Birnbaum v. Newport Steel Corp.

193 F.2d 461, cert denied, 343 U.S. 956 (1952)

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Nature of the Case

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Facts

Ps were stockholders of Newport (D). They sued on behalf of D and as representative of all similarly situated stockholders. Ps alleged the use of U.S mails to defraud the stockholders of D in the sale of certain stock owned by Feldman (D1) and Wilport (D2). Ds moved to dismiss the complaint for failure to state a cause of action. D1 owned approximately 40% of the common stock of D. Other defendants were directors of D from August 1950 and were controlled by D1. During this period, D and Follansbee Steel were negotiating a merger which would have been highly profitable to all the stockholders of D. However, D1 rejected the merger and sold his stock to Wilport for $22 per share which was twice the market value of the stock. Wilport had been formed by ten manufacturers who were end users of steel and wanted to use D as a captive source. D1 and his board puppets resigned and were replaced by Wilport and its board puppets. P sued D for violation of fiduciary obligations, fraud, and misrepresentation. The latter charges were based on letters sent to stockholders during this process and these letters only hinted at problems with the sale to Follansbee, and when the sales were made to Wilport, no price was even hinted at. Ps claimed these acts as violation of 10b-5. The district court dismissed because no fraud was perpetrated on a buyer or a seller of securities. P appealed.