•  
  •  
 

Abstract

In 1967, Santa Fe Industries undertook the acquisition of the Kirby Lumber Co. by the publication of a tender offer. By 1973, Santa Fe through its subsidiary, Santa Fe Natural Resources, had acquired ownership of 95% of Kirby's common stock. In 1974, Resources undertook the elimination of the remaining shareholders in Kirby by short form merger of Resources and Kirby. On July 11, Resources organized a shell corporation, Forest Products, Inc., under Delaware law and transferred to it its entire holdings in Kirby in return for all of Forest Products' stock. On July 30, the board of directors of Forest Products adopted and executed a merger resolution providing that Forest Products would be merged into Kirby, with Kirby as the surviving corporation. On August 1, 1974, S. William Green and the other minority shareholders of Kirby were notified of the completed merger and offered a cash payment of $150 per share held. They responded by filing a demand on August 21 with the Delaware Court of Chancery for an appraisal of their equity interest, the only remedy Delaware provides for dissenters to a short form merger. On September 9, 1974, Green and the others withdrew their appraisal demand and initiated a suit in the Federal District Court for the Southern District of New York. The complaint alleged that the consummation of the merger constituted fraud under section 10(b) of the Securities Exchange Act of 1934 and the corresponding regulation, rule 10b-5. Rescission of the merger and damages were requested. The district court dismissed the complaint, holding that as long as full and fair disclosure is made, transactions eliminating minority interests are beyond the purview of rule 10b-5. On appeal the Second Circuit in a divided panel decision reversed. Judge Medina writing for the majority ruled that a short form merger consummated without a justifiable business purpose was a breach of fiduciary duty owed by the majority shareholders to the minority, that such a breach constituted fraudulent conduct cognizable under rule 10b-5, and that the fact that Delaware law allowed the minority only an appraisal remedy did not preclude the federal courts from granting additional relief. In a strongly worded dissent Judge Moore disagreed on the grounds that the decision extended to the plaintiffs "an independent, substantive right totally unrelated to the anti-fraud scheme of the federal securities laws and in complete derogation of a valid state rule regulating corporate activity.” A rehearing en banc was denied on the grounds that the case was "of such extraordinary importance" that the decision should be reviewed by the Supreme Court." Certiorari was subsequently granted.

First Page

218

Download

Share

COinS