company to that shareholder at the current market price. The CFO initiated this sale while possessing critical, negative inside information that the shareholder does not have. Under the special-facts rule, the CFO would have a duty to disclose the termination of the major contract before proceeding with the sale of their shares to the unsuspecting shareholder.