Court Opinion

ID: 8904187
Source: CourtListenerOpinion
Date Created: 2022-11-27 01:37:28.744653+00
Date Added: 2024-06-11T17:08:03.379968
License: Public Domain

MESKILL, Circuit Judge,
concurring in part and dissenting in part:
I concur in Parts I and II of Judge Friendly’s opinion, for I agree that the district judge should have allowed amendment *222of the complaint1 and that a corporation may be defrauded by some or all of its directors. I part company, however, with the majority’s holding that the complaint, as “amended” in the manner suggested by Judge Friendly, to include the press releases, states a cause of action. Assuming that any deception of the minority shareholders took place, the complaint nevertheless fails to establish that the claimed deception was “material.”2 Accordingly, I respectfully dissent from the discussion in Part III of the majority opinion concerning materiality and the impact of Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977).
The test of materiality in securities law has recently been laid out by the Supreme Court. In TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976), which dealt with an alleged omission under Rule 14a-9, Justice Marshall stated:
The general standard of materiality that we think best comports with the policies of Rule 14a-9 is as follows: An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. This standard is fully consistent with Mills’ general description of materiality as a requirement that “the defect have a significant propensity to affect the voting process.” It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.
Id. at 449, 96 S.Ct. at 2133 (footnote omitted). See Gerstle v. Gamble-Skogmo, Inc., 478 F.2d 1281, 1302 (2d Cir. 1973); List v. Fashion Park, Inc., 340 F.2d 457, 462 (2d Cir.), cert, denied, 382 U.S. 811, 86 S.Ct. 23, 15 L.Ed.2d 60 (1965) (“The basic test of ‘materiality,’ on the other hand, is whether ‘a reasonable man would attach importance [to the fact misrepresented] in determining his choice of action in the transaction in question.’ ”).3
Under Panamanian law, no shareholder action was necessary to effect the UGO-Maritimecor merger. Accordingly, the burden is on the plaintiffs to demonstrate a substantial likelihood that they would have acted differently had full disclosure been made.4
For example, in Fershtman v. Schectman, 450 F.2d 1357 (2d Cir. 1971), we dealt with a *223“forced sale” of limited partnership interests made under the partnership agreement. The general partners were given the sole power to make this decision. The limited partners brought suit, claiming that a number of misleading statements and nondisclo-sures were made concerning the termination. The Court held that these allegations, even if true, did not meet the requirement of materiality:
[I]f defendants were legally entitled to terminate the partnership on March 31, 1968, in their sole discretion, it would make no difference what they misrepresented or concealed, even if we assume in plaintiff’s favor that this transaction constituted a sale.
Id. at 1360.5
Although the majority asserts that state remedies were available to halt the merger, the explanation of what they were is unpersuasive. The principal action suggested by the majority opinion is an injunction6 against the proposed merger. The theory is apparently that the shareholders, who were led down the primrose path by the misleading press releases, would have raced into court if armed with the full story. It is possible that plaintiffs could have obtained an injunction under New York’s Martin Act, N.Y.Gen.Bus.Law § 352 et seq. (McKinney 1976). See American Bank & Trust Co. v. Barad Shaff Securities Corp., 335 F.Supp. 1276 (S.D.N.Y. 1972).7 In order to prove materiality under this theory, Goldberg will have to demonstrate that he would, as a reasonable stockholder, have sought and obtained an injunction against the proposed action had the facts not been concealed.8 See Herzfeld v. Laventhal, Krekstein, Horwath & Horwath, 378 *224F.Supp. 112 (S.D.N.Y. 1974), mod. on other grounds, 540 F.2d 27 (2d Cir. 1976).
Moreover, the plaintiff fails even to mention in his two complaints what course of action he contemplated taking. Under Green, such an allegation is required to state a claim under 10b-5. There, as here, a plaintiff who sought to recover in federal court for a breach of fiduciary duty appended a conclusory allegation of deception. The Court stated:
In addition to their principal argument that the complaint alleges a fraud under clauses (a) and (c) of Rule 10b-5, 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 at 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.
430 U.S. at 474 n.14, 97 S.Ct. at 1301 n.14 (emphasis added) (citation omitted). I do not understand the remand to have relieved the plaintiff of his burden of pleading and proving the availability of state relief.9
The majority suggests two other bases for a finding of materiality. The first is the artificial maintenance of the price of UGO stock through nondisclosure. While this would be relevant in an action brought by the SEC or a plaintiff suing in his individual capacity,10 I fail to see what relevance this has in a derivative action. In his representative capacity, Goldberg may assert only the rights of UGO. It is self-evident that the artificial maintenance of a high price for its stock in no way injured UGO.11
*225The final suggested rationale of the majority is the “chastening effect” of full disclosure. The apparent theory is that those about to loot a corporation can be shamed into honesty through a requirement that they reveal their nefarious purposes.12
Even the high-water mark of expansion for 10b-5, Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971), acknowledged that breaches of fiduciary obligation were governed by state, and not federal, law. Id. at 12, 92 S.Ct. 165. The primary role of the states in these matters has been emphasized in a number of recent opinions of the Supreme Court. See, e. g., Green, supra, at 462, 97 S.Ct. 1292; Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 97 S.Ct. 926, 51 L.Ed.2d 124 (1977); Cort v. Ash, 422 U.S. 66, 78, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975).
Those who breach their fiduciary duties seldom disclose their intentions ahead of time. Yet under the majority’s reasoning the failure to inform stockholders of a proposed defalcation gives rise to a cause of action under 10b-5. Thus, the majority has neatly undone the holdings of Green, Piper and Cort by creating a federal cause of action for a breach of fiduciary duty that will apply in all cases, save for those rare instances where the fiduciary denounces himself in advance.
If the defendants have looted UGO in the manner alleged by the plaintiffs, a full recovery should not be difficult to obtain. Under New York state law, this would be a breach of the fiduciary duty imposed upon directors. My dissent is not based upon any desire to insulate such business practices from legal redress, but upon the fact that the plaintiff has chosen the wrong forum.
It is also noteworthy that, following a practice we have “unreservedly condemned],” Rosenfeld v. Black, 445 F.2d 1337, 1341 n.5 (2d Cir. 1971), cert, dismissed under Rule 60, 409 U.S. 802, 93 S.Ct. 24, 34 L.Ed.2d 62 (1972), Goldberg has filed a parallel action on behalf of UGO in New York State Supreme Court. This only serves to reinforce what I have sought to demonstrate, namely, that this complaint sounds entirely in state law. There can be no doubt that the State Supreme Court has wide experience in corporate matters similar to this, and can afford complete relief if Goldberg’s allegations are borne out at trial. Accordingly, I would remand with instructions to allow an amendment to the complaint.

. The allegation of deception was clearly insufficient under Fed.R.Civ.P. 9(b), which requires specificity in pleading fraud. See Segan v. Dreyfus Corp., 513 F.2d 695 (2d Cir. 1975). This deficiency is understandable in view of appellant’s stout insistence, throughout the district court proceedings, that 10b-5 had expanded to a point where an allegation of deception was no longer required. His principal support for this contention was our decisions in Green v. Santa Fe Industries, Inc., 533 F.2d 1283 (2d Cir. 1976) and Marshel v. AFW Fabric Corp., 533 F.2d 1277 (2d Cir. 1976). At that point, fraudulent deception was merely a makeweight. Following the Supreme Court reversal in Green, appellant shifted his emphasis on appeal, and recast his case to center on the alleged deception.

. As the majority concedes, the directors were under no obligation to denounce their own proposal, no matter how malign their intent. Thus, the omitted “facts” upon which the amended complaint is based are the failure to include the actual amount of Maritimecor’s assets and liabilities in the press release and a false representation that the transaction would inure to the benefit of UGO. While these are probably sufficient to survive a motion to dismiss, they amount to little more than that. The information on Maritimecor was almost undoubtedly in the hands of the public through its annual reports and filings with the SEC.

. The test of materiality under 14a-9 and 10b-5 is the same. See Mills v. Electric Auto-Lite Co., 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970); Gilbert v. Nixon, 429 F.2d 348, 355 (10th Cir. 1970).

. The majority’s heavy reliance on our en banc opinion in Schoenbaum v. Firstbrook, 405 F.2d 215 (2d Cir. 1968), cert, denied, 395 U.S. 906, *22389 S.Ct. 1747, 23 L.Ed.2d 219 (1969), is misplaced for two reasons. First, materiality was not discussed in Schoenbaum, since the district court had granted summary judgment on another issue. Second, Schoenbaum held that a breach of fiduciary duty, there the issuance of stock for inadequate consideration, was actionable under clause (3) of Rule 10b-5. Id. at 219-20. This holding has been overruled by Green.

. While it is true that Fershtman relies in part on the panel opinion in Drachman v. Harvey, 453 F.2d 722 (2d Cir. 1971), rev’d, 453 F.2d 736 (2d Cir. 1972) (en banc), that aspect of the holding was not disturbed by the en banc Court. Moreover, Schoenbaum v. Firstbrook had already been decided at the time.
Fershtman is apposite on another ground. The Court held there that a state remedy, reformation of the partnership agreement, was available. Presumably, full disclosure would have aided the plaintiffs in state court. However, the'existence of this state remedy was not deemed relevant to the existence of the federal cause of action.

. In our recent decision in S.E.C. v. Parklane Hosiery Co., 558 F.2d 1083 (2d Cir. 1977), we held that the availability of a state injunction was relevant in deciding materiality in an SEC enforcement action. The Court carefully distinguished that case from a private action for damages. Id. at 1087-88. While the majority contends that this distinction is unimportant, Parklane holds to the contrary.

. The availability of an injunction, rather than damages, in a private action under the Martin Act is unclear. See People v. Concord Fabrics, Inc., 83 Misc.2d 120, 371 N.Y.S.2d 550, 553 (Sup.Ct. N.Y.County 1975), affd, 50 A.D.2d 787, 377 N.Y.S.2d 84 (1st Dept. 1976). An injunctive action is' usually brought by the State Attorney General. However, a nondisclosure to the stockholders which might have prompted the Attorney General to sue cannot possibly give Goldberg a cause of action.
A second possibility is a lawsuit to enjoin the transaction as a breach of the statutory fiduciary obligation imposed on majority shareholders. See N.Y.B.C.L. § 720 (McKinney 1963). Here again, the right to enjoin the alleged misconduct here is unclear. Compare Blumenthal v. Roosevelt Hotel, Inc., 202 Misc. 988, 115 N.Y.S.2d 52 (Sup.Ct. N.Y.County 1952) (Breitel, J.), with Williams v. Bartell, 34 Misc.2d 552, 226 N.Y.S.2d 187 (Sup.Ct. N.Y.County), modified, 16 A.D.2d 21, 225 N.Y.S.2d 351 (1st Dept. 1962). Thus, the claim for relief depends on uncertain aspects of state law. This underscores the correctness of Judge Lasker’s holding that the federal interest was slight, if it existed at all.
The majority may be correct concerning the availability of injunctive relief in the state court. That is not the issue, however. The plaintiffs have not even alluded to the element of materiality, which is their burden to establish. Our Court should not carry that burden for them.

. Given the alacrity with which actions taken by controlling shareholders are challenged in federal court, one can easily envision a suit seeking an injunction on the grounds that full disclosure would have led the plaintiff to seek an injunction.

. According to defendants’ papers, UGO is a Panamanian corporation with principal offices in New York and Bermuda, and Maritimecor is a Panamanian corporation with its principal place of business in Zurich, Switzerland. Apparently, all but two of the defendants live outside of the United States and are citizens of foreign countries. While New York’s fiduciary standards will be applied in such an action for damages, see German-American Coffee Co. v. Diehl, 216 N.Y. 57, 109 N.E. 875 (1915) (Cardozo, J.), it is not at all clear that New York law determines the availability of an injunction in this situation in spite of the provisions of § 1317 of the General Business Law. See Hausman v. Buckley, 299 F.2d 696 (2d Cir.), cert, denied, 369 U.S. 885, 82 S.Ct. 1157, 8 L.Ed.2d 286 (1962). See Reese & Kaufman, The Law Governing Corporate Affairs: Choice of Law and the Impact of Full Faith and Credit, 58 Colum.L.Rev. 1118 (1958); Loss, The Conflict of Laws and the Blue Sky Laws, 71 Harv. L.Rev. 209 (1957); Currie, The Constitution and Choice of Law, 26 U.Chi.L.Rev. 9 (1958). Thus, in Green, the Supreme Court looked only to the availability of an injunction in Delaware, the state of incorporation. Neither the majority nor the plaintiff discusses this difficult choice-of-law issue. This unsettled question of state law may prove dispositive on the question of materiality. Moreover, if New York would grant an injunction and other states would not, the majority will have created a federal right, the existence of which depends on the venue of the suit brought to enforce it. On the other hand, if the availability of an injunction in New York determines the issue of materiality for every federal court, then the New York Legislature will have set the standard under Rule 10b-5 for the nation.

. An individual suit by Goldberg under 10b-5 would appear to founder on the purchaser-seller requirement of Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975).

. To the contrary, the high price of UGO stock would appear to be a benefit to the corporation. Furthermore, it is hardly fitting for Goldberg to seek equitable remedies on the ground that, properly informed, he could have unloaded his stock on some unsuspecting third party. Of course, if Goldberg told the truth to the prospective purchaser, a sale was unlikely. Very few, except those interested in purchasing stockholder suits, would be willing to invest in a company after the controlling shareholders have announced an intention to loot it.

. Such a disclosure would be material, since every jurisdiction would enjoin such conduct. If the majority is merely referring to the “chastening effect” of factual disclosure to shareholders who can do nothing to stop the proposed action, lack of materiality is still a barrier under Rule 10b-5.