## Facts

- James S. Jordan worked as a securities analyst at Duff & Phelps, Inc. and held a minority interest in the closely held corporation.
- Jordan acquired 188 shares at book value under an employee arrangement and had the right to acquire additional shares.
- A mandatory buy-back agreement required the corporation to repurchase an employee’s shares upon termination at book value as of the preceding December 31.
- Jordan sought other employment and timed his resignation to obtain a later year-end book valuation; he resigned in early 1984 and tendered his shares.
- Duff & Phelps paid Jordan $23,225, reflecting the contractual book value repurchase price.
- After resigning but before cashing the check, Jordan learned that before his resignation Duff & Phelps had been engaged in merger/buyout negotiations that, if completed, would have valued his shares far higher (with additional contingent payments possible).
- Jordan alleged that the corporation and two senior officers failed to disclose the negotiations when repurchasing his shares.

## Issues

1. Whether, under § 10(b) and Rule 10b-5, a closely held corporation repurchasing its own shares from an employee-shareholder must disclose material merger negotiations even absent an “agreement in principle” on price and structure.
2. Whether state fiduciary-duty principles applicable to closely held corporations required disclosure of such negotiations during a compulsory repurchase from a minority shareholder.
3. Whether the employee’s at-will status defeated reliance, causation, or damages as a matter of law because the corporation could have terminated him before any transaction closed.

## Decision

- The Seventh Circuit reversed the grant of summary judgment for defendants on the federal securities-fraud and state fiduciary-duty theories and remanded.
- The court held that a closely held corporation purchasing shares from an investor-shareholder may have a duty to disclose material information, including significant merger negotiations, even without an agreement in principle.
- The court concluded that the absence of an agreement in principle did not categorically preclude materiality or liability in this close-corporation repurchase setting.
- The court rejected the argument that Jordan’s at-will employment status barred recovery as a matter of law; whether the company would have fired him or whether he would have stayed with disclosure presented factual questions for a jury.

## Legal Principles

- When a closely held corporation repurchases stock from a shareholder, it may be required under Rule 10b-5 to disclose material nonpublic information to the selling shareholder.
- Materiality in merger-negotiation cases depends on the probability of the transaction and the magnitude of its expected effect on value; in a close-corporation repurchase, negotiations capable of radically changing value may be material even before agreement in principle.
- The disclosure analysis differs between public-market trading and direct repurchases by closely held firms because selective disclosure to the selling shareholder can occur without broadly signaling negotiations to the market.
- State fiduciary duties owed by managers/controlling parties in a closely held corporation can require disclosure when the corporation buys out a minority shareholder, and the same nondisclosure can support both fiduciary-duty and federal securities-fraud theories.
- At-will employment does not automatically negate causation or damages in a securities or fiduciary nondisclosure claim; counterfactual questions about termination, continued employment, and loss are generally for the factfinder when supported by evidence.

## Conclusion

The Seventh Circuit held that, in a compulsory repurchase by a closely held corporation, undisclosed merger negotiations with a large expected impact on share value may trigger disclosure duties under Rule 10b-5 and state fiduciary law, and that an employee-shareholder’s at-will status did not justify summary judgment on causation or damages.


Jordan v. Duff & Phelps, Inc., 815 F.2d 429 (7th Cir. 1987)