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SANTA FE INDUSTRIES, INC. V. GREEN, 430 U. S. 462 (1977) - US SUPREME COURT DECISIONS ON-LINE
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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 chanroblesvirtualawlibrary
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 chanroblesvirtualawlibrary
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.
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 chanroblesvirtualawlibrary
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 chanroblesvirtualawlibrary
Respondents, minority stockholders of Kirby, objected to the terms of the merger, but did not pursue their appraisal chanroblesvirtualawlibrary
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 chanroblesvirtualawlibrary
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 chanroblesvirtualawlibrary
Id. at 1291. See also id. at 1289. [Footnote 9] chanroblesvirtualawlibrary
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 chanroblesvirtualawlibrary
"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 chanroblesvirtualawlibrary
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 chanroblesvirtualawlibrary
We therefore find inapposite the cases relied upon by respondents and the court below, in which the breaches of chanroblesvirtualawlibrary
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 chanroblesvirtualawlibrary
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 chanroblesvirtualawlibrary
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 chanroblesvirtualawlibrary
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 chanroblesvirtualawlibrary
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 chanroblesvirtualawlibrary
533 F.2d 1292.
Like MR. JUSTICE STEVENS, I refrain from joining 430 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.
For the reasons stated by MR. JUSTICE BLACKMUN in his dissenting opinion in 421 U. S. 761 [Footnote 2/1] and those stated in my dissent in Piper v. Chris-Craft Industries, [email protected] 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.