## Facts

- Universal Gas & Oil Co., Inc. (UGO) was a publicly traded corporation controlled by Maritimecor, S.A., which was controlled by Maritime Fruit Carriers Co. Ltd. (MFC).
- A minority shareholder brought a derivative action on UGO’s behalf challenging a reorganization in which UGO agreed to:
  - Issue up to 4,200,000 new UGO shares to Maritimecor; and
  - Assume all of Maritimecor’s liabilities, including a $7 million debt Maritimecor owed to UGO,
  - In exchange for Maritimecor’s assets other than the 2,800,000 UGO shares Maritimecor already owned.
- The complaint alleged Maritimecor was insolvent or nearly insolvent, so the exchange overvalued Maritimecor’s assets, unfairly diluted UGO, and shifted value to the controller, effectively squeezing out minority shareholders.
- The plaintiff initially pleaded state fiduciary-duty theories and federal claims under § 10(b) and Rule 10b-5, then amended to pursue only the federal securities claims.
- The plaintiff sought leave to amend again to add allegations that defendants issued misleading press releases and public statements that omitted material facts about Maritimecor’s financial condition and the transaction’s unfairness.

## Issues

1. After Santa Fe, can a derivative plaintiff state a § 10(b)/Rule 10b-5 claim attacking a controller self-dealing transaction when the alleged federal wrong is materially misleading disclosure or nondisclosure about the transaction?
2. Did the district court err in denying leave to amend to plead specific allegations of deceptive press releases and material omissions?

## Decision

- The Second Circuit reversed the dismissal in relevant part and remanded.
- The court held that a properly amended complaint alleging materially misleading press releases and omissions connected to the transaction could state a § 10(b)/Rule 10b-5 claim, even though the underlying conduct also alleged a breach of fiduciary duty.
- The court held the district court erred in denying leave to amend because the proposed allegations were not futile and could satisfy Rule 10b-5’s deception requirement.

## Legal Principles

- A breach of fiduciary duty, standing alone and without deception, misrepresentation, or nondisclosure, does not state a claim under § 10(b) and Rule 10b-5.
- Misleading disclosure or nondisclosure about a self-dealing transaction may constitute actionable deception under Rule 10b-5 when the misstatements or omissions are material.
- In a derivative context, the “in connection with” requirement may be met where the corporation’s issuance of its own securities is the relevant purchase or sale, and deceptive public statements are used to effect the transaction.
- Materiality turns on whether there is a substantial likelihood a reasonable shareholder would view the omitted information as important, including in deciding whether to seek injunctive relief.
- Leave to amend under Rule 15(a) should be freely given; denial is improper where amendment could cure the pleading defect by adding deception allegations.

## Conclusion

The Second Circuit held that while federal securities law does not federalize ordinary fiduciary-duty unfairness claims, a derivative plaintiff may proceed under § 10(b) and Rule 10b-5 when corporate controllers use materially misleading press releases or omissions to accomplish a self-dealing transaction involving the corporation’s securities, and the plaintiff should have been allowed to amend to plead that deception.


Goldberg v. Meridor, 567 F.2d 209 (2d Cir. 1977)