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Law School Case Brief

Santa Fe Indus. v. Green - 430 U.S. 462, 97 S. Ct. 1292 (1977)


Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j, general prohibition of practices deemed by the Securities and Exchange Commission to be "manipulative," in the 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. Indeed, nondisclosure is usually essential to the success of a manipulative scheme. No doubt Congress meant to prohibit the full range of ingenious devices that might be used to manipulate securities prices. But the Court does not think it would have chosen this "term of art" if it had meant to bring within the scope of § 10(b) of the Act instances of corporate mismanagement such as where the essence of the complaint is that shareholders were treated unfairly by a fiduciary.


A majority stockholder acquired 95 percent of a corporations stock and carried out a short-form merger under Delaware corporation law. Respondent minority stockholders sued, alleging that majority stockholder's actions violated federal law because they employed a device, scheme, or artifice to defraud and engaged in an act, practice, or course of business that operated as a fraud or deceit in connection with the purchase of a security in violation of S.E.C. Rule 10b-5.

The United States Court of Appeals for the Second Circuit found that minority stockholders stated a cause of action upon which relief could be granted because S.E.C. Rule 10b-5 reached breaches of fiduciary duty by a majority against minority stockholders without any charge of misrepresentation or lack of disclosure by effecting a merger without a justifiable business purpose.


Did the minority shareholders state a cause of action for a violation of Rule 10b-5 based on the majority shareholder's conduct in the short-form merger of the corporation?




The Court held that the merger, if carried out as respondents' alleged in their complaint, was neither deceptive nor manipulative and, therefore, did not violate federal law. The Court found the short-form merger was carried out in full compliance with Delaware law and did not involve manipulation or deception as those terms were used in § 10b of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j. Thus, the court reversed the Second Circuit’s decision holing that the minority stockholders had a cause of action.

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