# Kohn v. American Metal Climax, Inc.

> Court of Appeals for the Third Circuit · March 31, 1972 · 458 F.2d 255

URL: https://www.frixlaw.com/law-library/cases/8887674

## Case

- **Full name:** Harold E. KOHN, Trustee v. AMERICAN METAL CLIMAX, INC., in 19175, 19537, 71-1099. Appeal of ROAN SELECTION TRUST, LIMITED, in 19176, 19538, 71-1100. Appeal of Harold E. KOHN, Trustee, in 71-1101
- **Court:** Court of Appeals for the Third Circuit
- **Decided:** March 31, 1972
- **Citations:** 458 F.2d 255; 1972 U.S. App. LEXIS 10354
- **Precedential status:** Published
- **Opinion:** Concurring in part by Adams
- **Judges:** Adams, Seitz
- **Cited by:** 142 later opinions in the Frix Law Library

## Citator (automated)

- **Red flag:** Overruled in part, on other grounds by Kershner v. Mazurkiewicz, 670 F.2d 440 (1982).
- Negative treatments: 1
- Distinguished by: 0
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/8887674

## Opinion text

ADAMS, Circuit Judge
(concurring and dissenting).
Although I concur in much of the majority opinion in this case. I disagree *271 with the conclusion that what transpired here is the sort of conduct that Congress intended to proscribe by the Securities Exchange Act of 1934. I agree with the majority’s treatment of the effect of the Zambian decree and the further hearing on remedy ordered by the district court despite the stipulation approved by the court providing for “a single unitary final hearing,” but because of the importance of this case and of these issues, I feel constrained to set forth my views on these matters. In addition, the remedy authorized by the majority merits in my view further comment.
The majority opinion states fraud is an essential element of a cause of action under Section 10(b) and Rule 10b-5. It then goes on to assert that the district court found that the “Explanatory Statement and Appendices sent to RST shareholders was' deliberately misleading and thereby violated Section 10(b) of the Securities and Exchange Act as well as Rule 10b-5”, and that fraud was found because these documents “were designed to create the false impression that the amalgamation, on the basis of the terms specified by the explanatory materials, was an inevitable consequence of Zambian nationalization.” Finally, the majority holds that the element of reliance, to the extent it is required, is satisfied by “the finding that the misrepresentation was material.”
The crucial basis of this dissent is that the statements were not misrepresentations, that if they deviated from the truth, the misrepresentations were not material, that the plaintiff class did not rely on the misrepresentations, and that the conclusory statements by the district court do not constitute findings of fraud, and to the extent they might, such findings are clearly erroneous in light of the applicable legal standards and the lack of factual support for them in the record. In short, without a finding of culpable conduct supported by the record, there can be no violation of the securities laws and regulations, and the imposition of liability is therefore not legally authorized.
I. THE BACKGROUND OF THE CONTROVERSY
In order to gain the full perspective of this case, it is necessary to explore in some further detail the factual setting, beginning a number of years prior to the events which culminated in this lawsuit.
Rhodesian Selection Trust (RST), a British company, began mining operations in Northern Rhodesia in 1927. It was reincorporated as a Northern Rhodesian company in 1953. Over the years RST became one of the two major producers of refined copper in the area. In 1961, Rhodesia imposed currency exchange control regulations which greatly restricted RST from seeking and exploiting foreign opportunities except in Botswanna, a neighboring country. 1
Throughout the 1960’s the political situation in Africa became increasingly tumultuous. In 1964, the Rhodesian Federation was dissolved, and Northern Rhodesia became the Republic of Zambia. 2 This Government, by the Mulinguishi Declaration of 1968, further circumscribed RST’s business mobility by limiting the dividends which could be paid to shareholders outside Zambia to 50% of accrued profits.
RST’s largest shareholder was American Metal Climax, Inc. (AMAX), a large American mining company. From 1933 to 1962, AMAX held 51% of RST’s stock, but by 1969, its holdings had decreased to 42.3%. Although AMAX held approximately 42% of RST’s stock, and was represented on RST’s board of directors, RST maintained its business in *272 dependence. The record in this case demonstrates that despite the substantia] ownership of RST by AMAX, control of RST was vested in RST’s management, and not in AMAX. RST’s management was almost entirely British, and its headquarters was located in Zambia. By 1969, AMAX’s investment in RST was worth approximately $100,000,000.
Because of the political ferment in Africa, AMAX decided as a matter of policy to decrease its exposure on that continent. In 1966, AMAX asked RST to file a registration statement with the SEC so that AMAX could sell its RST holdings on the open market. RST declined for two reasons: it was reluctant to incur the risks of registration for the primary benefit of one shareholder, and the necessary disclosures would have jeopardized its position with the Zambian government. 3 Thereafter, AMAX began selling its RST stock to the limited extent permissible under the American securities laws.
Still desiring to get out of Africa, AMAX in 1968 and 1969 attempted to sell half of its interest in RST to Megallgesellschaft Aktiengesellsehaft, a large German metals company, for $5.-38 per share. At the time, RST was selling on the open market for between 5% and 7% per share. However, the German company was not willing to pay more than $3.00 per share, and even this offer was conditioned upon insurance by the West German government against the risks of nationalization by Zambia. The sale was never consummated.
Despite public and private assurances that Zambia had no intention of nationalizing the copper industry, the Government steadily acquired a number of the country’s industrial and commercial companies. Then, in 1969, by the Matero Declaration, the President of Zambia announced his Government’s desire to acquire control of all the operating copper properties in Zambia for “fair value represented by book value.” 4 It immediately became clear that the Zambian Government was desirous of having this nationalization appear to be voluntary. Thus, the management of RST was able to negotiate and to extract, in addition to the sale price for 51% of RST’s operating assets, two important concessions as the quid pro quo for the appearance of voluntariness: the authorization for RST to externalize its remaining assets so that they would be free from Zambian exchange controls, 5 and the right to defer nationalization until its terms were approved by the RST shareholders. This last provision provided time in which RST could arrange to implement the externalization of its assets. Externalization was of vital importance for tax reasons and because the Zambian dividend ceiling and exchange controls meant that large sums would otherwise have to be retained in Zambia and would not therefore be utilized to develop non-Zambian mining enterprises.
After the agreement with Zambia was reached, RST began to formulate its reorganization plan, keeping in mind that it would be imperative to external *273 ize as promptly as possible after nationalization. Concern immediately developed whether a conflict of interest and possible antitrust law violations would result if RST attempted to become an international mining company. These problems might arise because RST would then be competing against AMAX, although AMAX would still hold 42% of RST. The only feasible methods of avoiding this conflict were for AMAX to sell its RST holdings or to buy the remainder of RST after the distribution of RST’s other assets.
AMAX had no desire to contravene its policy of disengagement from Africa in view of the political instability there, and yet it had to protect its $100,000,-000 investment in RST. Although RST wished to transform itself into an international mining company, because of the restrictions of prior years, this course of action was not feasible. 6 In order for RST to buy out AMAX’s holdings to avoid the conflict of having AMAX in effect compete against itself, RST would have to denude itself of cash. In addition, a “bail-out” by AMAX at this time would have undermined the confidence of investors and personnel in RST’s stability, and would have shifted to RST shareholders the full risk of further nationalization. This would also seriously depreciate further the value of the substantial amount of INDECO bonds to be owned by AMAX as a result of Zambia’s nationalization.
Accordingly, RST and AMAX began to negotiate the various alternatives for RST’s future. The discussions commenced in November, 1969, in London, between RST’s and AMAX’s banking and legal advisors. 7 There is nothing in the record to show that these discussions occurred at other than arm’s length. By the middle of February, 1970, the parties were so far from agreement that AMAX proposed a complete pro rata liquidation of all RST assets not necessary for the performance of the contracts with the Zambian government. Under AMAX’s recommendation, each shareholder, both AMAX and non-AMAX, would receive a proportionate share of RST’s assets. Put another way, RST’s liabilities would be discharged and every shareholder would receive his proportion of the remaining assets on the basis of his holdings in the company. RST’s management rejected this proposal, because under it, RST would for all practical purposes cease to exist.
During this period, the concept of RST's is becoming an international mining company, domiciled outside of Zambia, was explored further. Counsel quickly realized that such a reorganization would have disastrous tax consequences for the American-public shareholders of RST. The only solution to this problem, other than amalgamation 8 with AMAX, 9 was to “twin” the corporation. Under the twinning concept, RST would remain a Zambian corporation, *274 holding some assets; a non-Zambian corporation would be formed to hold the externalized assets; and shareholders would receive “twinned” share certificates representing inseparable shareholders in both companies. “Twinning” was rejected as unrealistic for a variety of reasons, including, inter alia, the fear that Zambia would not tolerate the delay that implementation of this arrangement would cause.
By the end of February, 1970, RST’s management concluded that the best interests of RST’s shareholders lay in an amalgamation with AMAX. Two factors provided the incentives for AMAX’s agreement to amalgamate. First, AMAX wanted to obtain liquid assets that RST owned because such assets would be exempt from American foreign investment restrictions. Second, in order to protect its $100,000,000 investment in RST, AMAX had to guard against RST’s failure to succeed as an independent international mining company, for if RST had difficulties, its assets, and therefore AMAX’s holdings, would depreciate in value. Similarly, payment of the INDECO bonds — and AMAX would own in excess of $50,000,000 of them — depended upon the profitable operation of the mines and refineries in Zambia.
The amalgamation agreement reached between AMAX and RST on March 5, 1970, provided for AMAX’s acquisition of the public shareholders’ interest in RST’s liquid assets, worth about $33,-800,000, and the entire interest in RST’s residual properties. In return, the public shareholders of RST would receive $76,200,000 of 8% subordinated AMAX debentures with warrants attached for the purchase of AMAX common stock. RST’s public shareholders would also receive slightly more than their pro rata share of the Zambian bonds, their pro rata share of RST’s interest in the Botswana venture, slightly less than their pro rata share of RCM stock, 10 and 25$ per share in cash.
On March 5, 1970, the date of the agreement between RST and AMAX, RST traded on the New York Stock Exchange at $6.25 per share. Kuhn, Loeb & Co. valued the package of securities which RST shareholders would receive as a result of the proposed amalgamation at $7.13 per share, AMAX valued it at $6.62 per share and plaintiff’s witnesses valued the package at between $6.95 and $12.20 per share. 11
The structure of the amalgamation was devised to preserve to the maximum extent possible the tax credit for RST’s public shareholders and to permit capital gains tax treatment of the distribution.
It was at this point in the negotiations, specifically on March 10,1970, that plaintiff, who had purchased 2,000 shares of RST less than two months earlier, on January 14, 1970, instituted his action to block the amalgamation. After an evidentiary hearing, the district court on June 8, 1970, denied a preliminary injunction motion without prejudice. 12 *275 Because the hearing by the Zambian court regarding the acquisition by the Government of Zambia of the Zambian assets was scheduled for August, 1970, the time consumed by the injunction proceeding compressed drastically the period for preparation of the necessary, but highly complicated, proxy materials and the Explanatory Statement. 13 In late June, plaintiff moved to enjoin the distribution of the proxy materials which presented the nationalization and reorganization plans for shareholder approval, charging that the materials violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j (1964). After a hearing, the district court enjoined the distribution, but this Court held that the district court’s action was void for failure to enter an order under Rule 65. On July 8, 1970, the district court again enjoined distribution of the proxy materials unless a letter from plaintiff was also included with them. Plaintiff, one of the nation’s most knowledgeable lawyers, drafted a statement explaining the opposition to the transaction. The proxy materials and plaintiff’s statement were then distributed, including a copy of the district court’s opinion, findings and order of June 8, 1970.
The day before the shareholder vote on the nationalization and reorganization was to be held, August 5, 1970, plaintiff moved to enjoin the vote, charging that the proxy materials were false and misleading. After a telephonic conference call to the trial judge, who was then in Florida, initiated by plaintiff and objected to by defendants, 14 this motion was denied, and the resolution adopting the terms of the reorganization and nationalization was approved by 85.5% of the shares present and voting. The non-AMAX shareholders then approved the resolution by an affirmative vote of 66.3%. They had been separately polled by RST’s management to ensure that AMAX would not force the amalgamation upon unwilling shareholders.
According to Zambian law, which governs this reorganization because of RST’s domicile in Zambia, the next procedure in the reorganization was to obtain the approval of the High Court of Zambia. Nine days prior to the date of the scheduled hearing, RST filed with the High Court all of the details of the plan, including the complete record in the district court. Plaintiff had been specifically informed on prior occasions, and as late as the August 5th conference call, of the date of the hearing, and advised of his right to attend and to object to the plan. He had also been informed that the decree of the Zambian court would be binding on all RST shareholders.
On August 12, 1970, plaintiff moved to enjoin the hearing, and an injunction was granted by the district court via another long-distance conference telephone call. This Court stayed the injunction provided that AMAX post a $10,000,000 bond and agree not to transfer any property subject to a final adjudication.
After a hearing on August 14, 1970, the High Court of Zambia approved the reorganization, finding it to be “fair to all RST shareholders,” and on August 15th, the High Court’s order was filed with the Zambian Registrar of Corn- *276 pañíes. Plaintiff did not attend the Zambian hearing, and no appeal was taken from the order of the High Court of Zambia.
Trial of the present action began on October 8, 1970, and concluded on November 3, 1970. After a jury was em-panelled, at the suggestion of the court the parties agreed to waive jury trial if all issues would be “finally determined by [the district court] in a single unitary final hearing.” The district court rendered a final judgment on November 25, 1970. Defendants appealed on December 2, 1970. The next day, plaintiff moved to amend and supplement the judgment. On January 8, 1971, this Court, over the objection of the defendants, remanded to the district court to rule on plaintiff’s motion. The district court filed three amendatory orders. One directed that supplementary hearings on the question of additional relief be held. Another was entered without notice to defendants and a discussion regarding its formulation took place between plaintiff and the court without participation by the defendants. On January 16, 1971, plaintiff filed a notice of appeal from the original judgment and the amendatory orders.
With the facts of the controversy in mind, we now turn to a consideration of the applicable securities laws and regulations.
II. SECTION 10(b) AND RULE 10b-5
In order properly to evaluate the facts set forth above, it is necessary to consider and then apply the appropriate legal standards. Although much has been written about this area of the law, further exploration might tend to dispel the murkiness surrounding the contours of an action based upon material misrepresentation. To be able intelligently to decide whether defendants here should respond in damages or be subject to in-junctive relief, a complete understanding of the section and rule, their legislative and administrative histories, and their interpretation by the courts is essential.
A. The Provisions of the Act and Rule and Their Legislative and Administrative Histories.
Section 10(b) of the Securities Exchange Act of 1934 provides:
“Regulation of the Use of Manipulative and Deceptive Devices
Sec. 10. It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—
* * * * * *
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.”
Pursuant to this statute, the Securities and Exchange Commission promulgated Rule 10b-5, which implements the statute. It states:
“Rule 10b-5. Employment of Manipulative and Deceptive Devices
It shall be unlawful for any person, directly or indirectly, by, the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,
(1) to employ any device, scheme, or artifice to defraud,
(2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”
The provisions of Section 10(b) and Rule 10b-5 are written in broad lan *277 guage, and some maintain they are ambiguous regarding the specific conduct that Congress and the Commission intended to prohibit. Therefore, since reference to the statute and rule will not provide the legal measuring rod, it is appropriate to examine the legislative and administrative history to ascertain the intent of Congress and the Commission. In as much as various aspects of this history have been extensively developed in the literature and cases, the present discussion will narrowly focus on aspects of the history relating to this case.
The Securities Exchange Act of 1934 was an outgrowth of the stock market crash of 1929 and the speculative boom of 1933. The present Section 10(b) evolved from Section 9(c) of bills originally introduced by Senator Fletcher and Representative Rayburn. 15 The legislative history deals primarily with other aspects of the 1934 act and is not very enlightening as to the intent of Section 10(b). 16 The Senate Report 17 discusses generally the various abuses which necessitated the legislative action and the inadequacy of self-regulation by the stock exchanges. The Report then analyzes the component provisions of the statute, citing examples of the flagrant conduct utilized by unscrupulous speculators, 18 but does not parse Section 10. However, the Report is replete with words and phrases indicating that the act was designed primarily to prohibit fraudulent activities. Nowhere does the Report imply that liability without culpability would attach for material misrepresentations.
Thomas G. Corcoran, one of the draftsmen, explained the purpose of section 9 (c) of the original bills as follows:
“Subsection (c) says, ‘Thou shall not devise any other cunning devices. * * * Of course, subsection (c) is a catch-all clause to prevent manipulative devices [.] * * * The Commission should have the authority to deal with new manipulative devices.’” 19
Thus, while Professor Bromberg is probably accurate in describing Section 10(b) as a “catchall,” 20 it seems quite clear that it was intended to be a “catchall” only for “any manipulative or deceptive device[s] or contrivance[s].” 21
The administrative history of Rule 10b-5 is even more cryptic than the legislative history of Section 10(b). Although the act had been passed in 1934, it was not until eight years later that the rule was promulgated. 22 The new rule *278 was enunciated on May 21, 1942, and the SBC explained:
“The Securities and Exchange Commission today announced the adoption of a rule prohibiting fraud by any person in connection with the purchase of securities. The previously existing rules against fraud in the purchase of securities applied only to brokers and dealers. The new rule closes a loophole in the protections against fraud administered by the Commission by prohibiting individuals or companies from buying securities if they engage in fraud in their purchase.” Securities and Exchange Act Rel. No. 3230 (1942) (emphasis added).
At the end of the year, in its Annual Report, the Commission again commented that the purpose of the rule was to protect investors against fraud. 23
Thus, the administrative history of Rule 10b-5 clearly points to one inescapable conclusion: that it was designed as a safeguard against fraud or other culpable conduct, and not as a general regulation of business affairs.
B. Elements of a Private Action Involving Money Damages or Injunctive Relief Under Section 10(b) and Rule 10(b)-5
The next inquiry in determining whether defendants’ conduct should give rise to equitable or pecuniary relief under the Act and Rule 10b-5 is into the nature of the right of action and the elements which must be alleged and proved to sustain the action.
At the time Rule 10b-5 was promulgated the SEC had not considered its application to private litigation, but rather contemplated enforcement only by the Commission. 24 Nevertheless, within a few years, courts had decided that the rule and statute implied a right of enforcement by private individuals.
The first case to so hold was Kardon v. National Gypsum Co., 69 F.Supp. 512 (E.D.Pa. 1946). In that case, where fraud was specifically alleged, Judge Kirkpatrick analyzed the statute and rule, and concluded that they created a statutory tort. He then applied tort principles to determine whether the plaintiff was a member of the class of persons the statute was designed to protect, whether the damage suffered was of the nature the statute was enacted to prevent, and whether the harm inflicted resulted from a hazard the statute was intended to obviate. 25 Other courts followed the lead of Kardon , and assumed or held that a private right of action was implied either by the language of the section or by construction of the entire statutory scheme. 26 One court approached the problem by beginning with the proposition that Section 10(b) is criminal in nature, and that a private right of ac *279 tion was inferrable therefrom. 27 Whatever the rationale, the Supreme Court has now determined that a private right of action could be inferred from the 1934 Act and the rules promulgated thereunder. 28
But it is obvious that Congress did not intend that every false, misleading or omitted fact would give rise to a cause of action. For example, it would be unrealistic to allow recovery for the omission of a trivial point. Accordingly, it must be assumed that the misrepresentation be of a matter material to the purchase or sale of the security. See Mills v. Electric Auto-Lite Co., 396 U.S. 375 , 90 S.Ct. 616 , 24 L.Ed. 593 (1970).
The Second Circuit defined materiality for Section 10(b) purposes 29 in SEC v. Texas Gulf Sulphur Co.
“As we stated in List v. Fashion Park, Inc., 340 F.2d 457 , 462, ‘The basic test of materiality * * * is whether a reasonable man would attach importance [to the fact misrepresented] * * * in determining his choice of action in the transaction in question. * * * ’” 401 F.2d 833 , 849 (2d Cir. 1968), cert. denied, 394 U.S. 976 , 89 S.Ct. 1454 , 22 L.Ed.2d 756 (1969).
And in the context of a misleading proxy statement, the Supreme Court defined materiality as that which “might have been considered important by a reasonable shareholder who was in the process of deciding how to vote.” Mills v. Electric Auto-Lite Co., supra, at 384, 90 S.Ct. at 621 (1970). These two tests from Texas Gulf and Mills are almost identical, the difference arising primarily from their particular applications. They will be the benchmarks for determining materiality here.
1. Element of Fraud or Culpability in Private Action Under Section 10(b) and Rule 10b-5.
Reference to the legislative history makes clear the intent of Congress to provide a private action so long as it is within certain parameters, including specifically, the elements of fraud and reliance.
In the general analysis of the Securities Act of 1934, the Senate Report states:
“In addition to the discretionary and elastic powers conferred on the administrative authority, effective regulation must include several clear statutory provisions reinforced by penal and civil sanctions, aimed at those manipulative and deceptive practices which have been demonstrated to fulfill no useful function. These sanctions are found in sections 9, 10, and 16.” S. Rep. 792, 73d Cong., 2d Sess. 6 (1934) (emphasis added).
*280 And in discussing civil liabilities, the Report explains:
“Experience with State laws designed to prevent the exploitation of the investor by supervision of the sale of securities has demonstrated the inadequacy of criminal penalties as the sole sanction. Customers are ordinarily reluctant to resort to criminal proceedings, and in the absence of complaints by them, the discovery of violations is often impossible. Furthermore, if cm, investor has suffered loss by reason of illicit practices, it is equitable that he should be allowed to recover damages from the guilty party. With these considerations in view, the bill provides that any person who unlawfully manipulates the price of a security, or who induces transaction in a security by means of false or misleading statements, or who makes a false or misleading statement in the report of a corporation, shall be liable in damages to those who have bought or sold the security at prices affected by such violation or statement. In such case the burden is on the plaintiff to show the violation or the fact that the statement was false or misleading, and that he relied thereon to his damage. The de fendant may escape liability by showing that the statement was made in good faith.” Id. at 12-13 (emphasis added).
Thus, it appears that Congress intended to grant a private action for damages suffered as a result of “illicit practices,” consisting of “manipulative and deceptive practices which have been demonstrated to fulfill no usful function." Essential to the elements intended by Congress are the requirements that the defendant has acted in other than “good faith” and that the plaintiff has “relied” on the misleading statement. Nowhere in the Senate Report is there a manifestation of an intent by Congress to provide a cause of action based on either mere negligence or liability without fault. There is no evidence that Congress intended that under Section 10(b) anyone should be an insurer against false or misleading statements made non-negligently or in good faith.
It seems clear from the discussion of the legislative history of Section 10(b) and the administrative history of Rule 10b-5 that Congress and the SEC both intended, before any liability for misrepresentation might attach, that the element of culpability be present. This intent was manifested by the constant usage of words such as “cunning,” “manipulative,” “deceptive,” “fraudulent,” “illicit,” “fraud,” and lack of “good faith,” and the absence of language indicating liability for negligent or non-negligent conduct. The inquiry then becomes whether courts have construed the language of the statute and rule so as to obviate the requirement of culpability that Congress and the SEC apparently contemplated.
The issue of scienter, or the intent to defraud, in 10b-5 matters has been widely discussed in the literature and, as might be expected, a divergence of opinion exists. One commentator urges that mere negligence should ordinarily be sufficient to give rise to a cause of action, but recommends the adoption of a flexible, transactional approach. 30 Other articles insist that 10b-5 liability should not attach to mere negligence, but rather the test ought to be whether the defendant actually knew the statement in question was false or misleading, and that in any event good faith sufficient to negative the intent to mislead would be an adequate defense. 31
*281 The cases collected and summarized in the Appendix to this opinion indicate that the vast majority hold, on analysis, but without specifically so stating, that for a private party to recover damages the element of fraud or culpability must be present. A number of courts assert that some form of intent to defraud must be pleaded or proved before recovery may be had, but a number have eliminated intent to defraud as a necessary element.
The requirement of intent to defraud was first incorporated into securities case law in criminal prosecutions for mail fraud and for fraud in violation of Section 17 of the Securities Act of 1933. See Rice v. United States, 149 F.2d 601 (10th Cir. 1945); Troutman v. United States, 100 F.2d 628 (10th Cir. 1938). See also, United States v. Benjamin, 328 F.2d 854 (2d Cir.), cert. denied, 377 U.S. 953 , 84 S.Ct. 1631 , 12 L.Ed.2d 497 (1964). Since Rule 10b-5 was drafted on the basis of the language of Section 17, it follows logically that intent to defraud would also be an element of a criminal prosecution for violation of Section 10(b) and Rule 10b-5. Cf. Trussell v. United Underwriters, Ltd., 228 F.Supp. 757 (D.Colo. 1964).
Fischman v. Raytheon Mfg. Co., 188 F.2d 783 (2d Cir. 1951), one of the earliest decisions holding that a private action existed under 10b-5, is the seminal case establishing scienter, or the intent to defraud, as an essential requirement for the maintenance of such an action. Fischman involved a suit for damages arising from a purchase of stock where untrue representations had been made in a prospectus and registration statement. The Second Circuit laid down the rule that “[p]roof of fraud is required in suits under § 10(b) * * *.” The court explained: “[W]hen, to conduct actionable under § 11 of the 1933 Act, there is added the ingredient of fraud, then that conduct becomes actionable under § 10(b) * * * ” Most cases decided subsequent to Fischman have not deviated from this position.
In Weber v. C. M. P. Corp., 242 F.Supp. 321 (S.D.N.Y. 1965), the court reasoned that to predicate relief on innocent or negligent misrepresentations would add a remedy not contemplated by Congress, as Section 10(b) would then render other sections of the securities acts meaningless. Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540 (2d Cir. 1967), held that an allegation of “[d]eceitful manipulation of the market price” by withholding dividends is sufficient to state a cause of action for injunctive relief.
In SEC v. Frank, 388 F.2d 486 (2d Cir. 1968), the Government sought to restrain an attorney from drafting documents which falsely or misleadingly described the properties of a new chemical product. In reversing the injunction on other grounds, the court indicated that an attorney would be liable for assisting in circulating a statement “he knows to be false,” and that he cannot “escape liability for fraud by closing his eyes to what he saw and could readily understand.” The case strongly suggests that the attorney would not be liable for errors resulting from mere negligence in translating technical reports into ordinary English, but that recklessness would be tantamount to wilful fraud, from which intent could be inferred.
Apparently the Fifth Circuit also requires the element of fraud. In Her-pich v. Wallace, 430 F.2d 792 (5th Cir. 1970), the court held that allegations of a “broad scheme to defraud” are sufficient to sustain a cause of action, as are allegations of facts amounting to “causal deceit.” See also, Shell v. Hensley, 430 F.2d 819, 824 (5th Cir. 1970) (allegations of fraudulent activity).
*282 This Circuit, too, has adopted the view that fraud or deception is required to establish a violation of Rule 10b-5. In Pappas v. Moss, 393 F.2d 865 (3d Cir. 1968), we concluded that the threshold requirement of a 10b-5 action was met because “a fraud in the act of selling a security” had been asserted.
There is nothing in SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 , 84 S.Ct. 275 , 11 L.Ed.2d 237 (1963), indicating that proof of fraud is an obsolete requirement. The Government there sought an injunction under the Investment Advisors Act of 1940, which contains language similar to that found in Section 10(b), to compel a registered investment advisor to disclose to its customers its practice of purchasing securities, recommending purchases of those securities by the subscribers to the service, and then selling the securities at a profit when the clients’ subsequent purchases caused an increase in the price. The Supreme Court based its holding on the fiduciary relationship existing between an advisor and his client. In relying on modern common law formulations of fraud, the Court stated that it would defeat the intent of the Act “to require proof of intent to injure and actual injury to clients” in an injunction action. 32 Thus, Capital Gains Research Bureau can be read as expanding the scope of Section 10(b) by including in the requirement of fraud the concept of constructive fraud, but it in no way eliminates the requirement altogether.
There have been cases, however, which seem to indicate that intent to defraud need not be alleged or proved to prosecute successfully a private action under Section 10(b) and Rule 10b-5. In analyzing these cases which purport to dispense with intent, the admonishment of the Supreme Court that 10(b) actions constitute an “area where glib generalizations and unthinking abstractions are major occupational hazards” 33 must be kept firmly in mind.
The first case which some commentators cite for the proposition that intent to defraud, scienter or culpability is not essential to a cause of action based on material misrepresentations is Ellis v. Carter, 291 F.2d 270 (9th Cir. 1961). That case was a privá’té action for' damages resulting from defendant’s misrepresentation that if plaintiff, as a participant in a joint venture to acquire control of a corporation, would purchase shares of the corporation at a price in excess of the market price, he would thereby obtain a voice in the corporate management. The Ninth Circuit held that a dismissal of a complaint may not be granted where the affidavits presented a disputed issue of fact as to the fraudulent nature of the conduct. 34
The court stated that Congress intended liability if there existed “any manipulative or deceptive device or contrivance in contravention of rules and regulations.” Quite significantly, there is no citation in Ellis to support the suggestion that fraud is not necessary in a 10b-5 action. Ellis relies primarily on Matheson v. Armbrust, 284 F.2d 670 (9th Cir. 1960), but Matheson does not say that fraud is unnecessary, and indeed there is in it a square finding of intentional fraud.
Royal Air Properties, Inc. v. Smith, 312 F.2d 210 (9th Cir. 1962), another Ninth Circuit ease dealing with the subject, was a private action for damages arising out of the purchase of stock in a corporation engaged in erecting apartment buildings, *283 The plaintiff alleged that his purchase was based on misleading statements made by a corporate officer and on a prospectus which omitted reference in the financial statements to certain land costs and debts of the corporation. In reviewing a judgment on the merits, the Court stated that in order to succeed, plaintiff need not allege or prove fraud. But, for support, the only two citations are Ellis and Matheson. Further, the statement regarding ordinary fraud is not completely controlling, since the case was also concerned with the validity of various equitable defenses. In addition, analysis of the facts in Royal Air Properties indicates that the defendants did have actual knowledge of the critical omissions regarding the debt owed» to the former president of the corporation and the substantial balance due on the corporate mortgage.
Another case considering and seemingly rejecting the element of intent to defraud is Kohler v. Kohler Co., 319 F.2d 634 (7th Cir. 1963), a private damage action arising out of the sale of stock by a shareholder to the corporation. The plaintiff, a member of the family controlling a large close corporation but who took no part in the management, desired to sell his interest in order to buy stock in another corporation. He asked the company to buy his shares so he could complete the other transaction. A dispute arose whether the shares should be valued at $115 or $125 per share. The accountant engaged by the company to negotiate the sale presented financial statements indicating that the value of the shares should be $117, whereupon a compromise was reached at $120. Koh-ler later sued- for the difference, claiming that the financial statements constituted misrepresentations, half truths and omissions due to the accountant’s erroneous estimations of earnings of similar companies, and non-disclosure of substantial items of deductions and income which would have affected the profit and profit potential of the company. In affirming a dismissal, the Seventh Circuit held only that there was no breach of duty on the part of the accountant in failing to volunteer details regarding a pension plan or the accounting method of annuity funding, even though a different method, if adopted, would have increased the company’s book value. However, the Court gratuitously stated that Section 10 (b) was “meant to cover more than deliberately and dishonestly misrepresenting or omitting material facts which ordinarily are badges of fraud and deceit,” relying principally on Ellis, 319 F.2d at 637 .
Stevens v. Vowell, 343 F.2d 374 (10th Cir. 1965), is yet another example of a court aserting that it is not necessary to allege common law fraud to recover damages under Section 10(b), although the facts demonstrate a situation where outright manipulation, or, indeed, actual fraud did exist. Plaintiff, in Stevens , sued to recover the amount paid for the purchase of stock in a corporation created to exploit an invention for the return of arrows in an archery lane. The defendants had misrepresented the ownership of the invention, their intent to build archery lanes to exploit the invention, and their intent to share funds others had invested. Although the court indicates absolute liability for material misrepresentations, relying on Matheson and Royal Air Properties, nonetheless the underlying facts demonstrate conduct from which intent to defraud is readily inferrable. It is significant that the same year Stevens was decided, a district court in the Tenth Circuit considered that the court of appeals went farther than necessary in making reference to the question of fraud and refused to find liability absent scienter, Parker v. Baltimore Paint and Chemical Corp., 244 F.Supp. 267 (D.Colo. 1965), relying instead on Trussell v. United Underwriters, Ltd., 228 F.Supp. 757 (D.Colo. 1964). See also Review 71 v. Alloys Unlimited, Inc., 450 F.2d 482 (10th Cir. 1972).
Myzel v. Fields, 386 F.2d 718 (8th Cir. 1967), cert. denied, 390 U.S. 951 , 88 S.Ct. 1043 , 19 L.Ed.2d 1143 (1968), was a private action for damages arising out of the sale of stock in a closed corporation *284 to the corporation. The evidence disclosed a flagrant scheme by corporate officers to purchase all the outstanding stock at depressed prices, without advising the stockholders of the dramatic turn in the company’s prospects, or that it was the company rather than another shareholder — as the sellers were led to believe — that was buying the stock. 35 In reviewing a jury verdict for plaintiff, the court stated that proof of “knowledge of the falseness of the impression produced by the statements or omissions made” is not necessary under the statute. 36 In reaching its conclusion that intent to defraud was not an element of the cause of action, the court relied on Ellis v. Carter, supra, and the district court’s opinion in SEC v. Texas Gulf Sulphur Co., 258 F.Supp. 262, 277 (S.D.N.Y.1966). 37 As shown above, Ellis stands on a questionable basis, and, as will be discussed below, it is doubtful whether Texas Gulf Sulphur can be extended beyond the context of an SEC enforcement action. Analysis of Myzel , therefore, demonstrates that it is weak authority for the proposition that fraud is no longer an essential element of a 10(b) action.
The Second Circuit, in SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (1968), cert. denied, 394 U.S. 976 , 89 S.Ct. 1454 , 22 L.Ed.2d 756 (1969), had occasion to consider the question of scienter. That case involved a misleading press release concerning a discovery of mineral deposits — described as a “once in a lifetime strike” — coupled with intensive insider trading. The SEC brought an action to enjoin the corporation and individual defendants from continuing such activity. In considering scienter, the district court, despite Stevens, Royal Air Properties and Ellis , ruled that although the SEC need not establish common law fraud, it must establish that the “defendants engaged in a ‘course of business’ which operated as a ‘fraud or deceit * * * in connection with the purchase or sale of any security,’” relying on SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 , 84 S.Ct. 275 , 11 L.Ed.2d 237 (1963). 38 The court of appeals, however, took a more expansive view of the scienter requirement. With respect to *285 the individual defendants, Judge Waterman stated that “lack of diligence, constructive fraud, or unreasonable or negligent conduct” would be an appropriate standard to promote “the deterrence objective of the Rule.” 401 F.2d at 855. Good faith would not constitute a defense unless the belief were reasonably held. Id., at 856. With regard to the corporate defendant, Judge Waterman asserted that “in an action for injunctive relief, the district court has the discretionary power under Rule 10b-5 and Section 10(b) to issue an injunction, if the misleading statement resulted from a lack of due diligence * * *." Id. at 863. The holding was restricted in both situations solely to injunctive actions.
However, only four judges joined in the view of scienter expressed by the main opinion. 39 Judge Friendly, whose vote was necessary to give Judge Waterman’s opinion majority status, differed sharply on the question of intent. In delicately delineating the types of actions and the requisite intent to sustain each, he said that the holding of the main opinion should not be extended beyond an injunction action brought by the SEC. 40 As to private damage actions, Judge Friendly would limit the expansive liability holdings of other circuits in private 10(b) actions to “the kind of recklessness that is equivalent to wilful fraud.” Id. at 868. 41 Accordingly, an analysis of Texas Gulf Sulphur demonstrates that its less stringent requirements should be applicable only in cases involving injunctive suits brought by the SEC.
Furthermore, subsequent private damage actions brought under Section 10(b) and reviewed by the Second Circuit indicate that it is not yet ready to apply the statements regarding the elements of fraud of Texas Gulf Sulphur beyond the setting of that case. In Heit v. Weitzen, 402 F.2d 909 (2d Cir. 1968), a damage action arising from the purchase of debentures where financial statements failed to disclose that income resulted from overcharges to the Government, the court held that the allegation that the defendants “knew or should have known that * * * [the financial statements] were incorrect and false and misleading” would state a cause of action, since allegations of actual knowledge of falsity would be sufficient. And in Globus v. Law Research, Inc., 418 F.2d 1276 (2d Cir. 1969), cert. denied, 397 U.S. 913 , 90 S.Ct. 913 , 25 L.Ed.2d 93 (1970), an action for damages alleging that an underwriter’s circular contained material omissions, the court approved an instruction requiring the jury, before ascertaining liability, to find actual knowledge of the falsity or, if the omission were disclosed, that the statement was misleading. The jury instruction in Globus was held not to be error since the allegations accused the defendants of actual knowledge, the evidence supported the allegations, and the jury found “high moral culpability.” 42 In Drachman v. Harvey, 453 F.2d 722 (2d Cir. 1972) (en banc), the court, reversing the affirmance of the dismissal of a complaint, held that a “sufficient claim is stated of fraud. . . .” Id. at 737 (emphasis added). See also Movielab, Inc. v. Berk- *286 ey Photo, Inc., 452 F.2d 662 (2d Cir. 1971); Fershtman v. Schectman, 450 F.2d 1357, 1361 (2d Cir. 1971); Levine v. Seilon, 439 F.2d 328 (2d Cir. 1971).
Close examination of the cases discussing fraud reveals that the courts which on the surface appear to have drifted away from the intent of Congress, as explicitly expressed in the legislative and administrative history of the Act and Regulations, have not demonstrated sufficient justification for their language. Scrutiny of the facts in the cases demonstrates that the culpability contemplated by the Act was indeed present, frequently in flagrant form. Although the Supreme Court’s opinion in Capital Gains Research Bureau, supra, indicates that in a suit to enjoin an ongoing course of action, “deliberate dishonesty” need not be shown, it nevertheless adopts a definition of fraud consistent with the Congressional intent. To go further would be impermissible, for in the language of a recent Supreme Court decision interpreting another section of the same Act, it would be a “construction [of the statute and rule] that not only strains, but flatly contradicts the words of the statute.” Reliance Elec. Co. v. Emerson Elec. Co., 404 U.S. 418, 427 , 92 S.Ct. 596, 601 , 30 L.Ed.2d 575 (1972). 43
A review of the cases reveals that the Seventh, Eighth, Ninth and Tenth Circuits have opted for broad coverage under the Act by purporting to eliminate the need for scienter, the Third and Fifth Circuits require a finding of culpability, while the Second Circuit is still unsettled as to the appropriate standard. However, determining the proper rule of law requires a closer analysis than merely polling the circuits or blindly following one of them. Instead, the cases should be carefully examined to glean their collective wisdom.
The first factor which becomes apparent is that in every case where liability was found, conduct tantamount to actual fraud existed, despite the fact that the reviewing court may have used language broader than necessary. In no case was liability affixed to non-culpable conduct, regardless of the dicta. See Kohler v. Kohler Co., supra. Thus, language must be peeled away to reach the core of the rationale behind the actions of the courts.
One distinction the cases suggest depends on the nature of the plaintiff. Where only one or a few parties are suing to recover, courts may well reach a different result from that when suit is brought on behalf of thousands of shareholders. Thus Ellis, Royal Air Properties, Stevens, and Myzel were essentially individual suits to recover personal damages. It is fitting that in the face-to-face confrontations, courts should impose a higher standard of disclosure by lessening the degree of culpability upon which liability can be imposed. From a practical standpoint, in such situations, the amount of damages is relatively finite, whereas in a suit on behalf of a class composed of thousands of shareholders, damages might well extend into millions of dollars. When faced with such huge potential payments, the brunt of which will be borne by innocent shareholders of the defendant corporation, the courts seem to have proceeded more slowly, by requiring that the plaintiff class prove conduct closer to the traditional concepts of actionable fraud.
Another distinction lies in the nature of the relief requested. Where the Government or a private party is seeking prospective injunctive relief only, it is appropriate that courts be able to protect the investors and shareholders from future harm even though the conduct involved does not amount to common *287 law fraud. See SEC v. Capital Gains Research Bureau, Inc., supra, cf. SEC v. Texas Gulf Sulphur, supra. On the other hand, when the plaintiff class is seeking retrospective relief, such as substantial money damages or dissolution of a merger, more serious problems arise and a different balance must be struck. When the Act is utilized retrospectively rather than prophylaetically, the courts must bear in mind that the civil recovery provisions were designed primarily as a “back-stop” for the criminal provisions, and that the Act operates essentially as a private penal statute. Where the relief discourages conduct through punishment, whether by damages or by divestiture, it is altogether proper, and indeed essential, for courts to cleave close to the Congressional purpose by construing the statute strictly, and to affix liability only where culpable conduct is made out.
Still a third variable is suggested by cases such as Myzel or Mutual Shares Corp. In the normal course of events, the ordinary shareholder has the right to rely on the fiduciary relationship between himself and his company to the extent of justifiably believing that recommendations with regard to shareholder action are in the best interests of the company. But where the management or board of directors of a corporation is either acting in their self interest, or for a controlling third party — a finding or conclusion not sustained by the majority opinion here — the shareholder is helpless unless he knows of the conflict of interest and has access to sufficient facts to reach a valid independent judgment. Hence, in self-dealing transactions, it does not seem unreasonable for courts, in an effort to achieve the required disclosure, to react by apparently lowering the standard of actionable conduct.
But it has now been established that this case does not involve self-dealing on the part of AM AX. Therefore, as a class action seeking retrospective relief of a punitive nature, every reason exists to apply the rigorous test of liability intended by Congress. Merely parrot-ting selected words from the statute or rule should be inadequate to establish a base for liability without a finding of the required intent supported by the record.
In addition to the legislative and administrative history and the case by case analysis, the realities of the business world must be considered in formulating an appropriate rule of culpability for the operation of 10b-5. In the every day course of business, corporations are required to issue news releases, proxy statements, financial reports and myriad other documents, the subject matter of which are generally complex rather than simple. Full disclosure is essential in order to provide the public in general and investors in particular with adequate knowledge of corporate affairs. Because of the complexities of these documents, they will often contain some mistake or perhaps even misrepresentation. To predicate liability on mere error, or even negligence, where highly qualified law firms, accountants and investment brokers prepared the documents in good faith, would constitute corporations and their officers and directors insurers. If the courts were to impose liability on a corporation because the draftsmen of a proxy statement set forth a fact in a latter portion of the material rather than in a former portion, or included a particular provision in an appendix as distinguished from a footnote in the body of the text, the sought-after goal of a free flow of corporate information might be discouraged rather than encouraged. The pragmatic rule might well become, “when in doubt, say as little as possible.”
On the other hand, if the placement of the data near the end of the document or in an appendix, or if the presentation of a proposition is in the form of one question rather than two, and there then is a finding that such arrangement is done with an intent to deceive, manipulate or defraud, the imposition of liability would accomplish the purposes of the Act and regulations, and not punish *288 the guileless or impede the stream of vital information.
In view of these considerations, and the fact that fraud or culpability appears to be the linchpin of Section 10 (b) and the regulation thereunder, it is critical that the elements of fraud vel non not be predicated on mere conclu-sory statements.
In summary, the proper standard of culpability to apply in a given case should take into account the intent of Congress and the SEC, the facts of the case as they bear on the conduct and interests of the parties, and the relationship of the defendants with those with whom they deal. It should balance the policies behind the statute and regulation against the facts of normal business life. To do otherwise would run the risk of deciding complicated matters, fraught with many subtle distinctions, by a process which amounts essentially to the mere application of labels.
2. The Element of Reliance in Private Actions Under the Securities Law.
At common law, a necessary element in recovery for the tort of deceit is “[j]ustifiable reliance upon the misrepresentation on the part of the plaintiff, in taking action or refraining from it.” 44 Although both Section 10(b) and Rule 10b-5 are silent as to reliance, Congress clearly intended that as part of a plaintiff’s case he prove that he relied on the particular misleading statement of which he complains. S.Rep. 792 at 13. And most cases discussing the matter hold that reliance is an essential element in an action for damages under the securities laws. See Rogen v. Ilikon Corp., 361 F.2d 260, 266-268 (1st Cir. 1966); Janigan v. Taylor, 344 F.2d 781, 785-786 (1st Cir.) cert. denied, 382 U.S. 879 , 86 S.Ct. 163 , 15 L.Ed.2d 120 (1965); List v. Fashion Park, Inc., 348 F.2d 457, 463 (2d Cir.), cert. denied, 382 U.S. 811 , 86 S.Ct. 23 , 15 L.Ed.2d 60 (1965).
Reliance is normally measured against the objective standard of the reasonable man. But in List v. Fashion Park, Inc., supra, the Second Circuit defined the test both objectively and subjectively:
“Thus, to the requirement that the individual plaintiff must have acted upon the fact misrepresented, is added the parallel requirement that a reasonable man would also have acted upon the fact misrepresented.” 340 F.2d at 462 (footnote omitted).
In other words, did the plaintiff, and would a reasonable man, rely on the statement? This two-pronged test seems to apply equally well to cases where the misrepresentation was accomplished by non-disclosure as well as by affirmative statements.
With the advent of Rule 23, Fed.R.Civ.P. governing class actions, the question of reliance became more complicated, mainly because proof of reliance might vary as to each individual member of the class. 45 One court held that where there has been “a complete failure to disclose any material facts,” a class action could be properly maintained. Esplin v. Hirschi, 402 F.2d 94 (10th Cir. 1968), cert. denied, 394 U.S. 928 , 89 S.Ct. 1194 , 22 L.Ed.2d 459 (1969). This solution, of course, avoided and therefore did not solve the more difficult problems presented by requiring proof of reliance in a class suit. Other courts have adopted various solutions considered workable. The Second Circuit approved separate trials to resolve the issue of reliance. Green v. Wolf, 406 F.2d 291 , 301 (2d Cir.), cert. denied, 395 U.S. 977 , 89 S.Ct. 2131 , 23 L.Ed.2d 766 (1968). Another court employed the device of proof-of-claim forms which were sent to each member of the class. Korn v. Franchard Corp., CCH Fed.Sec.L.Rep. ¶ 92,616 (S.D.N.Y.1970). 46
*289 Mader v. Armel, 402 F.2d 158, 161 (6th Cir. 1968), cert. denied, 394 U.S. 930 , 89 S.Ct. 1188 , 22 L.Ed.2d 459 (1969), in discussing the necessity for proving reliance with respect to a motion to dismiss the complaint, stated: “It seems to us that this is defensive matter hardly relevant to a motion to dismiss which admits the allegations of the complaint well pleaded.” The Mader court relied on Vine v. Beneficial Financial Co., 374 F.2d 627 (2d Cir.), cert denied, 389 U.S. 970 , 88 S.Ct. 463 , 19 L.Ed.2d 460 (1967), an individual private action, where the plaintiff was forced to exchange his shares as the result of a merger. The Vine court, also confronted with a motion to dismiss, stated (p. 635):
“[W]e regard [reliance] as unnecessary in the limited instance when no volitional act is required and the result of a forced sale is exactly that intended by the wrongdoer.”
Kahan v. Rosenstiel, 424 F.2d 161 (3d Cir.), cert. denied, 398 U.S. 950 , 90 S.Ct. 1870 , 26 L.Ed.2d 290 (1970), is an example of another situation where it was stated that “proof of reliance is not an independent element which must be alleged to establish a cause of action.” Id. at 173. That case, however, must be read in light of its peculiar facts. There, plaintiff represented a class of shareholders who sued to enjoin an unfair merger. As a result of the suit, the defendants offered a more valuable package in return for the stock of the corporation to be acquired, and the matter was settled. Plaintiff then sued for expenses and attorney fees, and defendants moved for summary judgment on the basis that plaintiff had not stated a cause of action because the complaint had not alleged reliance by members of the class. The sole issue was whether summary judgment was appropriate. It was in this context that the Court, bearing in mind the valuable services plaintiff had rendered to the class, viewed Mills v. Electric Auto-Lite Co., 396 U.S. 375 , 90 S.Ct. 616 , 24 L.Ed.2d 593 (1970), as obviating the need to allege reliance. This Court, in Kahan , had no occasion to address itself to the question whether reliance ultimately need be proved in a private 10b-5 action.
Mills was a class action under Section 14 and the proxy rules — provisions serving a different purpose from Section 10(b) and Rule 10b-5, and having substantially different standards. The thrust of the proxy rules is to ensure that shareholders receive accurate information by enabling objectors to a proxy statement to enjoin the distribution, or voting of proxies, or action taken pursuant to the vote, early in the process, while it is still relatively easy to correct the defect. Accordingly, it is appropriate that reliance and culpability not be essential independent elements of a Section 14 action. While the main thrust of Section 10(b) is to achieve the same goal, it does so by the significantly different method of prescribing penalties, civil and criminal, for the dissemination of false and misleading statements. In such case, reliance and culpability form crucial ingredients in the cause of action, and the equation in Mills of materiality with causation and reliance becomes inapplicable.
In any event, the critical omission in the Mills proxy statement was that substantially the same directors controlled Mergenthaler, the acquiring corporation that dominated Auto-Lite, the company to be acquired. As the majority opinion here indicates, such information was disclosed in great detail in the present case. See ante, at 267. The alleged misrepresentations here did not go to the independent judgment behind the directors’ recommendations, as in Mills, but rather only to several segments of *290 the transaction. For example, one of the important points here involves the statements of the investment bankers that they had not physically appraised the Fiji and Baluba projects. The three investment banking firms made such statements, but did so in their opinion letters, which were included in the appendix to the Explanatory Statement rather than in the text. But the objection is not about the existence or nonexistence of the physical aspects of these projects, but rather the method used to evaluate them.
Were Mills the latest word on the subject of reliance, one might contend that its broad language would be controlling, even in a 10(b) ease. However, subsequent individual private damage cases indicate that the requirement of reliance still has vitality. See Gottlieb v. Sandia American Corporation, 452 F.2d 510, 516 (3d Cir. 1971); Chasins v. Smith Barney & Co., 438 F.2d 1167 (2d Cir. 1970) (test for reliance is causation in fact); City National Bank v. Vander-boom, 422 F.2d 221 (8th Cir. 1970) (reliance necessary in an individual’s suit). Thus, the cases seem to fall into two categories: individual damage suits requiring proof of reliance, and class or injunctive actions not requiring proof of reliance beyond the objective standard. Since the present case was brought as a class action for pecuniary relief, at the very least the objective test must be met, and recovery may not be had if reasonable men would not have relied on the material in the Explanatory Statement about which a complaint has been asserted.
As noted in Mills, the objective test was primarily adopted to obviate the need to prove reliance on the part of each member of the class. But the Mills decision does not reach the important question raised by the unique facts present in this case. Here, unlike Mills, the class action and the fact that plaintiff adequately represented the interests of the class had been approved by the district court prior to the issuance of the alleged misstatements of which plaintiff complains. In this situation, are plaintiff and the class he represents nevertheless relieved of proving either subjective or objective reliance on the ground it can be presumed as a matter of law that they would not rely on material misrepresentations which they knew to be false ? In other words, where the class in fact has actual knowledge or notice of an erroneous statement prior to the vote, because of the information possessed by its representative and the opportunity he had been given to communicate with the class at the expense of the company, is the class then estop-ped from asserting objective reliance? Apparently, this question has not been discussed either by the courts or commentators in Section 10(b) or Section 14 cases, and is therefore still unresolved. However, logic would dictate that the answer must be in the affirmative.
Another question not reached by Mills is also presented in this case. Where the class has been alerted to the misleading or false nature of the proxy statement by a letter written by its attorney and enclosed with the proxy statement, what duty is imposed upon reasonable shareholders to look for allegedly “buried facts” highlighted by that letter before it may be said, as a matter of law, that they relied on the non-effective disclosure of such facts? To pose this question would appear to answer it. Reasonable shareholders, when given notice by their attorney and representative that the proxy materials are erroneous or misleading, would at least read such materials closely, and if a careful review of the proxy statement and its appendices would reveal any buried facts, the shareholders should be precluded from asserting that they relied on the non-existence of such facts. 47 A differ *291 ent result might be ordained where the allegedly “buried facts” were so artfully concealed that the ordinary shareholder could not discover them, or where they constitute an integral part of a manipulative scheme to defraud. However, there is no such finding here, nor even any suggestion that such conduct occurred.
C. The Violations of Section 10(b) and Rule 10b-5 In Issue Here.
Having set forth the elements of a course of action under Section 10(b) and Rule 10b-5, we move to an examination of the specific conduct in this case on which liability is predicated.
It is important to understand that this is not a ease of self-dealing on the part of AMAX, despite the inference which might arise from a 42% ownership of RST. First, the uncontradicted testimony was that RST was independent of AMAX and that RST and AMAX bargained at arms’ length. Second, this testimony is underscored by the facts that RST refused to issue a registration statement for AMAX’s benefit, and also refused to agree to a complete distribution of its assets, as suggested by AMAX. Thus, although it may appear that RST was in an inferior bargaining position, AMAX did not have such an unconscionable advantage, either through ownership or the exigent circumstances, so as to be able to make RST “dance on a string.” Furthermore, as discussed by the majority, the interests of the officers and directors who negotiated the transaction were fully disclosed in great detail in the Explanatory Statement. Accordingly, analysis of the facts should not be approached from the standpoint of an “undisclosed self-dealing” suit, with its lower standard of scienter.
The majority has affirmed or declined to decide seven specific acts by defendants which were found by the district court to constitute violations of Section 10(b) and Rule 10b-5. These items fall into two broad categories: (1) those directly connected with the mechanics of nationalization, externalization and amalgamation, and (2) those concerning facts disclosed but allegedly “buried.” For reasons more fully discussed below, I would hold that none of these acts constitutes a 10b-5 violation in the context of this case.
1. Charges Relating to Nationalization, Externalization and Amalgamation
The following particulars directly related to the nationalization, externalization and amalgamation of RST were held to be violations of Rule 10b-5: creating the false impression that the AMAX-RST amalgamation was a necessary consequence of nationalization; linking amalgamation and nationalization in a unitary proposal to the shareholders; and failing to disclose that externalization was discretionary and need not have been simultaneous with nationalization. In addition, the majority did not decide whether the district court was correct in ruling that the failure to disclose alternative plans for externalization and the implication that shareholder approval was prerequisite to nationalization were material misrepresentations or omissions in the Explanatory Statement.
It might be argued on a “hindsight” theory that it would have been better practice for RST to have clearly delineated the various stages of this transaction for the shareholders, and to have enabled them to vote separately on the proposals of nationalization and amalgamation. However, after reviewing the testimony carefully and realistically, I cannot conclude that RST’s failure to do so amounts to a violation of the securities laws of the United States. This conclusion is reinforced by the sound and compelling practical reasons for not doing so here.
*292 Because of the circumstances, nationalization, externalization and amalgamation in fact constituted only one transaction. On August 11, 1969, the Government of Zambia announced that the operating properties of RST would be nationalized and that Zambia would acquire 51% of these assets. It was subsequently discovered that the fair price Zambia had in mind would have returned to the shareholders only about 50% of the book value of the assets they would lose. The non-operating assets of RST consisted mainly of cash, which Zambia coveted in order to bolster its economy. Zambia’s intense interest in keeping this cash within Zambia was manifested by the currency exchange controls and the limitation on the payment of dividends to foreign shareholders it had previously invoked. It was obvious that to retain these assets in Zambia would create a serious risk of further nationalization. Even without this risk, RST was severely hampered in its ordinary international operations by these restrictions. Therefore, RST’s management concluded that the only possible course of action to follow after nationalization was externalization.
The desire of the Zambian Government to have the nationalization appear voluntary provided the opportunity to secure permission to externalize. In this regard, RST persuaded Zambia to defer nationalization until its shareholders approved, although Zambia would have preferred otherwise. This concession could not be deemed open-ended, or RST would have been able to postpone nationalization indefinitely. However, it did provide a breathing spell during which RST could formulate a plan for externalization.
The testimony in the district court by Sir Ronald Prain, Chairman of RST, Ian MacGregor, Chairman of AMAX, and Robert Page, a director and vice-president of RST, dramatically illustrated the plight of RST; how they were taken by surprise by the Matero Declaration because it represented a reversal of policy of the Government; the urgency with which they had to act; the reasons for deferring nationalization until the shareholders approved; the crippling effect of the Zambian currency restrictions; and the disastrous consequences which would result from remaining in Zambia after nationalization. They further testified that if the shareholders voted against nationalization, the entire transaction would have to have been renegotiated with Zambia, and that less favorable results would probably have been obtained the second time around. This testimony was internally consistent, was never contradicted, and the trial judge in his findings in no way questioned it.
Of course, shareholder approval was not an absolute prerequisite to nationalization. Presumably, the Zambian Government could have nationalized RST at any time and on its own terms. But Zambia had undertaken not to nationalize until the shareholders approved, so to this extent any implication that shareholder approval was required prior to nationalization was the truth. The only way RST could have made this statement more accurate would have been to raise the possibility in the proxy statement that if the shareholders voted not to approve nationalization, Zambia might breach its agreement with RST. Such a course of action would have been most unwise and indeed perhaps foolhardy for corporate officials who had just witnessed their Government’s basic change of policy with regard to nationalization itself.
Because the exact timing of the act of externalization was left to the discretion of RST’s management, it is technically true that externalization need not have been simultaneous with nationalization. However, the plain fact remains that externalization was the quid pro quo flowing to RST for its not protesting the nationalization. RST fully appreciated the value of its non-operating assets to the Zambian economy, and if RST had been nationalized without condition, Zambia would no longer have had any incentive to abide by the understanding that there could be an externaliza *293 tion. The testimony discloses that RST recognized the distinct possibility that were nationalization to occur without externalization, RST could be interminably locked into Zambia with no hope for escape. As the witnesses testified without contradiction, these fears could not have been clearly set forth in the Explanatory Statement without offending the Zambian Government. As a practical matter, then, the timing of the externalization was not in the least discretionary; and to succeed externalization had to be accomplished simultaneously with the nationalization. 48 Accordingly, failure to disclose the technically true state of affairs did not constitute a misleading statement or omission, but revealed the actual state of affairs, and hence could not amount to a violation of Rule 10b-5.
Applying the touchstone of materiality to these two departures from the absolute truth, it becomes apparent that the statements are not material. In order to determine materiality, the question is whether the technically true state of affairs “might have been considered important by a reasonable shareholder who was in the process of deciding how to vote.” Mills v. Electric Auto-Lite Co., 396 U.S. 375, 384 , 90 S.Ct. 616, 621 , 24 L.Ed.2d 593 (1970). If the reasonable shareholder knew that Zambia could nationalize RST even without shareholder approval, and if he knew that Zambia might ignore the understanding permitting externalization were RST to be nationalized first, the reasonable shareholder would be even more strongly inclined to vote in favor of the resolution. Because the shareholders voted overwhelmingly to nationalize and externalize, and not against such course of business, and because the technical truth would have further encouraged such a vote, it can hardly be said that the alleged misrepresentations were material or, in the words of the Fifth Circuit, amounted to “causal deceit.” Herpich v. Wallace, 430 F.2d 792, 801 (1970). Put another way, even if these misstatements were technical violations of Rule 10b-5, they did not cause the transaction to occur nor did they cause injury, and hence no recovery should be based on them. See Note, Causation and Liability in Private Actions for Proxy Violations, 80 Yale L.J. 107 , 129-30 (1970).
After deciding that externalization was in the best interests of RST, the management carefully investigated the various methods by which it could be accomplished. At first, reformation of the corporation into an international mining company was seriously discussed, and the proposal was approved by the board of directors. However, this plan was eventually rejected upon further study when it became apparent that it could not succeed, and that as the company’s prospects diminished, it would become increasingly subject to raids by others seeking to acquire it at extremely low prices. So pessimistic was the outlook in this respect that Rothschild, who had represented RST for over 30 years, warned that if RST persisted in becoming an international mining company, Rothschild would no longer represent it.
Rothschild advised that RST could not succeed as an international mining company for two compelling reasons: it would not have sufficient income free of Zambian controls to sustain itself while it explored for and developed new mineral deposits, and its credit would not permit it to borrow even one-tenth of the funds necessary to permit such activity. Further to operate as an international mining company, in view of the antitrust laws, RST would have to buy out AMAX’s holdings in RST, or AMAX would have to sell its holdings to a third party. But for RST to buy out AMAX would strip it of cash, and AMAX was unable to find a third-party buyer for its RST shares. In addition, the testi *294 mony shows that in either event, a “bail out” by AMAX would have severely undermined the confidence of RST’s investors and employees, and would have made it extremely difficult for RST to retain or hire sufficient professional personnel adequately to staff the company.
RST considered the concept of “twinning” the corporation, but counsel advised against this because, without approval from the American Internal Revenue Service, such a reorganization could have burdensome tax consequences for American shareholders. Furthermore, the time required to secure a ruling from the IRS was such that, according to the testimony, Zambia might become impatient and not wait for the required shareholder approval. Therefore, this plan was rejected with the thought that it might be resurrected at a later date if necessary. The majority opinion does not decide whether non-disclosure of these alternate methods of externalization constituted a violation of Rule 10b-5. 49
Since there was an absence of proof that knowledge of any of these other possibilities would have benefitted the plaintiff class by enabling it to achieve a more advantageous deal by rejecting the proffered proposal, or that insiders would benefit by misleading the shareholders into accepting lesser value for their shares, 50 the non-disclosure of alternative methods of externalization was not a material misrepresentation. No contrary authority has been cited which would support the district court’s holding on this point.
Having rejected the various alternatives, the management of RST reluctantly agreed to amalgamation with AMAX. This course of action was designed to be fair to, and yet be beneficial for, both AMAX and the non-AMAX shareholders or RST. 51 Testimony indicated that the terms of the agreement were difficult to work out, and at one point AMAX even proposed an outright distribution of RST’s assets remaining after nationalization to the RST shareholders in proportion to their holdings. RST rejected this proposal, and eventually agreement was reached.
The next step in the process was to achieve shareholder approval, and accordingly an Explanatory Statement and other proxy materials were prepared. In the materials, the matters of nationali *295 zation and amalgamation were combined into one proposal. Plaintiff sought to enjoin the distribution of the proxy statements on the grounds they were false and misleading with respect to valuation and the benefits accruing to AMAX. When the district court suggested that plaintiff and defendants produce a joint proxy statement to “avoid the problem of having an ex post facto injunction against the stockholders on the basis of what has been a materially misleading communication,” plaintiff replied
“We don’t even ask for that much. All we ask is we have the right to set forth our contentions in two pages; and if those two pages are a misrepresentation of our contentions, what has to be changed in them and some idea of where it is going to come, you know, it is not going to be buried down in page 17 to 19 in a 40-page statement so that nobody will even know there is this reference in it.
“I think it should be somewhere where people can see it. I think a page or two which we fairly succinctly summarized what our specific factual contentions are will be something that somebody can read. Then it is up to them. I’m perfectly willing to let them say what they want.”
Plaintiff made no mention, at the time of the court’s suggestion pertaining to the proxy statement, that he contemplated any problem because the proposals were combined into one question. Indeed, it was not until the “11th hour” meeting that plaintiff raised any question about amalgamation being a consequence of nationalization. And it was not until a further hearing following an appeal to this Court that the matter of the single resolution was raised. At this juncture, the district court stated to plaintiff’s counsel: “It seems to me that your * * * contentions in that respect can be succinctly stated in the material that goes out under your name.” Despite the fact that this matter was squarely in the mind of plaintiff, and despite the fact that the trial court suggested that it might be included in the letter to the shareholders, plaintiff made an affirmative decision not to so include it. At one point, the trial judge even conceded that the formulation of the proposal was a matter of business judgment, and that he would not interfere.
With that information as background, we now address ourselves to the proxy materials. Specifically, the question is whether the wording of the Explanatory Statement and formulation of a single proposal was misleading and deceptive as to whether the amalgamation was a natural consequence of the nationalization by Zambia. A close examination of the proxy materials sheds light on this issue.
In the letter of transmittal accompanying the Explanatory Statement, Sir Ronald Prain explained:
“As stated in Paragraph 5 of the Explanatory Statement, I and those of my colleagues on the Board who are not directors of Amax believe that it will benefit you to receive this readily marketable investment in Amax, a large international diversified mining and fabricating enterprise, in exchange for a reduction in your equity interest in the non-diverisified Zambian state mining venture and for an interest in other of the RST assets, most of which have become excess to the needs of the Zambian operations. It would probably have taken considerable time before these assets could have been employed in new mining projects in other parts of the world. Moreover, such projects would undoubtedly have required additional investment and could not have been expected to become income-producing for several years.”
The Explanatory Statement itself asserted in its second paragraph:
“This Explanatory Statement describes the proposal of the RST Board that the shareholders of RST approve this sale to Zimco as part of their approval of a reorganisation of the structure of the RST Group. This reorganisation will also include a reduction of capital of RST (The “Reduction of Capital”), resulting, in effect, in the acquisition *296 by American Metal Climax, Inc. (“Am-ax”) of part of the RST Group as a consequence of the cancellation of all shares of RST other than those owned by Amax in exchange for cash, certain assets of RST and $76,166,600 principal amount of Amax subordinated debentures with 761,666 common stock purchase warrants attached.” (emphasis added).
To the extent that these statements and those quoted by the majority imply that amalgamation was a natural consequence of nationalization, from a practical standpoint, they do so truthfully. The evidence clearly shows that externalization following nationalization was a business necessity for RST, that there was a need to accomplish externalization immediately, that it was impossible to effectuate other forms of externalization, and that amalgamation was the only viable business method to achieve the required result. Jacob Rothschild testified that his firm advised combining the questions into one proposal to prevent nationalization without externalization because this would have left RST stranded in Zambia. As discussed above, RST could not have further explained its business reasons without assuming the risk of incurring the displeasure of the Zambian Government. After all, RST and its shareholders would still continue to have a substantial stake in that country. Accordingly, the unitary proposal reflected the actual state of affairs as it then existed. Not to have used the unitary proposal would have exposed RST and its shareholders to considerable risk, and therefore did not amount to a violation of Rule 10b-5.
The plaintiff himself was certainly not mislead, and he had ample opportunity to explain to the class, if such were necessary, the implication of the questions involved in the unitary proposal.
Furthermore, with regard to any of the five matters discussed in this subsection, there is not a scintilla of evidence in the record which indicates that the management of RST acted recklessly or in bad faith with regard to their intermediate decisions, or their ultimate judgment as to the working of the Explanatory Statement, or the use of the unitary proposal. As noted above, the district judge at an early stage recognized that these matters constituted a question of business judgment. However, in its opinion, the lower court stated that “[a]fter having heard all of the testimony and reveiewed all of the exhibits * * it concluded that the “manner of presenting the proposals was itself a manipulative and deceptive device * This assertion, 52 which is found in the opinion as well as in Finding of Fact 102, must be substantiated by evidence of record or it is clearly erroneous. For this purpose, because of the court’s statement, we need only examine the exhibits and testimony. And this must be done in light of the majority’s reversal of many of the alleged violations of the Act.
The exhibits themselves are, as to be expected, silent as to intent, but reflect the end result of what the defendants intended. Accordingly, the support for the finding must be sought in the testimony of the witnesses. Plaintiffs’ witness never testified at all with regard to intent. Defendants’ witnesses stated that the purpose of their course of action was to prevent the corporation from becoming locked into Zambia following nationalization. There is no indication that such testimony was incredible, and it was unimpeached. Therefore, it must be accepted as true, and as such, it re *297 futes rather than supports the findings of the trial court. But even if such testimony were disbelieved, it was still un-contradicted. The disbelief of the trial judge is not evidence, and will not support the finding of culpability. Consequently, to the extent the district court's ruling that this method of achieving shareholder approval constitutes a manipulative or deceptive device is a finding of fact, it is clearly erroneous; to the extent it constitutes a conclusion of law, it is simply incorrect. There being no tenable determination of culpability, the result reached by the majority amounts to the imposition of liability without fault, and as such is clearly impermissible under the statute and rule.
2. Charges related to “buried facts”.
Remaining for determination is the issue whether certain facts were “buried” so as to be the equivalent of nondisclosure or material misrepresentation or omission. The two items so characterized concerned the benefits to be obtained by AMAX, and the fact that RST’s banking advisors did not make an independent survey of RST’s assets in Baluba and Fiji. It is conceded that these items were disclosed in the Explanatory Statement and its appendices. The sole question is whether a reasonable shareholder, under the circumstances of this case, would have or should have discovered them.
One must exercise care not to view these two items through lenses ground on the basis of “20-20 hindsight”. Indeed, since the plaintiff and the court participated in a discussion regarding the draft of the Explanatory Statement, their views expressed before the proxy statement was finally printed will help illuminate this issue.
Plaintiff fully realized the problems confronting the draftsmen of the Explanatory Statement, and before the materials were printed in final form made it clear that he thought it would be sufficient for proxy purposes if the contentions merely were pointed out:
“MR. KOHN: I don’t think anyone wants to play games of cat and mouse. We want to get this thing out and done. Nobody wants to spend the rest of his life on this if he can avoid it. “I think a two or three page statement which we have got summarizes our contentions and labeled our contentions. So to that extent they are harmful to your position if you put them in as yours. They are plainly ours.
“That is all we ask for, with some recognition as to where it is going to be in this overall document, which can be fairly voluminous. You know stockholders and the burdens they have and how much time they can spend reading all these things and so on.”
* * * * •*
“THE COURT: It is to notify them not only as to the pendency of the action but * * * the contentions. Most of the facts that appear in this preliminary opinion for all practical purposes are undisputed.
“It seems to me that the stockholders ought to know them.”
“MR. KOHN: I would be happy to have no comment from me. Send the complaint and the Judge’s opinion out. * * *»
The Explanatory Statement was printed, and it was not, in the words of the trial judge, until the “11th hour and 59th minute” that plaintiff complained that certain facts were buried. It was after these remarks by the trial judge that the Explanatory Statement was mailed to the shareholders, along with the letter from plaintiff and the court’s June 8th opinion, as plaintiff requested.
The first item in the package received by the shareholders was a letter written by Sir Ronald Prain alerting the shareholders to the litigation. 53 This letter *298 was added at the last minute in order to comply with plaintiff’s request for further emphasis on the litigation. It was followed by another letter of transmittal from Prain summarizing the transaction, which in turn, was followed by plaintiff’s letter. Plaintiff’s letter further explains the litigation and plaintiff’s allegations, and specifically refers the RST shareholders to pages 18 and 19 of the Explanatory Statement. The third paragraph of plaintiff’s letter focuses entirely upon the unique benefits to be acquired by AMAX:
“Specifically, it is charged and the Court has found that ‘AMAX will receive, inter alia, the following benefits if the Agreement in Principle between RST and AMAX is consummated: (a) AMAX’s annual income will be increased by $7 million calculated at $.50 per pound copper price; (b) AMAX’s cash flow will be improved by $134 million over the period of 1970-75; (c) AMAX’s foreign balance of payments position will be improved by $91 million; (d) although AMAX will increase its net exposure in Africa by about $24 million, 4Yz years of incremental earnings after the acquisition will recoup this; (e) AMAX will be acquiring high yielding assets.’ ”
After the plaintiff’s letter was the Explanatory Statement itself. The second paragraph of that document concluded with the following information:
“Appendices to this Explanatory Statement provide more detailed information concerning the proposal. In formation and notices concerning judicial proceedings in the courts of Zambia and a class action in the United States of America appear in Paragraphs 18 and 19.”
In section 18 of the Explanatory Statement, which appears on pages 18 and 19, the pending litigation was fully described. The fifth paragraph of that section, dealing with the June 8th preliminary injunction opinion of the district court, stated: “The findings of fact, conclusions of law, opinion and order of the Court are set forth in Appendix R hereto.” And in paragraph 28 of the district court’s order, set forth on page 5 of Appendix R of the Explanatory Statement, the following findings of fact are recited:
“AMAX will receive, inter alia, the following benefits if the Agreement in Principle between RST and AMAX is consummated:
(a) AMAX’s annual income will be increased by $7 million calculated at a $.50 per pound copper price;
(b) AMAX’s cash flow will be improved by $134 million over the period of 1970-1975;
(c) AMAX’s foreign balance of payments position will be improved by $91 million;
(d) Although AMAX will increase its net exposure in Africa by about $24 million, 4% years of incremental earnings after the acquisition will recoup this;
(e) AMAX will be acquiring high yielding assets.” (Footnote and citations to exhibits omitted).
If the assumption that the reasonable shareholder reads proxy materials is correct, then where the proxy materials disclose a lawsuit which could be of great financial benefit to the shareholder, it follows a fortiori that the shareholder would read the information concerning the lawsuit. But even if the shareholder relied on other sources of information such as a stock analyst in chosing how to *299 vote, the information regarding the advantages to AMAX clearly was available to such source and would have been reflected in the advice rendered to the shareholder.
The fact that some of the information is contained in an appendix rather than in the text is not significant here, for the purpose of appendices is to remove detailed facts from the Explanatory Statement proper. The procedure of utilizing appendices in transactions as complex as this is common. If each and every fact contained in the appendices were in the body of the Explanatory Statement, then it would be so large and unworkable that a serious question of “buried facts” would be presented.
The majority opinion notes that Rule 14a-5, 17 C.F.R. § 240 .14a-5, dealing with proxy statements, discourages incorporation by reference in a proxy statement of important facts. There is no dispute with such rule and its application so as to require a corporation to distribute a proper proxy statement. But the precise point here is whether the shareholders were misled in not knowing what benefits AMAX was to receive as a result of the transaction. If the reasonable shareholder in fact was plainly apprised of what AMAX was to receive as a result of his attorney’s letter and also as a result of the clear findings of the trial judge that were included with the letter and proxy material, it does not appear to be logical, nor in accord with the real purpose of Rule 14a-5, to ignore this information in determining whether the corporation should respond on the ground that it misled its shareholders.
The last of the 10b-5 violations sustained by the majority concerns the inadequate disclosure of the fact that Kuhn, Loeb, Rothschild and Lehman Bros, did not perform an independent survey of the mining properties, mineral reserves and exploration rights of RST. 54 It appears that the main thrust of this alleged violation goes to the valuation ascribed to the Fiji project, a project which had been underway for approximately six months prior to the events in question here. 55
On page 2 of the Explanatory Statement, the following paragraph appears in bold faced type:
“N. M. Rothschild & Sons and Kuhn, Loeb & Co. have both confirmed to RST that, in their opinions, the terms of the Reduction of Capital are fair and equitable to the shareholders of RST. Lehman Brothers have confirmed to AMAX that, in their opinion, the terms of the Reduction of Capital are fair and equitable to AMAX and its shareholders. A copy of the opinions of these bankers may be found in Appendix Q.”
The reasonable shareholder*, put on notice of this litigation charging basic unfairness, would or should have turned to Appendix Q, since fairness to RST shareholders should have been the crucial factor in deciding how to vote.
Appendix Q consists of three short letters from the three investment ad-visors. 56
Rothschild stated, in the second of three paragraphs:
“In our opinion, the proposal is fair and equitable as between Amax on the one hand and the other shareholders of RST on the other. In appraising the proposal we have assumed the accuracy of all the information and *300 statements contained in the Explanatory Statement. We have not made an independent survey of the RST Group’s mining properties, mineral reserves or exploration rights.” (emphasis added).
Kuhn, Loeb prefaced its opinion with the following statements:
“In considering the fairness of such proposed transaction, we have relied on the accuracy of the statements contained in the Explanatory Statement. We have not made an independent appraisal of RST’s mining properties, mineral reserves and exploration rights, but we have however taken the values of such mining properties, mineral reserves and exploration rights into consideration on the basis of opinions expressed by technical and geological personnel of RST.” (emphasis added).
Lehman Brothers, the firm advising AMAX, explained:
“Our analysis is based on the material set forth in the Explanatory Statement dated 30th June, 1970, and assumes that this material is accurate. With respect to RST, we have made no detailed survey of its mining properties and mineral reserves, but have relied on the opinions furnished by technically qualified personnel of RST and Amax.” (emphasis added).
The witnesses testified that before preparing the evaluations and letters, they closely questioned RST’s management and personnel, and were satisfied that those persons had exercised “due diligence” in discovering and reporting the extent, nature, and value of these mining properties, mineral reserves and exploration rights. Whether these firms were ultimately right or wrong as to valuation is one matter, but it is clear that this is not a case in which plaintiff even claimed that RST concealed physical assets. Moreover, plaintiff does not charge that a physical inspection would have produced a different result. Accordingly, it is questionable whether omission of the fact that the investment bankers had not made an independent survey would be material. But even if it were, in view of the reference to the appendix and the statements contained therein, this information was hardly buried.
The transaction sub judice was a very complex matter, and was rendered even more complicated by the pendency of this lawsuit. In order fully to describe it and the various assets of RST that would be affected, an Explanatory Statement, disclosing thousands of facts, consisting of 24 pages of text and 20 appendices was prepared. From this vast compilation, attention is called to a limited number of items which we are told constitute “buried facts”. Nowhere has the district court found that the draftsmen had submerged these items in order to deceive or mislead; nowhere is there a suggestion or finding of an intent to bury; nowhere is there a finding of bad faith or recklessness. The implication is merely that these few items should have been presented or highlighted in a manner other than that utilized.
Because these alleged buried facts were disclosed so that a reasonable shareholder could have or should have had actual knowledge of them, application of the objective test of reliance forecloses predicating relief upon subjective reliance on their non-existence.
With regard to buried facts, the admonition of the majority that “[rjeasonable latitude in this area is important if nit-picking is not to become the name of the game” is particularly appropriate. To allow recovery on the facts here would only encourage shareholders to examine proxy statements and other documents with a fine-tooth comb — nit-picking, as it were — so that they could construct law suits out of very slight factual misstatements or omissions.
For these reasons, in addition to those set forth at length above, I would hold that no 10b-5 violations have been established in this case.
*301 III. THE EFFECT OF THE ZAMBIAN DECREE
I agree with the majority that the case of Canada S. R. Co. v. Gebhard, 109 U.S. 527 , 3 S.Ct. 363 , 27 L.Ed. 1020 (1883) is controlling on the question of the effect to be given the decree of the High Court of Zambia. There, plaintiffs were American bondholders in a Canadian railroad undergoing reorganization in accordance with a special act of Parliament. Pursuant to the plan of reorganization, the railroad substituted a new bond issue for the old. Plaintiffs, however, refused to surrender their old bonds, and sued when the old bonds and interest coupons became due. The Supreme Court held that an act of a foreign government which was valid under the law there in force is binding on a corporation domiciled in that nation, the power of the domiciliary nation over corporations organized under its law being plenary. The Court reasoned that such a corporation is subject to all the control and direction that may be properly exercised over it at the place of its erection, and that every person who deals with a foreign corporation impliedly subjects himself to the laws of the foreign government which regulate the corporation. The Supreme Court concluded: “[Anything done at the legal home of the corporation, under the authority of such laws, which discharges it from liability there, discharges it everywhere.” Id. at 538 , 3 S.Ct. at 370 . “The true spirit of international comity requires that schemes of this character, legalized at home, should be recognized in other countries.” Id. at 539 , 3 S.Ct. at 371 . 57
Of course, the securities laws of the United States had not been enacted in 1883. Nevertheless, assuming that such laws render Gebhard inapposite, the same result may be achieved by the application of choice of law principles, as will be demonstrated below.
Section 27 of the Securities Exchange Act of 1934 vests in the federal courts “exclusive jurisdiction of violations of this title or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this title or the rules and regulations thereunder.”
Accordingly, to the extent that the Zambian decree purports to decide Section 10(b) or Rule lOb-5 questions vel non, the federal courts are not precluded from examining such issues de novo. For example, had the High Court of Zambia attempted to apply the standards of Section 10(b) or Rule 10b-5 to the Explanatory Statement, and then resolved that the Section or Rule had not been violated, the federal courts would nonetheless be able to determine independently whether any or all of the elements of a 10(b) or 10b-5 violation had occurred, although collateral estoppel might apply to the facts, simpliciter, determined in the Zambian proceeding. See Abramson v. Pennwood Investment Corp., 392 F.2d 759, 762 (2d Cir. 1968).
However, such is the beginning rather than the end of the inquiry regarding the effect of the Zambian decree. This is so because even assuming a finding of a transgression of the federal securities laws, the court must then fashion an appropriate remedy. Of course, the underlying fairness of the transaction is an important consideration. See Mills v. Electric Auto-Lite Co., 396 U.S. 375, 386 , 90 S.Ct. 616 , 24 L.Ed.2d 593 (1970). Although federal courts must “provide such remedies as are necessary to make effective the congressional purpose” of the Securities and Exchange Act, J. I. Case Co. v. Borak, 377 U.S. 426, 433-434 , 84 S.Ct. 1555, 1560 , 12 L.Ed.2d 423 (1964), it does not follow that the congressional purpose will be frustrated if decisions on non-federal claims determined in non-federal courts may be per *302 suasive as to the scope of relief in the federal cause of action. See Klein v. Walston & Co., 432 F.2d 936 (2d Cir. 1970). Indeed, this Court has recognized the importance of state law with regard to fairness in 10b-5 actions. See Levin v. Great Western Sugar Co., 406 F.2d 1112 (3d Cir. 1969).
Furthermore, count II of plaintiff’s complaint, in alleging breach of fiduciary duties, states a common law cause of action that the federal court here has authority to adjudicate through the doctrine of pendent jurisdiction. See United Mineworkers of America v. Gibbs, 338 U.S. 715 , 86 S.Ct. 1130 , 16 L.Ed.2d 218 (1966); Lowenfels, Pendent Jurisdiction and the Federal Securities Acts, 67 Colum.L.Rev. 474 (1967); Note, The Evolution and Scope of the Doctrine of Pendent Jurisdiction in the Federal Courts, 62 Colum.L.Rev. 1018 (1962). It is clear that when a court is examining the rights, duties and liabilities between or among a corporation, its directors, officers, and shareholders, the applicable law is that of the state of incorporation E. g., Zahn v. Transamerica Corp., 162 F.2d 36 (3d Cir. 1947). 58 In Hausman v. Buckley, 299 F.2d 696 (2d Cir.), cert. denied, 369 U.S. 885 , 82 S.Ct. 1157 , 8 L.Ed.2d 286 (1962), it was held that the Venezuelan substantive law was applicable to determine whether shareholders had the right to object to certain action taken by officers and directors where the company was incorporated in Venezuela and had its shareholders meeting there, although Americans controlled the company and all the parties to the action were Americans.
In this case, the decree of the Zambian High Court would be an accurate barometer of the Zambian law as applied to the facts of this amalgamation. Therefore, we must determine the effect of the Zambian judgment, for if it is eon-trolling as to the issue of the fairness of the merger to the RST shareholders, the district court would be precluded from re-examining that issue, even though plaintiff’s relief under the securities law might thereby be foreclosed.
Of course, tribunals in this nation are not absolutely bound to follow foreign judgments in every case. In Hilton v. Guyot, 159 U.S. 113 , 16 S.Ct. 139 , 40 L.Ed. 95 (1895), the Supreme Court ruled that foreign judgments were binding in courts of this country as a matter of international comity. if certain criteria are satisfied. Summarized, they are:
1. Opportunity for a full and fair trial abroad;
2. Trial before a court of competent jurisdiction;
3. Trial conducted upon regular proceedings ;
4. Proceedings following due citation or voluntary appearance of adversary parties;
5. Trial under a system of jurisprudence likely to secure an impartial administration of justice between the citizens of its own country and those of other countries;
6. No evidence to demonstrate
(a) prejudice in the court,
(b) prejudice in the system of laws in which court was sitting;
(c) fraud in procuring the judgment; or
(d) any other special reason why the comity of this nation should not allow full effect. Id. at 202-203 , 16 S.Ct. 139 .
This Court recently explained the importance of comity in holding that an English judgment, rendered after a defendant was duly notified and declined to appear, was enforceable in the federal *303 courts. In so doing, we concluded: “Comity should be withheld only when its acceptance would be contrary or prejudicial to the interest of the nation called upon to give it effect.” Somportex Ltd. v. Philadelphia Chewing Gum Corp., 453 F.2d 435, 440 (3d Cir. 1971) (footnote omitted), cert. denied, 405 U.S. 1017 , 92 S.Ct. 1294 , 31 L.Ed.2d 479 (1972).
A. Element of Reciprocity.
In Hilton v. Guyot, enforcement in the federal courts of an executory French judgment for the recovery of money was denied by the Supreme Court because France would not enforce an American judgment without first examining the merits of the controversy. 59 But on the same day that Hilton was decided, the Supreme Court enforced an executory Canadian money judgment, holding that by the law of England, prevailing in Canada, a similar United States judgment would be enforced in Canada. Ritchie v. McMullen, 159 U.S. 235 , 16 S.Ct. 171 , 40 L.Ed. 133 (1895).
Plaintiff has urged that there is a substantia] question whether Zambian courts would afford recognition to a judgment of a United States court. However, no cases, statutes or treatises, Zambian or otherwise, • have been brought to our attention in support of such proposition. On the other hand, we may assume that Zambia would recognize a judgment rendered in an American court. Zambia was formerly a British protectorate and decisions rendered by English courts are authoritative precedents in Zambia. Changes in sovereignty do not affect changes in local common law unless such law is affirmatively altered by the new government. 60 Since English courts grant reciprocity to judgments rendered by courts of the United States, 61 the assumption that Zambian courts would do so also is not unreasonable. 62
Having decided that the reciprocity factor is not a bar to the recognition of the Zambian decree, the next inquiry is whether the other criteria of Hilton have been satisfied.
B. Opportunity for a full and fair trial abroad.
The Zambian Companies Ordinance does not on its face grant standing to shareholders, as distinguished from creditors, to object to a reduction of capital of their corporation. However, the Zambian Ordinance was drawn from the British Companies (Consolidation) Act of 1908, and is similar to the current English statute, tShe Companies Act of 1948. The Companies Act also does not purport on its face to vest standing in shareholders to object to a reduction of capital, but it has long been held that the courts must be solicitous of the rights of shareholders. 63 The appropriate method *304 for a shareholder to object to a reorganization would be to appear at the hearing. 64
That the High Court of Zambia rendered its judgment within three hours from the time the proceeding commenced does not demonstrate that a full and fair hearing was not held in view of the fact that the court had all of the materials, including the complete record of the proceedings below, for consideration well in advance of the hearing date. To some extent, the brevity of the proceedings was attributable to the fact that no one appeared to object to the amalgamation. That the decree was, in effect, entered by default does not automatically vitiate it. Restatement (Second) of Conflicts, § 98, Comment i (1971); see Somportex Ltd. v. Philadelphia Chewing Gum Corp., supra.
C. Trial before a court of competent jurisdiction.
The Zambian Companies Ordinance, §§ 14-18, vests jurisdiction to approve reductions of capital in the High Court of Zambia. Therefore, that court was competent to hear the matter and to adjudicate it. British and American Trustee and Finance Corporation v. Couper, (1894) Appeal Cases 399 (H.L.). There is no suggestion in the record that the High Court lacked competence to approve this reorganization.
D. Trial conducted upon regular proceedings.
RST’s petition for confirmation of its reduction of capital was held on August 14, 1970, before the Honorable S. W. Magnus. There is no indication of any irregularity in the proceedings. 65 ' Mr. Justice Magnus had available, in addition to the proxy materials, the records of the shareholders’ votes, Mr. Kohn’s letter containing the various objections, the briefs, motions, pleadings, transcripts, exhibits, and the opinions filed in the action brought in the district court. These documents clearly alerted the High Court to the various contentions of unfairness and allegations of illegality and breaches of fiduciary duty. On that record and the testimony of partners in Cravath, Swaine & Moore and in Kuhn, Loeb, the High Court confirmed the reorganization, expressly holding that it was “fair and reasonable to all the shareholders of the Company.”
E. Proceeding following due citation.
Plaintiff was given personal notice of the hearing in the High Court and of his right to attend and object. At one point, the district judge specifically requested plaintiff to consider attending. In addition, full notice of the hearing, of the shareholders’ rights, and of the binding effect of the judgment of the High Court appeared in the proxy materials as well as in leading newspapers in America, London, Zambia, and Johannesburg. This elaborate notification appears to comply fully with the due process requirements promulgated by the Supreme Court in Mullane v. Central Hanover Bank and Trust Co., 339 U.S. 306 , 70 S.Ct. 652 , 94 L.Ed. 865 (1950). Plaintiff made an advertent decision not to attend the hearing, and no valid justification for such refusal appears in the record.
F. Trial under a system of jurisprudence likely to secure an impartial administration of justice.
The record shows that Zambia is governed in accordance with a constitution approved by the British and Northern Rhodesian governments prior to its be *305 ing granted independence. The judiciary consists of the Court of Appeals, the High Court, and subordinate and local courts. In many respects, the legal structure of Zambia is similar to that of Britain. Many of the laws of Zambia have been drawn from British counterparts, and in the absence of express change, British common law is controlling. The Zambian law governing the fiduciary duties of a corporation, its officers, directors and shareholders, and the concept of fairness, is Jiot substantially different from that of either Brit-tain or the United States. Specifically, in a reorganization of this nature, the High Court, despite its wide discretion, must be satisfied that the plan is fair and equitable to all shareholders before it may confirm the plan. British and American Trustee and Finance Corporation v. Couper, (1894) Appeal Cases 399 (H.L.); Magnus & Estrin, Companies Law and Practice (4th ed. 1968). There is nothing here which indicates that the Zambian system of jurisprudence would be unfair to non-Zambians asserting claims in the Zambian courts.
G. No evidence to demonstrate prejudice in the court or fraud in the procuring of the judgment.
The record is completely barren of even a suggestion that the High Court of Zambia was prejudiced in favor of the RST management or against any group of shareholders. Nor is there any evidence of direct fraud upon the Zambian court resulting in the judgment under consideration here. The Supreme Court has stated that these matters must be proved by competent evidence, and that mere eonclusory allegations are insufficient to attack a foreign decree. Ritchie v. McMullen, 159 U.S. 235 , 16 S.Ct. 171 , 40 L.Ed. 133 (1895). Even assuming that the shareholder vote was procured by fraud, such fraud would not contaminate the decree since all of plaintiff’s allegations and the record of the district court were before the High Court prior to its decision.
Similarly, there is no evidence of prejudice against non-Zambians intrinsic to Zambian laws or jurisprudence or in any other regard. Nor has there been demonstrated any special reason why the Zambian judgment ought not be accorded the comity of the United States. Furthermore, since federal courts may look to local law regarding matters o'f fairness and Zambian law with regard to fairness and fiduciary responsibilities is not materially different from ours, it surely has not been demonstrated that the acceptance of comity would be contrary or prejudicial to the interest of this nation.
Accordingly, the district court should have recognized the judgment of the High Court insofar as it determined the fairness of the amalgamation. The remaining question of this inquiry is the extent to which the Zambian decree es-tops shareholders from complaining about the fairness of the transaction. The Restatement of Conflicts indicates that “[n]ormally an American court would apply the foreign rules as to these matters if these rules are substantially the same as the rules of the American court.” Restatement (Second) of Conflicts, § 98, Comment f (1971).
The Zambian Companies Ordinance provides that if no appeal is taken, the order of the court confirming the reorganization and a minute showing of the details shall be registered by the Registrar of Companies, and “his certificate shall be conclusive evidence that all the requirements of this Ordinance with respect to reduction of share capital have been complied with * * * § 19(4). This is comparable to Section 69(4) of the Companies Act of 1948. Section 69(4) has been interpreted to bar attack on a reduction of capital where a company had no power under its articles of incorporation to reduce capital, Re Walker and Smith Ltd. (1903), 72 L.J. Ch. 572, or where a special resolution authorizing reduction of capital had not been properly passed, Ladies’ Dress Association v. Pulbrook [1900] 2 Q.B. 376 (C. A.). The conelusiveness of the Registrar’s certificate reaches all matters concerned with the reduction of capital. *306 Walker v. Peterson, (1933) South African Law Reports (Appeals Division) 23. 66
The conclusion that the decree bars further inquiry on the merits is essentially similar to the results reached in this country in reorganization proceedings under the Bankruptcy Act or the Public Utilities Holding Company Act of 1935, where it has been held that a final decree of a reorganization court binds all shareholders, whether or not they appeared in the court, Chicot County Drainage District v. Baxter State Bank, 308 U.S. 371 , 60 S.Ct. 317 , 84 L.Ed. 329 (1940), or whether they subsequently allege that the officers and directors of the corporation had formulated and obtained approval of a fraudulent reorganization plan. Nichols v. Alker, 231 F.2d 68 (2d Cir.), cert. denied, 352 U.S. 829 , 77 S.Ct. 42 , 1 L.Ed.2d 51 (1956). In King v. Realty Mortgage Co., 107 F.2d 90 (5th Cir. 1939), cert. denied, 309 U.S. 673 , 60 S.Ct. 712 , 84 L.Ed. 1018 (1940), it was held that a preferred shareholder who was notified of each step in a receivership proceeding, and who made no objection during dissolution and reorganization, could not thereafter attack the proceedings and decrees in subsequent suits. Therefore, there does not appear to be any policy reason which would dictate the non-application of Zambian law as to the effect of its decree.
For these reasons, plaintiff should be estopped by the Zambian judgment from asserting any unfairness in the amalgamation transaction. Thus even if violations of the federal securities laws have been established, both logic and comity require that the cause be remanded to the trial judge to fashion relief not inconsistent with the Zambian determination of fairness.
IV. FURTHER HEARINGS ON REMEDY
The entire panel agrees that the district court should hold no further hearings on remedy. However, the issue of the propriety of the district court’s order directing such hearings despite the stipulation is of such importance that it merits some discussion. 67
On the day set for trial, while the jurors were being selected, the district court suggested that if the parties would agree to a waiver of trial by jury, he would sever the issues of liability and damages. It was in this setting that the defendants responded they would waive a jury trial only if the issues of damages and liability would be tried together. The parties then entered into a written stipulation, specifically approved by the judge, whereby the jury trial was waived on condition that the matter be heard and determined in a “single unitary final hearing.” 68 Based on this written understanding, the case was tried and the “single unitary final hearing” was concluded on November 3, 1970, when all parties rested. The record was officially closed on November 16, 1970 because of some questions regarding documents.
*307 The district court filed its opinion and order on November 25, 1970. AMAX and RST filed their notices of appeal from the judgment on December 2, 1970, within the allowable period. 69 On December 3, 1970, plaintiff filed a “Motion to Amend and Supplement the Judgment”, under Rule 59(e) of the Federal Rules of Civil Procedure. At this point, it was clear that all parties considered the district court’s order of November 25, 1970, to be a judgment. 70 This Court then remanded the cause to the district court to allow it to rule on plaintiff’s motion. 71 The district court granted plaintiff’s motion and entered a series of orders amending the judgment of November 25, 1970, one requiring a further hearing as to damages and other relief. 72 It is the order requiring a further hearing on damages to which defendants object.
It is a well-recognized rule of law that valid stipulations entered into freely and fairly, and approved by the court, should not be lightly spt aside. E. g. Fenix v. Finch, 436 F.2d 831 (8th Cir. 1971); Henry v. Comm’r, 362 F.2d 640 (5th Cir. 1966); Barst

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/8887674. Public record. Not legal advice.