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.
Held:
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.
MR. JUSTICE WHITE delivered the opinion of the Court.
The issue in this case involves the reach and coverage of §
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
[
Footnote 1] thereunder in the
context of a Delaware short-form
Page 430 U. S. 465
merger transaction used by the majority stockholder of a
corporation to eliminate the minority interest.
I
In 1936, petitioner Santa Fe Industries, Inc. (Santa Fe),
acquired control of 60% of the stock of Kirby Lumber Corp. (Kirby),
a Delaware corporation. Through a series of purchases over the
succeeding years, Santa Fe increased its control of Kirby's stock
to 95%; the purchase prices during the period 1968-1973 ranged from
$65 to $92.50 per share. [
Footnote
2] In 1974, wishing to acquire 100% ownership of Kirby, Santa
Fe availed itself of § 253 of the Delaware Corporation Law, known
as the "short-form merger" statute. Section 253 permits a parent
corporation owning at least 90% of the stock of a subsidiary to
merge with that subsidiary, upon approval by the parent's board of
directors, and to make payment in cash for the shares of the
minority stockholders. The statute does not require the consent of,
or advance notice to, the minority stockholders. However, notice of
the merger must be given within 10 days after its effective date,
and any stockholder who is dissatisfied with the terms of the
merger may petition the Delaware Court of Chancery for a decree
ordering the surviving corporation to pay him the fair value
Page 430 U. S. 466
of his shares, as determined by a court-appointed appraiser
subject to review by the court. Del.Code Ann., Tit. 8, §§ 253, 262
(1975 ed. and Supp. 1976).
Santa Fe obtained independent appraisals of the physical assets
of Kirby -- land, timber, buildings, and machinery -- and of
Kirby's oil, gas, and mineral interests. These appraisals, together
with other financial information, were submitted to Morgan Stanley
& Co. (Morgan Stanley), an investment banking firm retained to
appraise the fair market value of Kirby stock. Kirby's physical
assets were appraised at $320 million (amounting to $640 for each
of the 500,000 shares); Kirby's stock was valued by Morgan Stanley
at $125 per share. Under the terms of the merger, minority
stockholders were offered $150 per share.
The provisions of the short-form merger statute were fully
complied with. [
Footnote 3] The
minority stockholders of Kirby were notified the day after the
merger became effective, and were advised of their right to obtain
an appraisal in Delaware court if dissatisfied with the offer of
$150 per share. They also received an information statement
containing, in addition to the relevant financial data about Kirby,
the appraisals of the value of Kirby's assets and the Morgan
Stanley appraisal concluding that the fair market value of the
stock was $125 per share.
Respondents, minority stockholders of Kirby, objected to the
terms of the merger, but did not pursue their appraisal
Page 430 U. S. 467
remedy in the Delaware court of Chancery. [
Footnote 4] Instead, they brought this action in
federal court on behalf of the corporation and other minority
stockholders, seeking to set aside the merger or to recover what
they claimed to be the fair value of their shares. The amended
complaint asserted that, based on the fair market value of Kirby's
physical assets as revealed by the appraisal included in the
information statement sent to minority shareholders, Kirby's stock
was worth at least $772 per share. [
Footnote 5] The complaint alleged further that the merger
took place without prior notice to minority stockholders; that the
purpose of the merger was to appropriate the difference between the
"conceded
pro rata value of the physical assets," App.
103a, and the offer of $150 per share -- to "freez[e] out the
minority stockholders at a wholly inadequate price,"
id.
at 100a; and that Santa Fe, knowing the appraised value of the
physical assets, obtained a "fraudulent appraisal" of the stock
from Morgan Stanley and offered $25 above that appraisal "in order
to lull the minority stockholders into erroneously believing that
[Santa Fe was] generous."
Id. at 103a. This course of
conduct was alleged to be
"a violation of Rule 10b-5 because defendants employed a
'device, scheme, or artifice to defraud' and engaged in an 'act,
practice or course of business which operates or would operate as a
fraud or deceit upon any person, in connection with the purchase or
sale
Page 430 U. S. 468
of any security.'"
Ibid. [
Footnote 6]
Morgan Stanley assertedly participated in the fraud as an accessory
by submitting its appraisal of $125 per share although knowing the
appraised value of the physical assets.
The District Court dismissed the complaint for failure to state
a claim upon which relief could be granted.
391 F.
Supp. 849 (SDNY 1975). As the District Court understood the
complaint, respondents' case rested on two distinct grounds. First,
federal law was assertedly violated because the merger was for the
sole purpose of eliminating the minority from the company,
therefore lacking any justifiable business purpose, and because the
merger was undertaken without prior notice to the minority
shareholders. Second, the low valuation placed on the shares in the
cash-exchange offer was itself said to be a fraud actionable under
Rule 10b-5. In rejecting the first ground for recovery, the
District Court reasoned that Delaware law required neither a
business purpose for a short-form merger nor prior notice to the
minority shareholders who the statute contemplated would be removed
from the company, and that Rule 10b-5 did not override these
provisions of state corporate law by independently placing a duty
on the majority not to merge without prior notice and without a
justifiable business purpose.
As for the claim that actionable fraud inhered in the allegedly
gross undervaluation of the minority shares, the District Court
observed that respondents valued their shares at a minimum of $772
per share, "basing this figure on the
pro rata value of
Kirby's physical assets."
Id. at 853. Accepting this
Page 430 U. S. 469
valuation for purpose of the motion to dismiss, the District
Court further noted that, as revealed by the complaint, the
physical asset appraisal, along with other information relevant to
Morgan Stanley's valuation of the shares, had been included with
the information statement sent to respondents within the time
required by state law. It thought that, if "full and fair
disclosure is made, transactions eliminating minority interests are
beyond the purview of Rule 10b-5," and concluded that the
"complaint fail[ed] to allege an omission, misstatement or
fraudulent course of conduct that would have impeded a
shareholder's judgment of the value of the offer."
Id. at 854. The complaint therefore failed to state a
claim, and was dismissed. [
Footnote
7]
A divided Court of Appeals for the Second Circuit reversed. 533
F.2d 1283 (1976). It first agreed that there was a double aspect to
the case: first, the claim that gross undervaluation of the
minority stock itself violated Rule 10b-5; and second, that,
"without any misrepresentation or failure to disclose relevant
facts, the merger itself constitutes a violation of Rule 10b-5"
because it was accomplished without any corporate purpose and
without prior notice to the minority stockholders.
Id. at
1285. As to the first aspect of the case, the Court of Appeals did
not disturb the District Court's conclusion that the complaint did
not allege a material misrepresentation or nondisclosure with
respect to the value of the stock; and the court declined to rule
that a claim of gross
Page 430 U. S. 470
undervaluation itself would suffice to make out a Rule 10b-5
case. With respect to the second aspect of the case, however, the
court fundamentally disagreed with the District Court as to the
reach and coverage of Rule 10b-5. The Court of Appeals' view was
that, although the Rule plainly reached material misrepresentations
and nondisclosures in connection with the purchase or sale of
securities, neither misrepresentation nor nondisclosure was a
necessary element of a Rule 10b-5 action; the Rule reached
"breaches of fiduciary duty by a majority against minority
shareholders without any charge of misrepresentation or lack of
disclosure."
Id. at 1287. [
Footnote 8] The court went on to hold that the complaint,
taken as a whole, stated a cause of action under the Rule:
"We hold that a complaint alleges a claim under Rule 10b-5 when
it charges, in connection with a Delaware short-form merger, that
the majority has committed a breach of its fiduciary duty to deal
fairly with minority shareholders by effecting the merger without
any justifiable business purpose. The minority shareholders are
given no prior notice of the merger, thus having no opportunity to
apply for injunctive relief, and the proposed price to be paid is
substantially lower than the appraised value reflected in the
Information Statement."
Id. at 1291.
See also id. at 1289. [
Footnote 9]
Page 430 U. S. 471
We granted the petition for certiorari challenging this holding
because of the importance of the issue involved to the
administration of the federal securities laws. 429 U.S. 814 (1976).
We reverse.
II
Section 10(b) of the 1934 Act makes it
"unlawful for any person . . . to use or employ . . . any
manipulative or deceptive device or contrivance in contravention of
[Securities and Exchange Commission rules];"
Rule 10b-5, promulgated by the SEC under § 10(b), prohibits, in
addition to nondisclosure and misrepresentation, any "artifice to
defraud" or any act "which operates or would operate as a fraud or
deceit." [
Footnote 10] The
court below construed the term "fraud" in Rule 10b-5 by adverting
to the use of the term in several of this Court's decisions in
contexts other than the 1934 Act and the related Securities Act of
1933, 15 U.S.C. § 77a
et seq. [
Footnote 11] The Court
Page 430 U. S. 472
of Appeals' approach to the interpretation of Rule 10b-5 is
inconsistent with that taken by the Court last Term in
Ernst
& Ernst v. Hochfelder, 425 U. S. 185
(1976).
Ernst & Ernst makes clear that, in deciding whether
a complaint states a cause of action for "fraud" under Rule 10b-5,
"we turn first to the language of § 10(b), for
[t]he starting
point in every case involving construction of a statute is the
language itself.'" Id. at 425 U. S. 197,
quoting Blue Chip Stamps v. Manor Drug Stores,
421 U. S. 723,
421 U. S. 756
(1975) (POWELL J., concurring). In holding that a cause of action
under Rule 10b-5 does not lie for mere negligence, the Court began
with the principle that
"[a]scertainment of congressional intent with respect to the
standard of liability created by a particular section of the [1933
and 1934] Acts must . . . rest primarily on the language of that
section,"
425 U.S. at
425 U. S. 200,
and then focused on the statutory language of § 10(b) -- "[t]he
words
manipulative or deceptive' used in conjunction with
`device or contrivance.'" Id. at 425 U. S. 197.
The same language and the same principle apply to this
case.
To the extent that the Court of Appeals would rely on the use of
the term "fraud" in Rule 10b-5 to bring within the ambit of the
Rule all breaches of fiduciary duty in connection with a securities
transaction, its interpretation would, like the interpretation
rejected by the Court in
Ernst & Ernst, "add a gloss
to the operative language of the statute quite different from its
commonly accepted meaning."
Id. at
425 U. S. 199.
But, as the Court there held, the language of the statute must
control the interpretation of the Rule:
"Rule 10b-5 was adopted pursuant to authority granted the
[Securities and Exchange] Commission under § 10(b). The rulemaking
power granted to an administrative agency charged with the
administration of a federal statute is not the power to make law.
Rather, it is "
the power to adopt regulations to carry into
effect the will of Congress as expressed by the statute.'" . . .
[The
Page 430 U. S.
473
scope of the Rule] cannot exceed the power granted the
Commission by Congress under § 10(b)."
Id. at
426 U. S.
212-214. [
Footnote
12]
The language of § 10(b) gives no indication that Congress meant
to prohibit any conduct not involving manipulation or deception.
Nor have we been cited to any evidence in the legislative history
that would support a departure from the language of the statute.
[
Footnote 13]
"When a statute speaks so specifically in terms of manipulation
and deception, . . . and when its history reflects no more
expansive intent, we are quite unwilling to extend the scope of the
statute. . . ."
Id. at
425 U. S. 214.
Thus, the claim of fraud and fiduciary breach in this complaint
states a cause of action under any part of Rule 10b-5 only if
Page 430 U. S. 474
the conduct alleged can be fairly viewed as "manipulative or
deceptive" within the meaning of the statute.
III
It is our judgment that the transaction, if carried out as
alleged in the complaint, was neither deceptive nor manipulative,
and therefore did not violate either § 10(b) of the Act or Rule
10b-5.
As we have indicated, the case comes to us on the premise that
the complaint failed to allege a material misrepresentation or
material failure to disclose. The finding of the District Court,
undisturbed by the Court of Appeals, was that there was no
"omission" or "misstatement" in the information statement
accompanying the notice of merger. On the basis of the information
provided, minority shareholders could either accept the price
offered or reject it and seek an appraisal in the Delaware Court of
Chancery. Their choice was fairly presented, and they were
furnished with all relevant information on which to base their
decision. [
Footnote 14]
We therefore find inapposite the cases relied upon by
respondents and the court below, in which the breaches of
Page 430 U. S. 475
fiduciary duty held violative of Rule 10b-5 included some
element of deception. [
Footnote
15] Those cases forcefully reflect the principle that "[§]
10(b) must be real flexibly, not technically
Page 430 U. S. 476
and restrictively" an that the statute provides a cause of
action for any plaintiff who "suffer[s] an injury as a result of
deceptive practices touching its sale [or purchase] of securities.
. . ."
Superintendent of Insurance v. Bankers Life & Cas.
Co., 404 U. S. 6,
404 U. S. 12-13
(1971). But the cases do not support the proposition, adopted by
the Court of Appeals below and urged by respondents here, that a
breach of fiduciary duty by majority stockholders, without any
deception, misrepresentation, or nondisclosure, violates the
statute and the Rule.
It is also readily apparent that the conduct alleged in the
complaint was not "manipulative" within the meaning of the statute.
"Manipulation" is "virtually a term of art when used in connection
with securities markets."
Ernst & Ernst, 425 U.S. at
425 U. S. 199.
The term refers generally to practices, such as wash sales, matched
orders, or rigged prices, that are intended to mislead investors by
artificially affecting market activity.
See, e.g., § 9 of
the 1934 Act, 15 U.S.C. § 78i (prohibiting specific manipulative
practices);
Ernst & Ernst, supra, at
425 U. S. 195,
425 U. S. 199
n. 21,
425 U. S. 205;
Piper v. Chris-Craft Industries, Inc., ante at
430 U. S. 43
(Rule 10b-6, also promulgated under § 10(h), is "an
anti-manipulative provision designed to protect the orderliness of
the securities market during distributions of stock" and "to
prevent stimulative trading by an issuer in its own securities in
order to create an unnatural and unwarranted appearance of market
activity"); 2 A. Bromberg, Securities Law: Fraud § 7.3 (1975); 3 L.
Loss, Securities Regulation 1541-1570 (2d ed.1961); 6
id.
at 3755-3763 (Supp. 1969). Section 10(b)'s general prohibition of
practices deemed by
Page 430 U. S. 477
the SEC to be "manipulative" -- in this technical sense of
artificially affecting market activity in order to mislead
investors -- is fully consistent with the fundamental purpose of
the 1934 Act "
to substitute a philosophy of full disclosure for
the philosophy of caveat emptor. . . .'" Affiliated Ute
Citizens v. United States, 406 U. S. 128,
406 U. S. 151
(1972), quoting SEC v. Capital Gains Research Bureau,
375 U. S. 180,
375 U. S. 186
(1963). Indeed, nondisclosure is usually essential to the success
of a manipulative scheme. 3 Loss, supra, at 1665. No doubt
Congress meant to prohibit the full range of ingenious devices that
might be used to manipulate securities prices. But we do not think
it would have chosen this "term of art" if it had meant to bring
within the scope of § 10(b) instances of corporate mismanagement
such as this, in which the essence of the complaint is that
shareholders were treated unfairly by a fiduciary.
IV
The language of the statute is, we think, "sufficiently clear in
its context" to be dispositive here,
Ernst & Ernst,
supra at
425 U. S. 201;
but even if it were not, there are additional considerations that
weigh heavily against permitting a cause of action under Rule 10b-5
for the breach of corporate fiduciary duty alleged in this
complaint. Congress did not expressly provide a private cause of
action for violations of § 10(b). Although we have recognized an
implied cause of action under that section in some circumstances,
Superintendent of Insurance v. Bankers Life & Cas. Co.,
supra at
404 U. S. 13 n.
9, we have also recognized that a private cause of action under the
antifraud provisions of the Securities Exchange Act should not be
implied where it is "unnecessary to ensure the fulfillment of
Congress' purposes" in adopting the Act.
Piper v. Chris-Craft
Industries, ante at
430 U. S. 41.
Cf. J. I. Case Co. v. Borak, 377 U.
S. 426,
377 U. S.
431-433 (1964). As we noted earlier,
supra this
page, the Court repeatedly has described the
Page 430 U. S. 478
"fundamental purpose" of the Act as implementing a "philosophy
of full disclosure"; once full and fair disclosure has occurred,
the fairness of the terms of the transaction is, at most, a
tangential concern of the statute.
Cf. Mills v. Electric
Auto-Lite Co., 396 U. S. 375,
396 U. S.
381-385 (1970). As in
Cort v. Ash, 422 U. S.
66,
422 U. S. 80
(1975), we are reluctant to recognize a cause of action here to
serve what is, "at best, a subsidiary purpose" of the federal
legislation.
A second factor in determining whether Congress intended to
create a federal cause of action in these circumstances is "whether
the cause of action [is] one traditionally relegated to state
law. . . .'" Piper v. Chris-Craft Industries, Inc., ante
at 430 U. S. 40,
quoting Cort v. Ash, supra, at 422 U. S. 78.
The Delaware Legislature has supplied minority shareholders with a
cause of action in the Delaware Court of Chancery to recover the
fair value of shares allegedly undervalued in a short-form merger.
See supra at 430 U. S.
465-466. Of course, the existence of a particular state
law remedy is not dispositive of the question whether Congress
meant to provide a similar federal remedy, but as in Cort
and Piper, we conclude that "it is entirely appropriate in
this instance to relegate respondent and others in his situation to
whatever remedy is created by state law." 422 U.S. at 422 U. S. 84;
ante at 430 U. S.
41.
The reasoning behind a holding that the complaint in this case
alleged fraud under Rule 10b-5 could not be easily contained. It is
difficult to imagine how a court could distinguish, for purposes of
Rule 10b-5 fraud, between a majority stockholder's use of a
short-form merger to eliminate the minority at an unfair price and
the use of some other device, such as a long-form merger, tender
offer, or liquidation, to achieve the same result; or indeed how a
court could distinguish the alleged abuses in these going private
transactions from other types of fiduciary self-dealing involving
transactions in securities. The result would be to bring within the
Rule a wide variety of corporate conduct traditionally left to
state regulation. In addition to posing a
Page 430 U. S. 479
"danger of vexatious litigation which could result from a widely
expanded class of plaintiffs under Rule 10b-5,"
Blue Chip
Stamps v. Manor Drug Stores, 421 U.S. at
421 U. S. 740,
this extension of the federal securities laws would overlap and
quite possibly interfere with state corporate law. Federal courts
applying a "federal fiduciary principle" under Rule 10b-5 could be
expected to depart from state fiduciary standards at least to the
extent necessary to ensure uniformity within the federal system.
[
Footnote 16] Absent a clear
indication of congressional intent, we are 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. As the Court
stated in
Cort v. Ash, supra:
"Corporations are creatures of state law, and investors commit
their funds to corporate directors on the understanding that,
except where federal law
expressly requires certain
responsibilities of directors with respect to stockholders, state
law will govern the internal affairs of the corporation."
422 U.S. at
422 U. S. 84
(emphasis added).
We thus adhere to the position that "Congress, by § 10(b), did
not seek to regulate transactions which constitute no more than
internal corporate mismanagement."
Superintendent of Insurance
v. Bankers Life & Cas. Co., 404 U.S. at
404 U. S. 12.
There
Page 430 U. S. 480
may well be a need for uniform federal fiduciary standards to
govern mergers such as that challenged in this complaint. But those
standards should not be supplied by judicial extension of § 10(b)
and Rule 10b-5 to "cover the corporate universe." [
Footnote 17]
The judgment of the Court of Appeals is reversed, and the case
is remanded for further proceedings consistent with this
opinion.
So ordered.
MR. JUSTICE BRENNAN dissents, and would affirm for substantially
the reasons stated in the majority and concurring opinions in the
Court of Appeals, 533 F.2d 1283 (CA2 1976).
[
Footnote 1]
Section 10 of the Securities Exchange Act of 1934, 15 U.S.C. §
78, provides in relevant part:
"It shall be unlawful for any person, directly or indirectly, by
the use of any means or instrumentality of interstate commerce or
of the mails, or of any facility of any national securities
exchange --"
"
* * * *"
"(b) To use or employ, in connection with the purchase or sale
of any security registered on a national securities exchange or any
security not so registered, any manipulative or deceptive device or
contrivance in contravention of such rules and regulations as the
Commission may prescribe as necessary or appropriate in the public
interest or for the protection of investors."
Rule 10b-5, 17 CFR § 240.10b-5 (1976), provides:
"Employment of manipulative and deceptive devices."
"It shall be unlawful for any person, directly or indirectly, by
the use of any means or instrumentality of interstate commerce, or
of the mails or of any facility of any national securities
exchange,"
"(a) To employ any device, scheme, or artifice to defraud,"
"(b) To make any untrue statement of a material fact or to omit
to state a material fact necessary in order to make the statements
made, in the light of the circumstances under which they were made,
not misleading, or"
"(c) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any
person,"
"in connection with the purchase or sale of any security."
[
Footnote 2]
App. 33a (merger information statement, considered by parties
and court below as part of the amended complaint). Santa Fe
controlled Kirby through its wholly owned subsidiary, Santa Fe
Natural Resources, Inc., which owned the Kirby stock.
[
Footnote 3]
The merger became effective on July 31, 1974, and was
accomplished in the following way. A new corporation, Forest
Products, Inc., was organized as a Delaware corporation. The Kirby
stock, together with cash, was transferred from Santa Fe's wholly
owned subsidiary (
see n 2,
supra) to Forest Products in exchange for
all of the Forest Products stock. The new corporation was then
merged into Kirby, with Kirby as the surviving corporation. The
cash transferred to Forest Products was used to make the purchase
offer for the Kirby shares not owned by the Santa Fe
subsidiary.
[
Footnote 4]
On August 21, 1974, respondents petitioned for an appraisal of
their Kirby stock, but they withdrew that petition on September 9,
and, the next day, commenced this lawsuit.
[
Footnote 5]
The figure of $772 per share was calculated as follows:
"The difference of $311,000,000 ($622 per share) between the
fair market value of Kirby's land and timber, alone, as per the
defendants' own appraisal thereof at $320,000,000 and the
$9,000,000 book value of said land and timber, added to the $150
per share, yields a
pro rata share of the value of the
physical assets of Kirby, of at least $772 per share. The value of
the stock was at least the
pro rata value of the physical
assets."
App. 102a.
[
Footnote 6]
The complaint also alleged a breach of fiduciary duty under
state law, and asserted that the federal court had both diversity
and pendent jurisdiction over this claim. The District Court found
an absence of complete diversity of citizenship between the
plaintiffs and defendants because of the defendant Morgan Stanley
and refused to exercise pendent jurisdiction because it held that
the complaint failed to state a claim under the federal securities
laws.
391 F.
Supp. 849, 855 (SDNY 1975).
[
Footnote 7]
The District Court also based its holding on the alternative
ground that the injuries alleged in the complaint were not causally
related to any deception by the majority shareholder:
"Assuming
arguendo that the merger information
statement did not constitute adequate disclosure, the amended
complaint does not demonstrate a causal connection between the
alleged deception and plaintiffs' damages. Plaintiffs did not
tender their shares for cancellation and payment pursuant to this
merger plan. . . . From the outset, plaintiffs recognized the
alleged deception, and did not rely upon it."
391 F. Supp. at 855.
[
Footnote 8]
The court concluded its discussion thus:
"Whether full disclosure has been made is not the crucial
inquiry, since it is the merger and the undervaluation which
constituted the fraud, and not whether or not the majority
determines to lay bare their real motives. If there is no valid
corporate purpose for the merger, then even the most brazen
disclosure of that fact to the minority shareholders in no way
mitigates the fraudulent conduct."
533 F.2d at 1292.
[
Footnote 9]
The Court of Appeals affirmed, however, the dismissal of the
complaint against Morgan Stanley. As the Court of Appeals
understood it, Morgan Stanley had not been charged with
participating in the majority shareholder's breach of fiduciary
duty; it had been involved only in evaluation of the stock and the
compilation of its report with respect thereto. The complaint
contained
"no allegation that Morgan Stanley & Co. engaged in any
misrepresentation or nondisclosure such as would support its
liability under Rule 10b-5(2)."
Ibid.
[
Footnote 10]
See n 1,
supra.
[
Footnote 11]
The Court of Appeals quoted passages from
Pepper v.
Litton, 308 U. S. 295,
308 U. S. 306,
311 (1939) (where this Court upheld the disallowance of a
bankruptcy claim of a controlling stockholder who violated his
fiduciary obligation to the other stockholders), and from 1 J.
Story, Equity Jurisprudence § 187 (1853); the court also cited
cases that quoted the passage from Mr. Justice Story's treatise --
Moore v. Crawford, 130 U. S. 122,
130 U. S. 128
(1889) (a diversity suit to compel execution of a deed held in
constructive trust), and
SEC v. Capital Gains Research
Bureau, 375 U. S. 180,
375 U. S. 194
(1963) (Investment Advisers Act of 1940 prohibits, as a "fraud or
deceit upon any client," a registered investment adviser's failure
to disclose to his clients his own financial interest in his
recommendations). Although Capital Gains involved a federal
securities statute, the Court's references to fraud in the
"equitable" sense of the term were premised on its recognition that
Congress intended the Investment Advisers Act to establish federal
fiduciary standards for investment advisers.
See id. at
375 U. S.
191-192,
375 U. S. 194.
Moreover, the fraud that the SEC sought to enjoin in
Capital
Gains was, in fact, a nondisclosure.
[
Footnote 12]
The case for adhering to the language of the statute is even
stronger here than in
Ernst & Ernst, where the
interpretation of Rule 10b-5 rejected by the Court was strongly
urged by the Commission.
See also Piper v. Chris-Craft
Industries, Inc., ante p.
430 U. S. 1, and
Blue Chip Stamps v. Manor Drug Stores, 421 U.
S. 723 (1975) (rejecting interpretations of Rule 10b-5
urged by the SEC as
amicus curiae). By contrast, the
Commission apparently has not concluded that Rule 10b-5 should be
used to reach "going private" transactions where the majority
stockholder eliminates the minority at an allegedly unfair price.
See SEC Securities Act Release No. 5567 (Feb. 6, 1975),
CCH Fed.Sec.L.Rep. � 80,104 (proposing Rules 13e-3A and 13e-3B
dealing with "going private" transactions, pursuant to six sections
of the 1934 Act, including § 10(b), but stating that the Commission
"has reached no conclusions with respect to the proposed rules").
Because we are concerned here only with § 10(b), we intimate no
view as to the Commission's authority to promulgate such rules
under other sections of the Act.
[
Footnote 13]
As the Court noted in
Ernst & Ernst:
"Neither the intended scope of § 10(b) nor the reasons for the
changes in its operative language are revealed explicitly in the
legislative history of the 1934 Act, which deals primarily with
other aspects of the legislation."
425 U.S. at
425 U. S. 202.
The only specific reference to § 10 in the Senate Report on the
1934 Act merely states that the section was "aimed at those
manipulative and deceptive practices which have been demonstrated
to fulfill no useful function." S.Rep. No. 792, 73d Cong., 2d
Sess., 6 (1934).
[
Footnote 14]
In addition to their principal argument that the complaint
alleges a fraud under clauses (a) and (c) of Rule 105, respondents
also argue that the complaint alleges nondisclosure and
misrepresentation in violation of clause (b) of the Rule. Their
major contention in this respect is that the majority stockholder's
failure to give the minority advance notice of the merger was a
material nondisclosure, even though the Delaware short-form merger
statute does not require such notice. Brief for Respondents 27. But
respondents do not indicate how they might have acted differently
had they had prior notice of the merger. Indeed, they accept the
conclusion of both courts below that, under Delaware law, they
could not have enjoined the merger, because an appraisal proceeding
is their sole remedy in the Delaware courts for any alleged
unfairness in the terms of the merger. Thus, the failure to give
advance notice was not a material nondisclosure within the meaning
of the statute or the Rule.
Cf. TSC Industries, Inc. v.
Northway, Inc., 426 U. S. 438
(1976).
[
Footnote 15]
The decisions of this Court relied upon by respondents all
involved deceptive conduct as part of the Rule 10b-5 violation
alleged.
Affiliated Ute Citizens v. United States,
406 U. S. 128
(1972) (misstatements of material fact used by bank employees in
position of marketmaker to acquire stock at less than fair value);
Superintendent of Insurance v. Bankers Life & Cas.
Co., 404 U. S. 6,
404 U. S. 9 (1971)
("seller [of bonds] was duped into believing that it, the seller,
would receive the proceeds").
Cf. SEC v. Capital Gains Research
Bureau, 375 U. S. 180
(1963) (injunction under Investment Advisers Act of 1940 to compel
registered investment adviser to disclose to his clients his own
financial interest in his recommendations).
We have been cited to a large number of cases in the Courts of
Appeals, all of which involved an element of deception as part of
the fiduciary misconduct held to violate Rule 10b-5.
E.g.,
Schoenbaum v. Firstbrook, 405 F.2d 215, 220 (CA2 1968) (en
banc),
cert. denied, 395 U.S. 906 (1969) (majority
stockholder and board of directors "were guilty of deceiving" the
minority stockholders);
Drachman v. Harvey, 453 F.2d 722,
733, 736, 737 (CA2 1972) (en banc) (Rule 10b-5 violation alleged on
facts found "indistinguishable" from
Superintendent of
Insurance v. Bankers Life & Cas. Co.);
Schlick v.
Penn-Dixie Cement Corp., 507 F.2d 374 (CA2 1974),
cert.
denied, 421 U.S. 976 (1975) (scheme of market manipulation and
merger on unfair terms, one aspect of which was misrepresentation);
Pappas v. Moss, 393 F.2d 865, 869 (CA3 1968) ("if a
deception' is required in the present context [of § 10(b) and
Rule 10b-5], it is fairly found by viewing this fraud as though the
`independent' stockholders were standing in the place of the
defrauded corporate entity," where the board of directors passed a
resolution containing at least two material misrepresentations and
authorizing the sale of corporate stock to the directors at a price
below fair market value); Shell v. Henley, 430 F.2d 819,
825 (CA5 1970) (derivative suit alleging that corporate officers
used misleading proxy materials and other reports to deceive
shareholders regarding a bogus employment contract intended to
conceal improper payments to the corporation president and
regarding purchases by the corporation of certain securities at
excessive prices); Rekant v. Desser, 425 F.2d 872, 882
(CA5 1970) (as part of scheme to cause corporation to issue
Treasury shares and a promissory note for grossly inadequate
consideration, corporate officers deceived shareholders by making
affirmative misrepresentations in the corporation's annual report
and by failing to file any such report the next year). See
Recent Cases, 89 Harv.L.Rev.1917, 1926 (1976) (stating that no
appellate decision before that of the Court of Appeals in this case
and in Marshal v. AFW Fabric Corp., 533 F.2d 1277 (CA2),
vacated and remanded for a determination of mootness, 429
U.S. 881 (1976), "had permitted a 10b-5 claim without some element
of misrepresentation or nondisclosure") (footnote
omitted).
[
Footnote 16]
For example, some States apparently require a "valid corporate
purpose" for the elimination of the minority interest through a
short-form merger, whereas other States do not.
Compare Bryan
v. Brock & Blevins Co., 490 F.2d 563 (CA5),
cert.
denied, 419 U.S. 844 (1974) (merger arranged by controlling
stockholder for no business purpose except to eliminate 15%
minority stockholder violated Georgia short-form merger statute)
with Stauffer v. Standard Brands, Inc., 41 Del.Ch. 7,
187 A.2d
78 (1962) (Delaware short-form merger statute allows majority
stockholder to eliminate the minority interest without any
corporate purpose and subject only to an appraisal remedy). Thus,
to the extent that Rule 10b-5 is interpreted to require a valid
corporate purpose for elimination of minority shareholders as well
as a fair price for their shares, it would impose a stricter
standard of fiduciary duty than that required by the law of some
States.
[
Footnote 17]
Cary, Federalism and Corporate Law: Reflections Upon Delaware,
83 Yale L.J. 663, 700 (1974) (footnote omitted). Professor Cary
argues vigorously for comprehensive federal fiduciary standards,
but urges a "frontal" attack by a new federal statute, rather than
an extension of Rule 10b-5. He writes:
"It seems anomalous to jig-saw every kind of corporate dispute
into the federal courts through the securities acts as they are
presently written."
Ibid. See also Note, Going Private, 84 Yale
L.J. 903 (1975) (proposing the application of traditional doctrines
of substantive corporate law to problems of fairness raised by
"going private" transactions such as short-form mergers).
MR. JUSTICE BLACKMUN, concurring in part.
Like MR. JUSTICE STEVENS, I refrain from joining
430 U.
S. I, too, regard that part as unnecessary for the
decision in the instant case and, indeed, as exacerbating the
concerns I expressed in my dissents in
Blue Chip Stamps v.
Manor Drug Stores, 421 U. S. 723,
421 U. S. 761
(1975), and in
Ernst & Ernst v. Hochfelder,
425 U. S. 185,
425 U. S. 215
(1976). I, however, join the remainder of the Court's opinion and
its judgment.
MR. JUSTICE STEVENS, concurring in part.
For the reasons stated by MR. JUSTICE BLACKMUN in his dissenting
opinion in
Blue Chip Stamps v. Manor
Drug Stores,
Page 430 U. S. 481
421 U. S. 73,
421 U. S. 761
[
Footnote 2/1] and those stated in
my dissent in
Piper v. Chris-Craft Industries, ante p.
430 U. S. 53, I
believe both of those cases were incorrectly decided. I foresee
some danger that
430 U. S.
Moreover, the entire discussion in Part IV is unnecessary to the
decision of this case. Accordingly, I join only Parts I, II, and
III of the Court's opinion. I would also add further emphasis to
the fact that the controlling stockholders in this case did not
breach any duty owed to the minority shareholders because (a) there
was complete disclosure of the relevant facts, and (b) the minority
are entitled to receive the fair value of their shares. [
Footnote 2/2] The facts alleged in the
complaint do not constitute "fraud" within the meaning of Rule
10b-5.
[
Footnote 2/1]
See also Eason v. General Motors Acceptance Corp., 490
F.2d 654 (CA7 1973),
cert. denied, 416 U.S. 960.
[
Footnote 2/2]
The motivation for the merger is a matter of indifference to the
minority stockholders, because they retain no interest in the
corporation after the merger is consummated.