Lewis v. Chrysler Corp.
1991 WL 231981, 949 F.2d 644 (1991)
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Rule of Law:
A corporation's failure to disclose its directors' entrenchment motives for adopting defensive measures does not constitute a material misrepresentation or omission under § 10(b) and Rule 10b-5, so long as the substance and effects of the defensive measures themselves are fully and accurately disclosed.
Facts:
- In 1988, Chrysler Corporation adopted a shareholder rights plan, commonly known as a 'poison pill,' designed to deter hostile takeovers.
- In 1989, Chrysler amended the plan, lowering the stock ownership threshold that would trigger the poison pill from 30% to 20%.
- In late 1990, investor Kirk Kerkorian acquired a stake exceeding nine percent of Chrysler's outstanding common stock.
- On December 14, 1990, in response to Kerkorian's purchase, Chrysler's board again amended the poison pill, reducing the trigger threshold from 20% to 10%.
- On the same day, Chrysler issued a press release announcing both Kerkorian's stock purchase and the plan amendments.
- The press release stated that the amendments 'are intended to enhance the ability of Chrysler’s Board to act in the best interest of all the Company’s shareholders.'
- Shareholder Harriet Lewis alleged these amendments were enacted solely to entrench the current board, effectively capping the stock price and making any outside acquisition economically unfeasible.
Procedural Posture:
- Harriet Lewis, on behalf of a class of shareholders, filed a complaint against Chrysler Corporation in the U.S. District Court, alleging violations of § 10(b) of the Securities Exchange Act and state-law claims.
- Chrysler filed a Rule 12(b)(6) motion to dismiss the federal securities fraud count.
- The district court granted Chrysler's motion, dismissing the complaint for lack of standing because it failed to allege that the class members were 'purchasers' or 'sellers' of securities.
- Lewis filed an amended complaint, which the district court also dismissed on the same standing grounds.
- Lewis, as appellant, appealed the dismissal of her amended complaint to the U.S. Court of Appeals for the Third Circuit, where Chrysler was the appellee.
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Issue:
Does a corporation's press release, stating that amendments to its 'poison pill' plan are 'intended to enhance the ability' of its board to act in shareholders' best interests, constitute a material misrepresentation actionable under § 10(b) and Rule 10b-5 when the alleged true motive for the amendments was board entrenchment?
Opinions:
Majority - Nygaard, Circuit Judge
No. A corporation's statement that amendments to a poison pill are 'intended to enhance the ability' of the board to act in shareholders' best interests is not a material misrepresentation under § 10(b) and Rule 10b-5, even if the board's underlying motive is entrenchment. The court reasoned that the plaintiff failed to plead any particular misrepresentation or omission of a material fact. The press release did not claim the amendments were in the shareholders' best interests, only that they were intended to enhance the ability of the board to act in their interests in a future takeover scenario, which is not a false statement of fact. Citing precedents like Santa Fe Industries, Inc. v. Green, the court affirmed that the failure to disclose an improper motive, such as entrenchment, is a matter of state-law fiduciary duty, not federal securities fraud. Allegations of an 'unclean heart' are not actionable under Rule 10b-5 without an accompanying objective misrepresentation of fact. Furthermore, the court held that investors are charged with knowledge of the 'universal interest' of directors in maintaining control, so failing to disclose this motive is not a material omission when the mechanics of the poison pill were accurately described.
Analysis:
This decision reinforces the sharp distinction between state-law claims for breach of fiduciary duty (corporate mismanagement) and federal securities fraud claims. It establishes that corporate statements regarding intent or purpose are not actionable as fraud unless they misrepresent underlying objective facts. The ruling provides corporate boards significant latitude in framing public communications about defensive measures, immunizing them from federal fraud claims as long as they accurately describe the mechanics of those measures. This prevents plaintiffs from 'bootstrapping' state-law mismanagement claims into federal court by merely alleging that a company failed to disclose its own culpability or improper motives.
