Reappraisal of Santa Fe: Rule 10b-5 and the New Federalism

Abstract

In Santa Fe Industries, Inc. v. Green, the Supreme Court refused to recognize an actionable claim under section 10(b) of the Securities Exchange Act of 1934 and rule 10b-5 thereunder for alleged breaches of fiduciary duty in connection with a corporate merger. The Santa Fe Court concluded that, absent "manipulation" or "deception," the statute and rule do not reach breaches of fiduciary duty. The Supreme Court's decision was widely regarded as sharply curtailing the scope of rule 10b-5.

The evolution of Santa Fe and its progeny in the federal and state courts can be seen as an experiment in American federalism. Prior to Santa Fe, it was widely felt that state corporation laws inadequately protected shareholders from overreaching by management. Indeed, the trend towards "flexible" and "modern" corporation statutes was frequently characterized as a "race to the bottom" that ignored all interests except management's. The remedies proposed for the perceived abuses were often some form of federal regulation. Both courts and commentators spoke of an emerging "federal corporation law."

This Article shall examine Santa Fe and its progeny from the preceding perspective. First, for historical purposes, it will describe the chartering states' "race for the bottom" in the pre-Santa Fe period. Second, the Article will turn to the Santa Fe line of cases in both the federal and state courts. As hopefully will be seen, the respective positions taken by the federal and state tribunals represent a surprising and delicate experiment in federalism.