Santa Fe Industries, Inc. v. Green
430 U.S. 462 (1977)

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U.S. Supreme Court

Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977)

Santa Fe Indus., Inc. v. Green

No. 75-1753

Argued January 18-19, 1977

Decided March 23, 1977

430 U.S. 462


Delaware's "short-form merger" statute enables a parent company owning at least 90% of the stock of a subsidiary to merge with the subsidiary upon approval of the parent company's board of directors, and to make cash payments for the minority shareholders' shares. Though advance notice to or consent of the minority shareholders is not required, they must be notified within 10 days of the merger's effective date, and any dissatisfied minority shareholder may petition the Delaware Court of Chancery for the payment of the fair value of his shares as determined by a court-appointed appraiser subject to court review. Pursuant to that statutory procedure, petitioner Santa Fe Industries, which had acquired 95% control of another company (Kirby), after obtaining independent appraisals of Kirby's assets and submitting them with financial data to a banking firm to appraise the Kirby stock's fair market value, decided to offer the minority stockholders $150 per share, which was more than the banking firm's appraisal. The minority stockholders were notified the day after the merger became effective, and advised of their right to obtain an appraisal if dissatisfied with the $150 price, and were given an information statement containing relevant financial data about Kirby, the appraisals of its assets, and the banking firm's stock appraisal. Respondents, minority stockholders who objected to the merger, instead of pursuing their Delaware appraisal remedy, brought this action in District Court seeking to set aside the merger and to recover the fair value for their stock, which they claimed was at least $772 per share. Respondents alleged that the Kirby stock had been fraudulently appraised in an effort to freeze out the minority stockholders at an inadequate price, in violation of § 10(b) of the Securities Exchange Act of 1934, which makes it

"unlawful for any person . . . [t]o use or employ . . . any manipulative or deceptive device or contrivance in contravention of [Securities and Exchange Commission rules],"

and Rule 10b-5, issued thereunder, which, in addition to nondisclosure and misrepresentation, prohibits any "artifice to defraud" or any act "which operates or would operate as a fraud or deceit." The District Court dismissed the complaint for failure, with

Page 430 U. S. 463

respect to the to aspects on which respondents' case was deemed to rest, to state a claim upon which relief could be granted: (1) With regard to the claim that actionable fraud inhered in the allegedly gross undervaluation of the minority shares, the court concluded that, if "full and fair disclosure is made, transactions eliminating minority interests are beyond the purview of Rule 10b-5," and that respondents did not allege any nondisclosure or misrepresentation in this case. (2) With regard to the claim that the merger was undertaken without prior notice to minority shareholders, and was solely to eliminate the minority from the company, and therefore lacked any justifiable business purpose, the court concluded that Rule 10b-5 did not override the Delaware corporation law provisions, which do not require a business purpose or prior notice for a short-form merger. The Court of Appeals reversed. While not disagreeing with the lower Court's conclusions with respect to (1), supra, the Court of Appeals concluded that Rule 10b-5 reached "breaches of fiduciary duty by a majority against minority shareholders without any charge of misrepresentation or lack of disclosure," and that therefore the complaint, taken as a whole, stated a cause of action under the Rule.


1. Only conduct involving manipulation or deception is reached by § 10(b) or Rule 10b-5.

"When a statute speaks so specifically in terms of manipulation and deception, . . . and when its history reflects no more expansive intent, [the Court is] quite unwilling to extend the scope of the statute . . . ,"

Ernst & Ernst v. Hochfelder,425 U. S. 185, 425 U. S. 214. Pp. 430 U. S. 471-474.

2. The Kirby merger, if carried out as alleged in respondents' complaint, was neither deceptive nor manipulative, and therefore did not violate § 10(b) or Rule 10b-5. The minority shareholders were furnished with all relevant information with which to decide whether to accept the price offered for their stock or reject it and seek an appraisal in the Delaware court, and the cases relied on by respondents and the Court of Appeals in which breaches of fiduciary duty were held violative of Rule 10b-5, all of which included some element of deception, are inappropriate here, where there was none. Manipulation is "virtually a term of art when used in connection with securities markets," Ernst & Ernst, supra at 425 U. S. 199, referring to practices that are intended to mislead investors by artificially affecting market activities, none of which was involved here. Pp. 430 U. S. 474-477.

3. A holding that the complaint in this case alleged fraud under Rule 10b-5 would bring within the Rule a wide variety of corporate conduct traditionally left to state regulation. Absent a clear indication

Page 430 U. S. 464

of congressional intent, the Court should be reluctant to federalize the substantial portion of the law of corporations that deals with transactions in securities, particularly where established state policies of corporate regulation would be overridden. Cf. Cort v. Ash,422 U. S. 66, 422 U. S. 84; Piper v. Chris-Craft Industries, Inc., ante at 430 U. S. 41. Pp. 430 U. S. 477-480.

533 F.2d 1283, reversed and remanded.

WHITE, J., delivered the opinion of the Court, in which BURGER, C.J., and STEWART, MARSHALL, POWELL, and REHNQUIST, JJ., joined, and in all but Part IV of which BLACKMUN and STEVENS, JJ., joined. BLACKMUN, J., post, p. 430 U. S. 480, and STEVENS, J., post, p. 430 U. S. 480, filed opinions concurring in part. BRENNAN, J., filed a dissenting statement, post, p. 430 U. S. 480.

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