430 U.S. 462 (1977), 75-1753, Santa Fe Indus., Inc. v. Green

Docket NºNo. 75-1753
Citation430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480
Party NameSanta Fe Indus., Inc. v. Green
Case DateMarch 23, 1977
CourtUnited States Supreme Court

Page 462

430 U.S. 462 (1977)

97 S.Ct. 1292, 51 L.Ed.2d 480

Santa Fe Indus., Inc.



No. 75-1753

United States Supreme Court

March 23, 1977

Argued January 18-19, 1977




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

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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.


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, 214. Pp. 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 199, referring to practices that are intended to mislead investors by artificially affecting market activities, none of which was involved here. Pp. 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

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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, 84; Piper v. Chris-Craft Industries, Inc., ante at 41. Pp. 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. 480, and STEVENS, J., post, p. 480, filed opinions concurring in part. BRENNAN, J., filed a dissenting statement, post, p. 480.

WHITE, J., lead opinion

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-51 thereunder in the context of a Delaware short-form

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merger transaction used by the majority stockholder of a corporation to eliminate the minority interest.


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 [97 S.Ct. 1297] 95%; the purchase prices during the period 1968-1973 ranged from $65 to $92.50 per share.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

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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.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

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remedy in the Delaware court of Chancery.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.5 The complaint alleged further that the merger took place without prior [97 S.Ct. 1298] 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...

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