Santa Fe Industries Inc. v. Green

430 U.S. 462 (1977)

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Nature of the Case

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Facts

Santa Fe (D), acquired control of 60% of the stock of Kirby and then through a series of purchases over the succeeding years, D increased its control of Kirby's stock to 95%. In 1974, D availed itself of § 253 of the Delaware Corporation Law, known as the 'short-form merger' statute. It 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 of his shares, as determined by a court-appointed appraiser subject to review by the court. 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 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. Green (P) objected to the terms of the merger, but did not pursue their appraisal remedy in the Delaware Court of Chancery. P 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. P claimed that Kirby's stock was worth at least $772 per share. P alleged further that the merger took place without prior 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,' and the offer of $150 per share - to 'freeze out the minority stockholders at a wholly inadequate price,' and that D, knowing the appraised value of the physical assets, obtained a 'fraudulent appraisal' of the stock from Morgan Stanley and offered $25 above that appraisal 'in order to lull the minority stockholders into erroneously believing that D generous.' This conduct was alleged to be 'a violation of Rule 10b-5 because Ds employed a `device, scheme, or artifice to defraud' and engaged in an `act, practice or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.'' The District Court dismissed the complaint for failure to state a claim upon which relief could be granted. It reasoned that Delaware law required neither a business purpose for a short-form merger nor prior notice to the minority shareholders who the statute contemplated would be removed from the company, and that Rule 10b-5 did not override these provisions of state corporate law by independently placing a duty on the majority not to merge without prior notice and without a justifiable business purpose. It observed that Ps valued their shares at a minimum of $772 per share, 'basing this figure on the pro rata value of Kirby's physical assets.' It noted that the physical asset appraisal, along with other information relevant to Morgan Stanley's valuation of the shares, had been included with the information statement sent to Ps within the time required by state law. It thought that if 'full and fair disclosure is made, transactions eliminating minority interests are beyond the purview of Rule 10b-5,' and concluded that the 'complaint fail[ed] to allege an omission, misstatement or fraudulent course of conduct that would have impeded a shareholder's judgment of the value of the offer.' The complaint, therefore, failed to state a claim and was dismissed. A divided Court of Appeals for the Second Circuit reversed. The Court of Appeals' view was that, although the Rule plainly reached material misrepresentations and nondisclosures in connection with the purchase or sale of securities, neither misrepresentation nor nondisclosure was a necessary element of a Rule 10b-5 action; the Rule reached 'breaches of fiduciary duty by a majority against minority shareholders without any charge of misrepresentation or lack of disclosure.' It reasoned that the majority has committed a breach of its fiduciary duty to deal fairly with minority shareholders by effecting the merger without any justifiable business purpose. The minority shareholders are given no prior notice of the merger, thus having no opportunity to apply for injunctive relief, and the proposed price to be paid is substantially lower than the appraised value reflected in the Information Statement.' The Supreme Court granted the petition for certiorari challenging this holding because of the importance of the issue involved to the administration of the federal securities laws.