Bridge over ocean
1 March 1978 Financial Analysts Journal Volume 34, Issue 2

“Going Private”—Implications of the Santa Fe Case for Shareholders and Security Analysts

  1. Jeff A. Schnepper

The possibility that a public corporation will “go private” is a fundamental risk for shareholders. The states, which still govern corporations’ internal affairs, have historically competed for local business incorporation by offering statutes that provide maximum flexibility for management.

Over the last 15 years, minority shareholders have attempted to protect their interest by litigating under the conflict-of-interest and self-dealing provisions of Rule 10b-5 of the Securities Exchange Act of 1934. Where successful, they have been able to point to some misrepresentation or nondisclosure, even if it played only a minor role in the transaction. But when Santa Fe Industries formed a new wholly owned Delaware subsidiary, which it then merged with Kirby Lumber Company in order to remove Kirby’s minority shareholders, Green—a Kirby shareholder—alleged breach of fiduciary duty by the majority shareholders, arguing that the concept of fraud in the Exchange Act is not restricted to misstatements or deception alone.

Ultimately the case reached the Supreme Court, which refused to extend the scope of the federal anti-fraud statutes: “The language of Section 10(b) gives no indication that Congress meant to prohibit any conduct not involving manipulation or deception.” In reemphasizing federal deference to state law in areas traditionally under state control, the Court struck down what might have become the most important legal shield for the rights of minority shareholders.

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