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June 28, 1985

JACK POLAK, as Trustee for Catharina Polak, and Anthony Polak, Plaintiffs,


The opinion of the court was delivered by: SWEET


Defendants Continental Hosts, Ltd. ("Continental"), Stanley Lewin, Bruce Lewin and Marjorie Lewis (the "individual defendants"), have moved to dismiss the complaint of the two plaintiffs Jack Polak (the "Disclosure Plaintiff") and Anthony Polak (the "Merger Plaintiff"), shareholders of Continental, pursuant to Rule 12(b)(6), Fed.R.Civ.P. The complaint, in the form of a class action, alleges a violation of Rule 10(b)(5) promulgated pursuant to § 10-b of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78. See 17 C.F.R. 240, 10b-5. The motion will be granted for the reasons set forth below.

 On or about February 4, 1985 the Merger Plaintiff received notice that Continental Hosts Acquisition Corp. ("CHAC") had been formed and that Continental would be merged into CHAC (the "Merger"). The notice received by the Merger Plaintiff stated that "public shareholders will be paid $ 12 per share for their shares but that they will have the rights provided under DCL (Delaware Corporate Law), in lieu of acceptance of the $ 12 offered, to demand an appraisal of the value of CHL (the "Company") shares and to commence a proceeding for appraisal in the Delaware Chancery Court . . ." Complaint, P32. The Merger Plaintiff purports to represent all current shareholders of the Company who purchased their shares before February 1, 1985 and whose shares are subject to the Merger.

 According to the Merger Plaintiff, the $ 12 price announced under the Merger is "grossly inadequate" (Complaint, P33) and the appraisal right under Delaware law "presents the public shareholders with an unfair burden." (Complaint, P34) and that these allegations state a claim under Rule 10b-5, (Complaint, PP32-35).

 The Disclosure Plaintiff purports to represent a class of all persons who sold shares of the Company between April 9, 1982 and February 1, 1985. According to the Disclosure Plaintiff, he and the class sold their shares at an artifically low price caused by the defendants' failure to disseminate "all pertinent financial information respecting the Company." (Complaint, P19). The complaint alleges:

 Since April 1981, CHL [the Company] and the Individual Defendants have called no annual meeting and have failed and refused to distribute CHL financial and operations information to the public shareholders or to market makers in its securities.

 Complaint, P16.

 It is conceded that the Company has been a "non-reporting company" under the Exchange Act since 1976 (Complaint, P12), and that the defendants had no obligation to call an annual meeting under Delaware law (Complaint, PP17-19). The complaint further alleges that Continental purchased approximately 33,000 of its shares between 1979 and 1983. Complaint, P31.

 There are no allegations by the Merger Plaintiff of any misrepresentations or material nondisclosures in any material issued by Continental. The Merger Plaintiff contends that offering a "grossly inadequate" price and requiring shareholders in a Delaware corporation to avail themselves of Delaware appraisal procedures constitutes "fraud" or "manipulation" under Rule 10b-5, although no effort to obtain injunctive relief with respect to the Merger was made. The Merger was apparently consummated on February 28, 1985.

 The argument advanced by the Merger Plaintiff was rejected by the Supreme Court in its landmark decision, Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 51 L. Ed. 2d 480, 97 S. Ct. 1292 (1977), which specifically held that no claim under Rule 10b-5 was stated by a shareholder of a Delaware corporation confronted with a merger, regardless of the alleged inadequacy of the price being offered pursuant to the merger. The Supreme Court held that the shareholder's sole remedy was to pursue appraisal rights under Delaware law. 430 U.S. at 477-80. It further held that the shareholder had not made out a claim for either "fraud" or "manipulation" under Rule 10b-5. Id. at 472-77.

 As to the failure to disclose in connection with the merger, Rule 10b-5 is violated only if non-disclosure violates a recognized duty of disclosure. As the Supreme Court has stated:

 The cases have emphasized, in accordance with the common-law rule, that "the party charged with failing to disclose market information must be under a duty to disclose it." Frigitemp Corp. v. Financial Dynamics Fund, Inc., 524 F.2d 275, 282 (2d Cir. 1975). Accordingly, a purchaser of stock who has no duty to a prospective seller . . . has been held to have no obligation to reveal material facts. See General Time Corp. v. Talley Industries, Inc., 403 F.2d 159, 164 (2d Cir. 1968), cert. denied, 393 U.S. 1026, 89 S. Ct. 631, 21 L. Ed. 2d 570 (1969).

 Chiarella v. United States, 445 U.S. 222, 229, 63 L. Ed. 2d 348, 100 S. Ct. 1108 (1980). See also Laventhall v. General Dynamics Corp., 704 F.2d 407, 412 (8th Cir.), cert. denied, 464 U.S. 846, 104 S. Ct. 150, 78 L. Ed. 2d 140 (1983). ("It is important, however, to emphasize that no cause of action arises under Section 10(b) or Rule 10b-5 simply because an insider has inside information and fails to disclose it"); Staffin v. Greenberg, 672 F.2d 1196, 1202 (3d Cir. 1982) (if "no duty to disclose exists," then there can be no rule 10b-5 liability, even if undisclosed facts are material).

 In the present case, the defendants had no duty to hold annual meetings or to disclose information relating to the Company's financial status, Continental ...

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