## Facts

- Kenneth H. Bitting joined Merrill Lynch after his St. Louis brokerage merged into the firm; he later became a general partner.
- Merrill Lynch dissolved its partnership structure and incorporated in 1959, with former partners exchanging their interests for common stock.
- The corporation’s charter imposed transfer restrictions and granted Merrill Lynch an option to repurchase a stockholder’s shares after death within a stated period.
- The stock certificates conspicuously stated both the transfer restrictions and the repurchase option.
- After Bitting died in 1970, Merrill Lynch exercised the charter-based option and repurchased his shares from his estate.
- Bitting’s executors sued Merrill Lynch and certain executives, alleging the option was invalid under Delaware law and that its creation and exercise involved federal securities fraud, common-law fraud, and breach of fiduciary duty.
- The district court found liability on the federal and state claims, awarding compensatory damages with prejudgment interest and punitive damages.

## Issues

1. Whether creating, disclosing, or exercising the charter-based repurchase option constituted fraud or a deceptive device “in connection with” a securities transaction under § 10(b) and Rule 10b-5.
2. Whether the same conduct supported common-law fraud or breach of fiduciary duty under state law.
3. Whether Delaware law permits a corporate option, stated in the charter and on the certificates, to repurchase a deceased shareholder’s shares from the estate.

## Decision

- The court of appeals reversed the district court and ordered the complaint dismissed.
- It held the plaintiffs failed, as a matter of law, to establish the elements of a § 10(b)/Rule 10b-5 claim.
- It held the record did not support common-law fraud or breach of fiduciary duty.
- It held the repurchase option was valid and enforceable under Delaware law given its charter basis and conspicuous disclosure on the certificates.

## Legal Principles

- Enforcement of a charter-based, conspicuously disclosed stock repurchase option does not, without additional deceptive conduct, establish liability under § 10(b) and Rule 10b-5.
- For federal securities fraud, plaintiffs must prove a material misrepresentation or omission (or other deceptive conduct), the required state of mind, and causation of injury in connection with a purchase or sale of securities.
- Clear disclosure of transfer restrictions and repurchase options in corporate governing documents and on stock certificates defeats claims premised on concealment or nondisclosure of those terms.
- Delaware corporate law permits certain charter-based transfer restrictions and repurchase arrangements, including an option to repurchase shares upon a shareholder’s death, when properly authorized and disclosed.

## Conclusion

The Eighth Circuit concluded that Merrill Lynch’s repurchase of a deceased shareholder’s restricted shares pursuant to a charter-based, plainly disclosed option was valid under Delaware law and did not, on this record, support federal securities fraud, common-law fraud, or fiduciary-duty liability, requiring dismissal of all claims.


St. Louis Union Tr. Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 562 F.2d 1040 (8th Cir. 1977)