*2 SCHNACKENBERG, FAIR- Before CUMMINGS, Circuit CHILD Judges. Judge.
SCHNACKENBERG, Circuit Inc., Dasho, Dasho-Rogers, William Schy, corporation, and Maurice H. Illinois plaintiffs, appealed from have an order $917,331. the district court entered June It also had an income tax 1966, dismissing carry derivative $12,000,- forward credit of about brought by plaintiffs, acquired in connection with the against Susquehanna Corporation, liquidation of a railroad. (inter alia) directors, its officers During year April before charging conspiracy to defraud Sus- managed by Susquehanna was *3 quehanna in the sale and of Jr., George Bard, Bogan, Ralph M. A. L. 17(a) in violation of § Lannan, Boshell, Edward O. J. Patrick Securities Act of 15 U.S.C.A. § Mason, Lauhoff, Howard J. Harold G. 77q, 10(b) of the § Securities Michels, May, Hugh R. C. J. Earle C. 78j, Act of 15 U.S.C.A. and § Schenk, Schmick, C. Harold Franklin B. of rule 10b-5 of the Rules of Securities Stuart, Wirtz, C. Arthur M. and Francis (“SEC”). and Commission Woolard, Lannan here referred to as “the 21, 1965, plaintiffs On December had group”, individually who owned or con- filed a complaint third amendment to the They 436,297 trolled shares on that date. adding II, alleged they count in which officers, were directors or the dominant inter alia that defendants caused Sus- being Lannan, of chairman quehanna to proxy distribute a false Schenk, board, president and and statement on or about November director. 14(a) violative of of the 1934 (a) appears It further from said com- Act, which approval led to stockholder plaint, upon belief, and information Susquehanna’s of merger with defendant disregard group, complete the Lannan Gypsum Company, American a New derogation duty and in of their to Sus- corporation. Mexico quehanna shareholders, and to its other Although face, designated not so on its intending unjustly and them- to enrich complaint filed October 1965 was damage expense selves at the and to the by by referred to the district court and Susquehanna of and its other sharehold- parties I, as count and is so referred ers, agreed conspired among them- opinion. to in this selves, and with defendant Herbert F. Defendants moved to dismiss both Korholz, acting Gypsum, for himself and Although ruling counts. there was no Susquehanna cheat defraud II, part as to count which is not a property said other shareholders out of appeal, this the district court sustained property rights great value. I, defendants’ motions to dismiss count by causing Susque- This was to be done and, doing, in so made reference to a acquire 435,000 by hanna to indirection proxy statement attached as an exhibit stock, shares its own all or substan- to count II. part tial of which were owned or con- complaint, amended, From the sworn as by group, trolled the Lannan at a appear: Susquehanna these facts on June $1,740,000 about excess of fair 30,1965 outstanding 2,763,035 had shares market value of such result shares. This stock, traded in the over-the-counter through accomplished was to be the de- 8,755 market. It had about shareholders. group vice of a sale principal cash, Its assets were short-term Gypsum, acting through Korholz, its investments, ownership president sub- majority stockholder, fol- sidiary engaged companies activities Susquehanna. lowed into mining ores, processing such as An inducement trans- Korholz was the operation line, production of a bus Susquehanna, by fer of control seri- sulphuric acid, pentoxide vanadium resignations group atim of Lannan di- aggregate used in rectors, the manufacture and the substitution of Korholz concrete. Its current assets at the end plan and his nominees. Success of this year 30, 1965, its fiscal on depended June upon the re-election $13,730,081, amounted group Susquehanna directors about 15 times its current liabilities of meeting April annual stockholders’ on group plan, Susquehanna carry owned shares of To City plus proxies pledging group, $300,685 re- own its the Kansas solicited in cash. was on a basis election board. This misrepre- tyhich contained undervalued the These solicitations Vanadium fact, the by $700,000, profit in furtherance realized sentations of City particularity in conspiracy, pleaded group later with Kansas two weeks complaint.1 proxies ob- so With a resale of that stock to Vanadium tained, group Corporation. the board elected to defend- of members. Of the thirteen its controlled owned or Korholz 56% here direc- ants who were voting Gypsum. outstanding stock of meeting, tors, present at all were passage resolutions He secured the anything inform but none did corporations, of the two directors plan shareholders of the real *4 recommending merger Gypsum into of merge Gypsum. group Lannan to with Susquehanna, of shares the ratio 1.9 on (the group A dissident of shareholders Susquehanna, Gypsum of for 1 share of City Group”), representing “Kansas represent I count to averred in a ratio 328,000 shares, about cumulated Gypsum gross a overvaluation placed votes defendants A. D. Martin Although assets included stock. and Albert Thomson on board. W. 435,000 Susque Gypsum were the May 1965, On defendants Lannan Lannan purchased from the hanna shares stating press and Korholz issued a release Gypsum purchased these shares group, “major Susquehanna that Lannan and bank, a funds borrowed with shareholders” had sold shares by Susque assumed loan was effect they Susquehanna con- owned merger agreement. under the hanna acting trolled to Korholz behalf of on consummated, Thus, if the were Gypsum, $6,525,000in cash. 435,- acquired Susquehanna have would price Susquehanna stock at a The of its own vacancies on the 000 shares fair by electing $1,740,000 in excess board were filled Korholz of about Hardin, chairman and Nielsen thereof. market value Reeves, they thereof, as members alia, sought, inter count I Plaintiffs in being the nominees Korholz. merg- enjoin Gypsum-Susquehanna to $1,- Susquehanna foregoing er, to recover for transfer of control Susquehanna 740,000 premium Lannan realized board was averred 435,000 shares group I on sale of the count spiracy. to in furtherance of con- be surcharge de- Susquehanna, and to $700,000, the amount with fendants (b) alleges that, Count I in further- they Susquehanna’s undervalued which holding conspiracy, May ance of the shares, the ex- of Vanadium sue, City group Kansas to threatened change by the shares owned such charging corporate mismanagement, and City group. Kansas Susquehanna defendants change 140,000 to ex- caused to dismiss shares of defendants moved Vanadium Cor- While ground poration plaintiffs Susquehanna stock owned I on the count meeting April 19, group 1. At the stockholders’ Lannan of defendants presid nominated where Lannan and two additional candidates Schenk ed, represented by management were elected as direc- Lannan present: stockhold corporation. Defendant Lan- ers tors of the “ * * * Susque- represented the stock- nan further present meeting companies that he hanna with one of several holders at listed on shares the New York Stock would not sell his per approxi- imminent; share, that such would then $15 mately market, be notwith- beneficial and its above 20% standing already agreed shareholders; pending merg- that such that he had negotiations hampered would be to defendant Kor- er shares [those] sell ” * * * per have little chance to unless share. $15 materialize holz purchasers were not ties, of securi- or sellers its own shares is a to which ‘sale’ they point plaintiffs policy expressed sued the anti-fraud in the derivatively, asserting Hoop cause federal securities laws extends. belonging Susquehanna, corpora- Corp., er v. Mountain States Securities wrongful injured Cir., 1960, 200-203, acts of its 282 F.2d directors, denied, officers and party-plaintiff. which is real cert. 365 U.S. * * 693; 5 L.Ed.2d that, Plaintiffs contend under facts opinion that an areWe alleged by cases, them decided and the acquisition disposition securities by corporation the “issuance” falls within other securities exchanged to be for shares or assets of statutory definitions and of another constitutes the merger. reasoning applies to a case issuing corporation either a seller or indicating a There are no circumstances purchaser securities entitled to contrary congressional intent, but protection of the securities laws. In legislative history purpose of addition, appears it from a brief which that an ex the securities laws indicate permitted we filed the Securi- merg change to a incidental ties and Commission as amicus protec subject er is to their antifraud curiae, question presented that the here tions. is not whether a or a sale Exchange Act *5 Inasmuch as the was by was Gypsum made individual enlarge protection for in- meant to the Susquehanna shareholder, but that (1933), by vestors afforded an earlier act issue is whether there was a Congress say it seems to that reasonable by Susquehanna or a sale itself. We reorganizations as that intended such argument impressed by its anti- here to come within involved merger proposed Commission that provisions. fraud Gypsum Susquehanna into involved that the We reach conclusion Su- purchase (the both acquisition Sus- give preme never to Court intended quehanna shares of its own common-law the word limited “sale” the stock) (the and a sale issuance of Sus- meaning word, applied that when quehanna Gypsum’s shares to share- stock those which transactions such as holders) Susquehanna. As we in the case that consider at bar. Our attention is called to Sections Swan, U.S. court said in Wilko v. 346 3(a) (13) 3(a) (14) and 430-431, 98 74 182 at Act, (a) 15 (13) U.S.C. 78c § and 78c § “pur (1953): L.Ed. 168 (a) (14), which define word response mes- “In to a Presidential any chase” to buy, “include contract to sage urging that added to there be purchase, acquire,” or otherwise and emptor the rule of ancient caveat any “sale” to “include contract to sell further beware,’ ‘let the also doctrine of seller dispose otherwise of.” This broad Congress passed the Securities language indicates an intention Con Designed protect in- Act of 1933. gress “purchase” the words and issuers, vestors, requires Act under- “sale” are not limited transactions writers, full dealers to make and ordinarily governed by the commercial fair disclosure the character law of evidently sales. The foreign securities sold interstate to make control of securities transactions prevent fraud in commerce and to reasonably complete and effective to ac 12(2) policy, sale. To effectuate this complish purposes legislation. of right special for to recover created a In Ruckle v. Corpora- Roto American misrepresentation sub- which differs tion, Cir., (1964), 339 F.2d 24 stantially from the common-law action said, court at 27: seller to assume made authority proving “As prin- matter of the burden lack scienter. * * *» ciple, by corporation the issuance court the district & Supreme cause is remanded to Court Securities Howey proceedings. J. for further Commission W. 293, 299, Co., 66 S.Ct. 328 U.S. remanded. Reversed recognized (1946), L.Ed. 1244 that, purpose of the Securities for Judge (with FAIRCHILD, Circuit Act, the term “investment contract” Judge, CUMMINGS, Circuit whom joins), according interpreted would be concurring. “ * * * than a flexible rather pre- transactions are Two different capable principle, one that is static adaptation ac- causes of as foundations sented meet the countless interstate fraudulent tion under by those schemes devised who variable act1 of the securities section transactions money the use of the of others seek prac- deceptive manipulative and and the promise profits.” And exchange act.2 of' tices section law, questions of answer two bar, must we Thus in the case at when the difficulty. considerable approved each of occurred, the owner of securities The Transactions: security purchased had effect new steps, transfer, by successive I. The paid by turning in old his it Susquehanna stock 435,000 shares of the antifraud one. In such a situation to Korholz the Lannan defendants from protections afforded the Securities ultimately into Gypsum, and than a situation Act are needed no less post-merger Susquehanna, via assets of outright purchase one makes an where Susquehanna. Gypsum into agree counsel of stock for cash. We with fraudulent this was a It is claimed complex for the amicus curiae by-which Lannan scheme oppor- nature aof enhances the pricé highly excessive could extract a thus tunities for fraud and increases shares. for their protection. need antifraud 140,- II. The sale *6 of compelled conclusion that We are to the the stock shares Vanadium of unduly impressed the was district court City group return in Kansas for conceptual the semantic and diffi- plus Susquehanna stock, boot shares of arising “pur- culties the when words money. this sale that It claimed is mergers. applied to chase” and “sale” are large profit Kansas for the produced a City group devised was a scheme and that, for conclude and hold We the to silence in order' case, purpose this is no there carry- group protect City and Kansas ing under the Securities inherent distinction benefit I for the of Transaction corporate and a acts between of defendants. sale stock for cash and relative Questions: impact corporate two on the shares merger statutory merger. involve resulting corporations A. Does a from their cause so that a sale securities a result, it not In view of this is can action in favor of necessary points for us to consider other alleged upon predicated fraudulent by plaintiffs.2 raised It I? in Transaction involved scheme Wherefore, Gypsum this cause the order from which had a not is claimed appeal property of is was taken reversed and which became of action success, steps I 2. Lauhoff’s contention that count is in- Lauhoff assure its taken responsible sufficient to state claim for a relief for of his co-con- the acts against particular” conspira- spirators “him in is without in of said furtherance cy. merit herein. Lauhoff’s sale his resignation his a director were al- 77q. § U.S.C. legedly of the overt two acts done him conspiracy. Thus, 78j. in of the furtherance § 2. 15 U.S.C. allegedly joined conspiracy merger, Susquehanna upon presumably (Or merger perhaps chased an asset. group analyzed because the Lannan did not owe could be as a Sus- Gypsum duty special including quehanna Gypsum’s as directors assets they Susquehanna. 485,000 shares, accepted figure which owed at a value, in excess of their for in return corpora- B. When directors aof Gyp- issuance shares to buy tion cause it at an securities shareholders.) sum excessive or to sell securities inadequate price, in order to serve theory corporate Neat would dictate personal directors, some interest statutory a no sale involves corporation, may adverse to the cause a merging corpo- of the shares or assets of action under the securities ex- rations, light of change but corpo- acts arise in exchange favor of acts to ration reason investing protect public, failure of it seems special obligations directors concept fulfill of sale reasonable that they corporation owe the as directors? may encompass these acts the various Causes of action under well arise rights pro- modifications but, circumstances, state law under these by merger. duced assuming grounds required other for Legislative history, administrative jurisdiction, federal do of cor- activities contruction, judicial do not decision porate personal directors for their ad- produce answer.3 a and consistent clear vantage expense corporation at the finds, amount fraud under the securities Professor in a 1933 com- Loss exchange merg- report, acts? mittee an indication a regarded was er as a sale statutory merger A. Does a involve registra- require 77e a U.S.C. would question sale securities? This has statement,4 Trade Federal usually been considered terms- of Commission, first administered which at whether, upon merger, there is a sale act, registration required the securities surviving post-merger in the proposal statement before to the was submitted to shareholders. merging corporations pre-merger corpora- Starting 1934, however, shares in each the Securi- occurs, tion. If such sale within the indicated ties Commission meaning of the securities and the ex- not a sale such that change acts, persuading registration required.5 fraud in statement *7 merger approve position would This remains the the com- give mission, although 1956, rise to a federal cause of in in commission the stating 133, favor Here, repeal of the shareholders. how- of its Rule considered ever, merging one of corporations, the its that construction had “become an surviving which also corporation, is the Prior instrument evasion the law.”6 asserting is grounded a cause of action to 1951 the commission the took even merger, design position merger fact that broader that a was not defendants, sale, apparently any purpose.7 forced In has it assume a for obligation 1951, 133, price adopted for the excessive the commission Rule merging making corporation which pur- position the other it clear its that that See, generally, Loss, 3. Regula- Supply 7. In Securities National Co. v. Leland Stan (1961 ed.) ford, University 1943), (9th 518-539. Jr. Cir. 689, 773, 694, F.2d cert. den. 320 U.S. Loss, op. 519, H.R.Rep. 4. 85, cit. No. 73d 77, 462, 88 L.Ed. the court noted Cong. (1933) 1st Sess. 16. had filed an amicus that commission brief “indicative its view that the con Loss, supra 3, p. 520; footnote Note to se solidation did not involve a ‘sale’ of adopted E-1, 1935; Rule Form 5 of Rule amounting curities, exchange or an to a 133, adopted 1951. sale, liability provisions hence the civil supra Loss, p. 529, application.” footnote n. 232. the Act have no merger, right, to turn ap- merger in a form statutory short involves no sale cash, registration who had require- in his shares for plies only to the seeking ap- statutory bar, an alternative In the case at ments the act. might praisal, have who position was a seller that takes the commission practices deceptive merger exchange a cause action for pursuant to a of shares exchange A district under act.12 sections is a the antifraud sale so that conclusion court reached the same apply. of the acts 1965.13 not entire- decisions have been Judicial argument transformation ly The that this field. consistent merg- rights statutory occurring upon In circuit indicated the ninth phenomenon corporate er is a distinct not a consolidation did view that purchase which not does involve exchange or an involve a sale of appeal, sale of securities has some but 8 although amounting was this to a sale objectives of the securities view the ground principal for the not the decision. exchange acts, me it seems to In recognize, a district court that a held better to of the merger “may may pur- provisions, pur- not involve antifraud sales and that meaning of chase and sale within chases This view involved. does. 10(b)” exchange act, statutory language, Section of the no violence to the the transaction before the court present interpretation is the appeared body sale. responsible to be a for the admin- is merger type appear not does istration of acts. opinion. It was said “Plaintiff power B. Misuse directors’ corporation is a which issued its Deception is more fraud. exchange stock of another readily spelled I. The out in Transaction corporation.”9 allegations suggest 435,- sale of In this circuit considered an 000 shares owned the directors attack at an excessive on a where a violation scheme, somewhat concealed 10(b) exchange of sec. had act composed of the successive transfers among alleged, things, been other but merger. the ultimate There be both holding opinion sets forth no distinct palpable deception and failure to dis- statutory that a a sale not personal close under defendants’ adverse in- the securities and acts.10 II, respect terest. With to Transaction appears In a district court only there latter. have so held that a was a sale shareholders had cause of action Newport Corp.14 In Birnbaum Steel misleading reports on account of second circuit held that where merger11 persuaded them to vote corporate insider sold his stock to a party, misrepresented third the facts And held the second circuit gave shareholders, given the to the other rise that a who was shareholder *8 Supply 11. Haven Board & 8. Leland Simon v. New Carton National Co. v. Stanford Company (D.Conn.1966), F.Supp. supra University, 250 Jr. footnote 7. See 297, Sawyer involving long Company (9th form such as Mill v. Pioneer 200, ques- 1962), in this ease. Cir. 300 F.2d where the again, hut would have arisen Company 12. v. Finance Vine Beneficial mootness. (2d 627, 1967), 635. Cir. F.2d 374 Company (S.D. 9. H. v. L. Green Childree Voege 13. v. American Sumatra Tobacco N.Y.1960), F.Supp. 96. 185 1965), Corporation (D.Delaware 241 F. Supp. 369, 373. Company (7th v. I. Borak J. Case 838, 847, Cir. 462-463, aff’d, (2d 1952), 1963), Cir. 193 F.2d 317 F.2d 377 U.S. den. 96 cert. 343 U.S. 84 S.Ct. L.Ed.2d (1952). (1964). L.Ed. 1356 exchange Susquehanna has I conclude that no cause of action under the respect “The cause of both with the shareholders. act favor of allegedly improvident acquisition, court, however, Rule viewed the district only merger, question fraud aimed at ‘a as exchange allegedly improvident purchaser perpetrated upon or seller’ no of Vanadium shares of securities and as relation duty by fiduciary corporate shares. breaches of resulting upon those
insiders fraud purchasers or
who were sellers.” not appeals agreed. case court of The
The distinguished
can be on its facts present corporation one because suing
is here as a seller defrauded
buyer of second securities. The circuit recently view
has noted the commission’s Birnbaum is too narrow.15 rule HALLIDAY, Petitioner, Corp Russell T. In Ruckle v. American Roto Appellant, oration,16 “that second circuit held jurisdiction federal courts have ac over alleges complaint tions which the America, UNITED STATES corporation de has been be Respondent, Appellee. selling issuing frauded into No. 6898. through the or refusal of some failure fully its directors to disclose to Appeals United States Court remaining con directors material facts First Circuit. cerning the or the financial transactions July 12, 1967. corporation.” condition The same holding exchange (under would follow act) corporation, here, where a has purchased securities. Maytag,17
In O’Neill v. cir- second cuit concluded that where all the directors causing
participated disadvantage stock at a to it personal advantage them, there deceit, could no claim of withheld information, or misstatement material only possible
fact. dif- material perceive I ference can between Ruckle O’Neill is that in Ruckle there were participants
directors who were not in the transaction and thus be deceived could ordinary case, in the sense. In either
however, defendant failure perform duty pre- directors sumably injured corporation, I
do not it is believe sound to differentiate
between situations where directors wrongdoing
were unanimous
those where less thán all were involved. *9 (2d (2d 1964),
15. A. T. Brod &
16.
Co. v. Perlow
Cir.
Cir.
339 F.2d
1967),
393, 397,
375 F.2d
footnote 3.
(2d
1964),
Cir.