## Facts

- Santa Fe Industries, Inc. acquired 95% of Kirby Lumber Corporation’s stock.
- Under Delaware’s short-form merger statute, a parent owning at least 90% could merge a subsidiary without minority consent, with post-merger notice and an appraisal remedy for dissenting shareholders.
- Santa Fe obtained independent asset appraisals and an investment bank valuation that appraised Kirby stock at $125 per share; Santa Fe offered minority shareholders $150 per share.
- After the merger became effective, minority shareholders received an information statement with financial data, the appraisals, the bank’s valuation, and notice of Delaware appraisal rights.
- Minority shareholders alleged the shares were grossly undervalued and that the merger was a freeze-out effected through breach of fiduciary duty; they sued under Exchange Act § 10(b) and SEC Rule 10b-5 rather than pursuing Delaware appraisal.

## Issues

1. Whether a fully disclosed short-form freeze-out merger alleging only unfairness and breach of fiduciary duty, without misrepresentation, nondisclosure, or other deceptive conduct, states a claim under § 10(b) and Rule 10b-5.
2. Whether § 10(b) and Rule 10b-5 function as a federal remedy for corporate fiduciary breaches in internal corporate transactions.

## Decision

- The Supreme Court reversed the Second Circuit and reinstated dismissal of the federal securities claims.
- The Court held that § 10(b) and Rule 10b-5 reach only conduct involving manipulation or deception.
- Because the complaint did not allege material misrepresentation, omission, or other deceptive practices, it did not state a Rule 10b-5 claim.
- Claims of unfair price and fiduciary breach in a freeze-out merger, absent deception, are addressed by state corporate law remedies, including appraisal.

## Legal Principles

- § 10(b) and Rule 10b-5 prohibit manipulative or deceptive devices used in connection with the purchase or sale of securities; they do not federalize corporate mismanagement or fiduciary breach standing alone.
- Allegations of substantive unfairness in a transaction (including a freeze-out) are insufficient under Rule 10b-5 when full and fair disclosure is made and no deception is alleged.
- Regulation of internal corporate affairs, including fiduciary duties and appraisal-based valuation disputes, is primarily a matter of state law unless accompanied by deception or manipulation within the meaning of federal securities law.

## Conclusion

The Court limited Rule 10b-5 to deception and manipulation and held that a fully disclosed freeze-out merger challenged only as unfair or disloyal does not state a federal securities fraud claim; the appropriate remedies lie in state corporate law.


Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977)