The language of § 10b of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j, gives no indication that Congress meant to prohibit any conduct not involving manipulation or deception. Thus the claim of fraud and fiduciary breach in a complaint states a cause of action under any part of S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5, only if the conduct alleged can be fairly viewed as "manipulative or deceptive" within the meaning of the statute.
Petitioner Santa Fe Industries, Inc. (Santa Fe) is the majority shareholder of Kirby Lumber Corp. (Kirby). Through a series of purchases over the succeeding years, Santa Fe increased its control of Kirby's stock to 95%. Santa Fe then carried out a short-form merger under Delaware corporation law, notifying the minority shareholders after the merger became effective, furnishing them with an information statement containing relevant financial data, and advising them of their right under state law to obtain a state court appraisal of the fair value of their stock if they were dissatisfied with the price offered under the terms of the merger. Respondent minority stockholders objected to the terms of the merger, but did not pursue their appraisal remedy in the state court, instead sued before the United States District Court for the Southern District of New York to set aside the merger or to recover the fair value of their stock. They claimed that 10(b) of the Securities Exchange Act of 1934, which prohibits the use of any "manipulative or deceptive" device in contravention of Securities and Exchange Commission rules, and the Securities and Exchange Commission's Rule 10b-, which prohibits nondisclosure, misrepresentation, any "artifice to defraud," or any act "which operates or would operate as a fraud or deceit," were violated because the merger was for the sole purpose of eliminating the minority shareholders from the company, therefore lacking any justifiable business purpose, and because the merger was undertaken without prior notice to the minority shareholders. The District Court dismissed the complaint, concluding that since full and fair disclosure was made to the minority stockholders under state law, the merger transaction was beyond the purview of Rule 10b-5. The appellate court reversed, holding that even without any misrepresentation or nondisclosure of relevant facts, the merger constituted a violation of Rule 10b-5, because it was accomplished without any corporate purpose and without prior notice to the minority stockholders.
Whether Santa Fe employed manipulation and deception in carrying out the merger ?
The Court reversed, holding 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 Section 10b. There was no allegation of a material misrepresentation or nondisclosure. On the basis of information provided with the post-merger notice given to the minority shareholders, they could have determined whether to accept the price offered for their stock or seek an appraisal in the state court. Also the conduct alleged in the complaint was not "manipulative" as having been intended to mislead investors by artificially affecting market activity. Even if the language of 10(b) were considered as not being sufficiently clear to preclude the action under Rule 10b-5, nevertheless a private cause of action for the minority stockholders would not be implied, since the court was reluctant to recognize a cause of action to serve the mere tangential concern of 10(b) with the fairness of the terms of a transaction, if there was full and fair disclosure. The cause of action was one traditionally relegated to state law and it was appropriate to relegate the minority shareholders to the state law remedy. If a cause of action were implied, it would bring within the Rule a wide variety of corporate conduct traditionally left to state regulation and would overlap and possibly interfere with state corporate law.