In this class action charging the defendant Oppenheimer and Company (“Oppenheimer” or “the Company”) with fraud in the exchange of its 18% Volume-Indexed Debentures (the debentures), the plaintiffs Sylvia Martin Mann and R. Allan Martin appeal a decision of the Court of Chancery granting summary judgment to Oppenheimer. The complaint alleges that Oppen
Addressing the issue as a matter of first impression in this Court, we conclude that there is no private cause of action under Section 17(a) of the Securities Act. Thus, we overrule the earlier Superior Court decision of
Unit, Inc. v. Kentucky Fried Chicken Corp.,
Del.Super.,
I.
Oppenheimer is a privately owned, diversified investment services firm. As a registered broker-dealer and a member firm of the New York Stock Exchange, Oppenheimer is subject to the Uniform Net Capital Rule of the Securities and Exchange Commission (Rule 15C3-1), which specifies uniform minimum net capital requirements for its registrants, and is designed to measure the general financial integrity and liquidity, and to control the expansion, of a broker-dealer’s business.
In July 1981, Oppenheimer sold $25 million of the debentures which bore an interest rate ranging from 18% to 22%, depending on the trading volume on the New York Stock Exchange. The net proceeds to the Company of $23,805,000, were used to repay existing subordinated liabilities and short-term bank loans. The prospectus disclosed that compliance with the Net Capital Rule “may limit those operations of a firm (such as the Company) which require intensive use of its capital for such purposes as underwriting securities distributions, maintaining the inventory required for firm trading in securities and carrying customer accounts.” However, it noted that the Company’s liquidity would be enhanced by the proceeds of the offering.
Whatever the effect of the Net Capital Rule, Oppenheimer’s ability to redeem the securities was restricted by the terms of the indenture:
No redemption of the Debentures will be permitted prior to July 1, 1986, directly or indirectly, from or in anticipation of moneys borrowed having an effective interest cost which is less than 16%, per annum.
During the relevant period, the debentures yielded the maximum 22% interest. To reduce this expense, on March 2, 1983, Oppenheimer made an exchange offer by which debenture holders would receive $1,275 in principal of new 12.75% interest debentures (new debentures), plus the accrued interest on the old ones, for every $1,000 of debentures exchanged. The offer, according to plaintiffs, twice falsely stated that if a “major portion” of the securities were not exchanged, “the Company
presently intends
to redeem [them] at some time after July 1, 1983.” (Emphasis added). Oppenheimer further declared that the new debentures’ market value would be greater than the subsequent re
The plaintiffs, as trustees of a trust which exchanged its debentures, filed suit on behalf of the trust and all other debenture holders who accepted the “fraudulent and coercive” offer. The plaintiff, Martin, who retained his own debentures, also alleged that he and others similarly situated were injured when Oppenheimer’s offer adversely affected the market value of their holdings. The plaintiffs contend that Op-penheimef’s statements of an intent to redeem the debentures, if the exchange failed, were false and misleading in violation of Sections 12(2) and 17(a) of the Securities Act, as well as Delaware common law, since the Company lacked sufficient funds, unless borrowed at 16% — then well above the going rate — to effect any such redemption.
Pursuant to Chancery Court Rule 12(b)(6), 2 Oppenheimer moved to dismiss the complaint for failure to state a claim upon which relief could be granted. Appended to its motion were copies of the prospectus, the offering circular, certain Commentaries on indenture provisions from the American Bar Foundation, various unreported judicial decisions, and a specimen debenture certificate. The Vice Chancellor concluded that under Rule 12(b) Oppenheimer’s submissions converted the motion to dismiss into a motion for summary judgment under Chancery Court Rule 56. 3
Mánn and Martin sought, but were refused, discovery on the grounds that they had not shown a need for particularized discovery, and because the issue was one of law turning upon the interpretation of documents, especially the old indenture. The Vice Chancellor then granted Oppenheimer summary judgment, holding that (1) plaintiffs had no private cause of action under Section 17(a); (2) because Oppenheimer was “legally” able to redeem the debentures, its announcement of such an intention did not amount to coercion, fraudulent misrepresentation violative of Section 12(2), or common law fraud; and (3) absent a legal basis for plaintiffs’ allegations, it was unnecessary to rule on the request for equitable relief. 4 Mann v. Oppenheimer, Del.Ch., No. 7275, Walsh, V.C. (April 4, 1985).
II.
When a party moves to dismiss for failure to state a claim pursuant to Rule 12(b), and submits matters outside the pleadings, the motion will be treated as one for summary judgment under Rule 56. Del.Ch.Ct. Rule 12(b);
Danby v. Osteopathic Hospital Ass’n of Delaware,
Del.Ch.,
Moreover, when issues are decided on summary judgment, the parties must have a reasonable opportunity to present all facts pertinent to the motion. Del. Ch.Ct. Rule 12(b);
Danby,
A.
In granting summary judgment on the Section 12(2)
5
and common law fraud claims, the trial judge held that the issue was one of law “turning upon the interpretation of documents [the prospectus and the offering circular] which are concededly genuine.”
Mann v. Oppenheimer,
Del.Ch., C.A. No. 7275, slip op. at 2, Walsh, V.C. (April 4, 1985). While the legal ability to redeem may be fairly discerned from a study of the documents, Oppenheimer’s claimed intent to redeem may not comport with factual reality. Plaintiffs’ complaint alleges that Oppenheimer’s false and misleading statements of intent had an improper coercive effect on the exchange. In the prospectus and offering circular the only expressions of defendant’s intent to redeem are the very declarations which plaintiffs
Generally, parties may obtain discovery of any matter not privileged which is relevant to the subject of the pending action. Del.Ch.Ct. Rule 26(b)(1)
6
. Federal authority indicates that plaintiffs must have access to the relevant materials through discovery before summary judgment can be granted, especially when the information is exclusively within defendant’s control.
Johnson v. RAC Corp.,
The application of the discovery rules is subject to the exercise of the trial court’s sound discretion.
Dann v. Chrysler Corp.,
Del.Ch.,
Since Oppenheimer essentially controls the relevant information, material to the issue of intent, plaintiffs can only develop facts to contest the motion for summary judgment through the discovery process. To deny them that right, and thus extinguish plaintiffs’ action at its threshold, does not comport with principles of judicial discretion, expecially when there is no indication that discovery on the relatively narrow issue of Oppenheimer’s intent would interfere with the administration of justice. Reversal, under the circumstances, is mandated. Del.Ch.Ct. Rule 12(b).
B.
Relying principally upon the indenture terms and two analogous federal cases, the trial court ruled as a matter of law that because Oppenheimer could redeem under circumstances which were technically possible, the company’s expression of that intent was neither fraudulent nor misleading. Following the reasoning in
Franklin Life Insurance Co. v. Commonwealth Edison Co.,
The rights of debenture holders are controlled by the terms of the indenture under which the securities are issued.
Wolfensohn v. Madison Fund, Inc.,
Del.Supr.,
No redemption of the Debentures will be permitted prior to July 1, 1986, directly of indirectly, from or in anticipation of moneys borrowed having an effective interest cost which is less than 16%, per annum.
In
Franklin Life,
the restriction was that certain 9.44% preferred shares issued by Commonwealth Edison could not be redeemed “through refunding, directly or indirectly, by or in anticipation of” debt carrying an interest cost, or equity bearing a dividend cost, below 9.44%.
Franklin Life,
In
Morgan Stanley,
ADM Midland Company (ADM) issued certain 16% debentures in May, 1981. The indenture provided that the bonds were not redeemable before a certain date “pursuant to such option from the proceeds, or in anticipation, of the issuance of any indebtedness ... [if] the interest cost or interest factor applicable thereto ... shall be less than 16.08% per annum.”
Morgan Stanley,
Morgan Stanley, which held a large block of debentures, filed an action claiming that the redemption was barred by the indenture agreement, and that the use of stock proceeds was a mere “juggling of funds” to avoid the limitation. Adopting the “source” test of Franklin Life, the court upheld the redemption. The court also quoted The American Bar Foundation’s Commentaries on Model Debenture Indenture Provisions (The Commentaries):
[I]nstead of an absolute restriction [on redemption], the parties may agree that the borrower may not redeem with funds borrowed at an interest rate lower than the interest rate in the debentures. Such an arrangement recognizes that funds for the redemption may become available from [sources] other than borrowing, but correspondingly recognizes that the debenture holder is entitled to be protected for a while against redemption if interest rates fall and the borrower can borrow funds at a lower rate to pay off the debentures.
Morgan Stanley,
The court concluded: “We read this comment as pointing to the
source
of funds as the dispositive factor in determining the availability of redemption to the issuer ...”
Morgan Stanley,
As plaintiffs correctly observe, Franklin Life and Morgan Stanley are distinguishable in that they involved redemptions with equity funds, whereas no such source has yet been demonstrated by Oppenheimer. Indeed, plaintiffs forcefully argue that recourse to equity capital is the least likely redemption method available to the Company, because it (1) is privately held, and (2) is subject to the stringent requirements of the Uniform Net Capital Rule of the Securities and Exchange Commission. These factors, coupled with the indenture limitation, point to but one conclusion according to plaintiffs — the coercive redemption threat was fraudulent since the Company knew it had no practical means of carrying it out. Whether that in fact is so awaits another day. However, plaintiffs fail to note another critical distinction: in the pri- or cases, the interest floor on the source of redemption funds matched the rate the securities paid, while Oppenheimer could borrow funds at 16%, a rate lower than the range of its obligation under the debentures (18%-22%). As a result, although it was unprofitable for Commonwealth Edison or ADM to redeem with proceeds from debt more costly than the securities, Oppenheimer could redeem with borrowed funds less expensive than the interest cost of the debentures. Likewise, the reasoning from the Commentaries applies to redemption provisions, such as in Franklin Life and Morgan Stanley, under which issuers may not redeem with funds borrowed at a cheaper rate than that which the security pays. Here, Oppenheimer faced no such restriction.
The source rule prevents a redemption, directly or indirectly, by means of funds acquired in a manner forbidden by the indenture. The limitation upon an Oppenheimer redemption applied only when the source of the funds was money borrowed at less than 16%. Unlike the prior cases, there was greater latitude to redeem with borrowed money.
Oppenheimer also had the option of becoming a public company, issuing equity securities, and using the proceeds of the public offering to redeem as in Franklin Life and Morgan Stanley. Any implication to that effect in the exchange offer might be technically accurate. However, fraud does not turn on bare legal niceties. The element of intent remains, and on that point the record was prematurely closed.
Mann and Martin also contend that Oppenheimer had a duty to disclose the anticipated source of the redemption funds. However, securities laws require neither the disclosure of indefinite or contingent plans nor the prediction of future actions.
Crane Co. v. Harsco Corp.,
III.
Mann and Martin also appeal the dismissal of their claim under Section 17(a) of the Securities Act.
7
Although this Court has
The availability of an implied private right of action under Section 17(a) remains unresolved in the federal courts. The United States Supreme Court has declined to address the question.
See Aaron v. Securities and Exchange Commission,
We begin by considering such guidance as the Supreme Court of the United States has furnished to date. In
Cort v. Ash,
... First, is the plaintiff “one of the class for whose especial benefit the statute was enacted,” ... that is, does the statute create a federal right in favor of the plaintiff? Second, is there any indication of legislative intent, explicit or implicit, either to create such a remedy or to deny one? ... Third, is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the plaintiff? ... And finally, is the cause of action one traditionally relegated to state law, in an area basically the concern of the States, so that it would be inappropriate to infer a cause of action based solely on federal law?
Id.
at 78,
The central inquiry is whether Congress intended to create a private cause of action, either expressly or by implication.
Touche Ross & Co. v. Redington,
In
Transamerica Mortgage Advisors, Inc. v. Lewis,
... But the mere fact that the statute was designed to protect advisers’ clients does not require the implication of a private cause of action for damages on their behalf ... The dispositive question remains whether Congress intended to create any such remedy. Having answered that question in the negative, our inquiry is at an end.
Id.
at 24,
A finding of intent is more likely where the statutory language confers a right directly upon a class of persons, but less likely where Congress “instead has framed the statute simply as a general prohibition or a command to a federal agency.”
Universities Research Ass’n, Inc. v. Coutu,
An analysis of Section 17(a) under the modified
Cort
test demonstrates that no private cause of action arises under the statute. The first inquiry is whether the statute was created for the especial benefit of plaintiffs, such as Mann and Martin, and whether the statute creates a federal right in their favor. Section 17(a) acts as a general prohibition forbidding those who offer or sell securities from employing fraudulent schemes or engaging in transactions which operate as a fraud on purchasers. While purchasers are clearly beneficiaries, the provision does not grant them a federal right. “The question is not simply who would benefit from the [statute], but whether Congress intended to confer federal rights upon those beneficiaries.”
California v. Sierra Club,
In
Sierra Club,
the Court denied a private cause of action under a statute barring construction on the nation’s navigable waters without certain approval. This denial should be compared with the grant of a private cause of action under Section 901 of Title IX of the Educational Amendments of 1972
10
in
Cannon v. University of Chicago,
The second element of the modified
Cort
test asks whether there is any explicit or implicit intent on the part of Congress to create a private remedy. The legislative history of the Securities Act indicates no such intent. Sections 11
11
and 12 of the Act create explicit civil remedies, while Section 17(a) does not. The House Committee report points only to Sections 11 and 12 as providing civil remedies
12
and there is no mention of civil liability under Section 17(a).
Landry v. All American Assurance Co.,
The overall regulatory scheme of the Act likewise evinces no intent to create a civil remedy under Section 17(a).
Landry,
Because we find no intent to create a private remedy in either the statutory language or the legislative history and overall scheme of the Act, it follows that we must deny Mann and Martin a private cause of action under Section 17(a). Although such civil actions arguably would further enforce the Act, and thus be consistent with its underlying purposes, this alone will not confer a private remedy.
See Transamerica Mortgage Advisors,
Plaintiffs argue that Section 17(a) implies a private remedy, because its language closely parallels that of Section 10(b) of the Securities Exchange Act of 1934. Section 10(b) clearly confers a private remedy.
Herman & MacLean v. Huddleston,
It is one thing to imply a private right of action under § 10(b) or the other provisions of the 1934 act, because the specific liabilities created by §§ 9(e), 16(b), and 18 do not cover all the variegated activities with which that act is concerned. But it is quite another thing to add an implied remedy under § 17(a) of the 1933 act ... Within the area of §§ 5 and 17(a), §§ 11 and 12 (unlike §§ 9(e), 16(b), and 18 of the 1934 act) are all-embracing ...
Hill v. Der,
Finally, the federal circuit courts which have found a private remedy generally have done so by following the analysis in Judge Friendly’s concurrence in
SEC v. Texas Gulf Sulphur Co.,
The application of the modified
Cort
test to Section 17(a) demonstrates that Mann and Martin have no standing under that statute. In light of recent United States Supreme Court rulings, we find previous cases to the contrary to be of less value than holdings such as
Landry
and
Hill v. Der.
Accordingly, we are constrained to overrule the earlier decision of the Superior Court in
Unit, Inc. v. Kentucky Fried Chicken Corp.,
Del.Super.,
IV.
The trial court ruled that because there was no legal basis for plaintiffs’ allegations of fraud, the question of equitable relief was moot. In view of our rulings today, that matter remains open upon remand. While Oppenheimer argues that plaintiffs have an adequate remedy at law, fraud actions, depending on their facts, may sound in equity or law.
See Stephenson v.
For the foregoing reasons, the decision of the Court of Chancery is AFFIRMED in part, but REVERSED on the issues of Oppenheimer’s alleged misleading, fraudulent and coercive statements of intent. The matter is REMANDED for further proceedings consistent herewith.
Notes
. 15 U.S.C. § 77l(2) (1982); 15 U.S.C. § 77q(a) (1982). The two statutes are essentially anti-fraud provisions. See infra nn. 6, 8.
. The pertinent provision of the rule is as follows:
[T]he following defenses may at the option of the pleader be made by motion: ... (6) failure to state a claim upon which relief can be granted ...
Del.Ch.Ct. Rule 12(b).
. The pertinent provision of Chancery Rule 12(b), like its federal counterpart, is:
... If, on a motion asserting the defense numbered (6) to dismiss for failure of the pleading to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the Court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56.
Del.Ch.Ct. Rule 12(b) (emphasis added).
.The Vice Chancellor also ruled that Martin had no standing as an individual plaintiff under § 12(2), because he (and other members of his class) did not exchange their debentures and thus were not "purchasers” as required under Section 12(2). However, Martin et al still had standing for the common law fraud claim. This part of the decision below was not appealed.
. The pertinent provision of Section 12(2) provides:
Any person who—
(2) offers or sells a security ... by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such untruth or omission,
shall be liable to the person purchasing such security from him, who may sue either at law or in equity in any court of competent jurisdiction, to recover the consideration paid for such security with interest thereon, less the amount of any income received thereon, upon the tender of such security, or for damages if he no longer owns the security.
15 U.S.C. § 77/(2) (1982).
. The pertinent provision of the rule provides:
... Parties may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action ...
Del.Ch.Ct. Rule 26(b)(1).
. The relevant text of Section 17(a) provides:
(a) It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce orby the use of the mails, directly or indirectly—
(1) to employ any device, scheme, or artifice to defraud, or
(2) to obtain money or property by means of any untrue statement of material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or
(3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
15 U.S.C. § 77q(a) (1982).
.
See, e.g., Stephenson v. Calpine Conifers II, Ltd.,
. Securities Act, Section 22(a). 15 U.S.C. § 77v(a) (1982).
. 20 U.S.C. § 1681(a) (1982). In relevant part, the statute provides:
(a) No person in the United States shall, on the basis of sex, be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any educational program or activity receiving Federal financial assistance ...
******
. 15 U.S.C. § 77k (1982).
. H.R.Rep. No. 85, 73rd Cong., 1st Sess. 9-10 (1933).