Ok, Looong explanation: LOL
Transmission fluid level has always been critical on auto trannie's from the beginning. The range as everyone knows is ~ 1/2" or so, on the dipstick. There's a narrow range of tolerance due to the following reasons:
1) A quart is more than a "quart":
What I mean by that is once the oil pan is bolted back onto the transmission, the valve body (or part of it anyway), filter etc, protrudes
into the pan a fair amount taking up a lot of the available space in the oil pan. It's like putting a bunch of rocks in a coffee can, and it only takes a little water to fill it up. Vs if the can were empty. That's probably a lousy example but you get the idea: a quart makes more difference in overall level in the transmission than simply pouring a quart into an empty pan. Which is why in the old days it was printed on the dipstick "only add 1 pint" ..something like that.
Transmission shifting works by valves routing hydraulic fluid accordingly, and using hydraulic fluid pressure
..a lot of it, to push servo's and hold clutch packs tightly together (so the clutches grip/hold).
If the fluid becomes too high (overfilled), transmission fluid can get into the rotating parts/gears, etc higher up inside the transmission. If that happens, it can lead to foaming or 'frothing' of the fluid. Think of a stack of bubbles in a bath and how delicate they are. Foam & bubbles contain a lot of air which is not compressible (like fluid), and if some (even a little) gets sucked into the areas which require pressure to hold clutches 'tight' ....suddenly can't hold the clutches tight. So slipping or surging can occur.
: Just as it sounds. If the fluid becomes excessively low, there is the possibility of air getting sucked into the transmission pump, valve body and rest of system. Just like above, air isn't compressible and there won't be enough pressure to hold the clutch packs as tight as they need to be. And transmissions operate in the range of 150-350 even 400# (PSI) range. So a little air can lead to reduced pressure (clutch slipping). That could lead to lubrication problems and burned clutches, things like that, because they're normally 'bathed' in tranny fluid, if not rectified soon enough.
That's the real ROOT reason transmission fluid needs to be set at a pretty 'tight' range. And having the transmission pan 'level' ensures the fluid is at the right level. Don't run them too high, or low and you'll have a lot of happy miles/KM's!!
Hope it helps