[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
JULY 30, 2010
No. 09-12999
JOHN LEY
________________________
CLERK
D. C. Docket No. 06-00637-CV-ORL-35-KRS
GENE BADGER,
JOHN LOVE,
MARVIN EVANS,
SID BANACK,
JOHN WILLIS, all on behalf
of themselves and all others
similarly situated,
Plaintiffs-Appellees,
versus
SOUTHERN FARM BUREAU LIFE
INSURANCE COMPANY, a
Mississippi Corporation,
Defendant-Appellant.
________________________
Appeal from the United States District Court
for the Middle District of Florida
_________________________
(July 30, 2010)
Before EDMONDSON, CARNES and ANDERSON, Circuit Judges.
ANDERSON, Circuit Judge:
Plaintiffs-Appellees Badger et al., some of the shareholders of Plaintiffs’
Shareholders Corporation (“PSC”), brought this shareholders’ derivative suit on
behalf of PSC against Defendant-Appellant Southern Farm Bureau Life Insurance
Company (“Southern Farm”). The charges involve federal securities fraud, in
violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and
Securities Exchange Commission (“SEC”) Rule 10b-5, 17 C.F.R. § 240.10b-5, and
Florida common-law fraud. The charges stem from Southern Farm’s purchase of a
debenture held by PSC, which was PSC’s primary asset. In the course of
negotiations, Southern Farm gave to PSC an actuarial valuation it had
commissioned of the debenture and stated that the valuation represented a “fair
price.” After PSC and Southern Farm settled on a price higher than Southern
Farm’s valuation, PSC issued a meeting notice and proxy statement to its
shareholders, who subsequently voted for the sale.
Plaintiffs were PSC shareholders who were opposed to the sale. They
brought a shareholders’ derivative suit against Southern Farm for federal securities
fraud and Florida common-law fraud, alleging that Southern Farm’s valuation was
misleading because it did not take into account certain leverage that PSC had in
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the deal, and that Southern Farm was liable for failing to disclose the facts giving
rise to PSC’s leverage to PSC’s shareholders. The jury found Southern Farm
liable in the amount of $31.7 million. Southern Farm now appeals, claiming, inter
alia, that Jury Instruction 11 contained incorrect statements of law and that the
proof underlying one basis of liability was legally insufficient. For the reasons set
out below, the judgment of the district court must be reversed with regard to both
the federal securities law claim and the Florida common-law fraud claim, and the
verdict of the jury cannot stand.
I. FACTS AND PROCEDURAL HISTORY
Southern Farm is a privately-held life insurance company owned by ten
investment corporations located in ten states, including Florida. The common
stock of each investment corporation is held by the Farm Bureau Federation in
each of those respective states. The corporate relations between these various
entities are governed by a Charter Treaty that: (1) restricts the dividends that each
investment corporation can retain in excess of $5,700; (2) limits the transfer of
Southern Farm and investment corporation stock; and (3) requires unanimous
approval of any amendment, including any extension of the Treaty beyond its
expected expiration date.
PSC acquired the debenture at the center of this case as a result of prior
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litigation, the full details of which are not relevant here. The debenture was issued
by Florida Farm Bureau Holding Corporation (“Florida Holding”). Pursuant to the
terms of the debenture, its owner, PSC, was entitled to 27.7% of any dividends
that Florida Holding received from Southern Farm, and upon termination of the
Charter Treaty PSC would be entitled to receive 27.7% of Florida Holding’s stock.
In 2000, Southern Farm began to explore extending the Charter Treaty, an
action that would require unanimous approval of the ten state Farm Bureau
Federations. In 2004, Southern Farm sought Florida Holding’s consent to extend
the Treaty. PSC’s attorney, Bruce Brashear, formally objected to the extension of
the Charter Treaty without the approval of PSC shareholders. PSC shareholders’
right to approve the Charter Treaty extension arose in connection with its
ownership of the debenture. Florida Holding’s board resolved that it would
consent to the Charter Treaty extension only if Southern Farm first purchased the
debenture from PSC. In turn, Southern Farm’s management decided to
recommend purchasing PSC’s debenture.
Brashear represented PSC in negotiations with Southern Farm’s general
counsel regarding the sale of the debenture. In the course of negotiations,
Southern Farm offered $3.3 million for the debenture based on a valuation
performed by the actuarial firm Towers Perrin Tillinghast (“the Valuation”). The
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Valuation was calculated by applying a discount rate of 14% to the likely value of
the 27.7% payout of the debenture in 2033, when the Charter Treaty was set to
expire. Southern Farm’s counsel told Brashear that the Valuation reflected a “fair
price.” PSC made a counteroffer of $4.4 million, and the companies agreed to the
sale at that price.
Because Florida law requires a corporation to obtain shareholder approval
in order to sell a principal asset, Fla Stat. § 607.1202, Brashear prepared and
mailed to PSC shareholders a meeting notice and proxy statement detailing the
proposed debenture sale. The proxy statement did not include the facts that
Southern Farm wanted to extend the Charter Treaty or that Florida Holding had
conditioned its consent to the extension on Southern Farm’s purchase of the
debenture. PSC shareholders met on October 15, 2004, and approved the sale by a
10-to-1 margin. Plaintiff Badger and several other PSC shareholders voiced their
opposition both before and at the meeting.
Following the sale, Badger and other dissenters sued Southern Farm in this
shareholders’ derivative action, claiming that Southern Farm failed to disclose
certain material facts about the debenture sale to the shareholders and that, as a
result, PSC received too little consideration in exchange for the debenture.
Specifically, the Plaintiffs alleged:
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The Defendant represented to the Plaintiffs that the Tillinghast
Valuation of the Convertible Debenture represented a fair price for
the purchase of the Debenture, but the Defendant omitted the
following information:
(a) that [Southern Farm] was attempting to extend the Charter Treaty and
that it could not do so without the consent of the debenture holder;
(b) that Florida Holding and the Florida Federation would only consent
to the extension of the Charter Treaty if [Southern Farm] first
purchased the debenture;
(c) that the Tillinghast Valuation did not consider (i) the Defendant’s
attempts to extend the Charter Treaty, (ii) Plaintiffs’ control of any
such extension, and (iii) [Southern Farm]’s need to purchase the
debenture because Florida Holding and Florida Federation would
only consent to the extension of the Charter Treaty if [Southern Farm]
first purchased the debenture;
(d) that contemporaneous with [Southern Farm]’s purchase of the
debenture, it purchased a future income interest held by the Alabama
Farm Bureau Federation using a discount rate of 4.9%; and
(e) that in order to obtain the consent of the Texas Farm Bureau to extend
the Charter Treaty, [Southern Farm] agreed to increase payouts to all
ten (10) farm bureau federations by $82 million.
Jury Instructions, Dkt. 208 at 11-12, 19-20.
Using these alleged omissions as the basis for their claims, Plaintiffs sued
Southern Farm for violations of Rule 10b-5 and Florida common law. Jury
Instructions 9 and 10 detailed the elements of these claims respectively. Jury
Instruction 9 stated that, in order to prevail on the Rule 10b-5 claim, the Plaintiffs
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had to prove each of the following facts by a preponderance of the evidence:
First: That the Defendant’s conduct in connection with the
transaction violated Rule 10b-5(b) by making a false
representation of a material fact, or omitting a material
fact;
Second: That the Defendant acted “knowingly,” as defined
herein;
Third: That the Plaintiffs “justifiably relied” upon the
Defendant’s conduct; and
Fourth: That the Plaintiffs suffered damages as a result of the
Defendant’s wrongful conduct.
Jury Instructions, Dkt. 208 at 10-11. Jury Instruction 10 stated that, in order
to prevail on the common-law fraud claim, the Plaintiffs had to prove each
of the following facts by a preponderance of the evidence:
First: That the Defendant made one or more of those alleged
misrepresentations or omissions;
Second: That the misrepresentation or omission related
to a material existing fact;
Third: That the Defendant knew at the time it made the
misrepresentation that it was false or acted with reckless
disregard for its truth or falsity or that the omission made
other statements materially misleading;
Fourth: That the Defendant intended to induce the Plaintiffs to
rely and act upon the misrepresentation or omission; and
Fifth: That the Plaintiffs “reasonably” and “justifiably” relied
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upon the misrepresentation or omission and the Plaintiffs
suffered injury or damage as a result.
Jury Instructions, Dkt. 208 at 20-21.
The jury found Southern Farm liable for both a Rule 10b-5 violation and
common-law fraud, and assessed compensatory damages of $31.7 million. The
district court denied Southern Farm’s renewed Motion for Judgment as a Matter of
Law and Motion for New Trial. The district court then amended the judgment to
add interest. This appeal followed.
II. STANDARD OF REVIEW
“Our role in reviewing a trial court’s jury instructions is to assure that the
instructions show no tendency to confuse or to mislead the jury with respect to the
applicable principles of law.” S.E.C. v. Yun, 327 F.3d 1263, 1281 (11th Cir. 2003)
(internal quotation marks omitted). We review jury instructions de novo to
determine whether they misstate the law or mislead the jury to the prejudice of the
party who objects to them. Morgan v. Family Dollar Stores, Inc., 551 F.3d 1233,
1283 (11th Cir. 2008). “We will not disturb a jury’s verdict unless the charge,
taken as a whole, is erroneous and prejudicial.” Yun, 327 F.3d at 1281. “As long
as the instructions accurately reflect the law,” we afford the district court “wide
discretion as to the style and wording employed in the instructions.” Morgan, 551
8
F.3d at 1283 (internal quotation marks omitted).
III. DISCUSSION
A. Jury Instruction 11
Jury Instruction 11, the accuracy of which is the central issue in this appeal,
provides as follows:
Ordinarily in an arms length transaction, a third party buyer or seller
is free to rely on the board of a corporation to disclose information to
the corporation, including to the corporation’s shareholders. In this
regard, any disclosures by the third party to a director or an agent of
the corporation or other knowledge obtained by the director or agent,
where that director or agent is acting in his or her capacity as a board
member or agent, is imputed to the board and, thus, discharges the
third party’s duty of disclosure if the disclosure is of all material
information and is not materially misleading.
In this case, shareholder approval was required to approve this
transaction. Therefore, if the Plaintiffs prove that the Defendant
knew or was severely reckless as to whether material information had
not been fully disclosed to the shareholders or that the disclosures
made by the Defendant to the corporation were materially misleading,
then the Defendant had a duty to disclose the material information
directly to the shareholders, to insure that the shareholders got proper
disclosure or to decline to enter the transaction.
Jury Instructions, Dkt. 208 at 25–26.
Southern Farm argues that Jury Instruction 11 is erroneous in two respects.
First, Southern Farm maintains that Instruction 11 incorrectly assigned liability if
Southern Farm merely “knew or was severely reckless as to whether material
9
information had not been fully disclosed to [PSC] shareholders,” without also
requiring the jury find that Southern Farm had a legal duty to disclose that
information. Second, Southern Farm argues that, even if Southern Farm had a
duty to disclose certain material information in the course of its transaction with
PSC, Instruction 11 erred in instructing the jury that the duty ran directly to PSC
shareholders, rather than to PSC’s officers or board of directors. We will address
each objection in turn.
1. Southern Farm’s Duty to Disclose
Southern Farm argues that Instruction 11 erroneously omitted a requirement
that the jury find that Southern Farm had a legal duty to disclose material facts to
PSC. SEC Rule 10b-5, promulgated under the Securities Exchange Act of 1934,
15 U.S.C. § 78j, states:
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,
a. To employ any device, scheme, or artifice to defraud,
b. 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
c. To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon any
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person,
in connection with the purchase or sale of any security.
17 C.F.R. § 240.10b-5.
Although Rule 10b-5 could be read broadly to require disclosure of any
nonpublic information about a security that is the subject of a transaction, the
Supreme Court has held that “a duty to disclose under § 10(b) does not arise from
the mere possession of nonpublic market information.” Chiarella v. United States,
445 U.S. 222, 235, 100 S. Ct. 1108, 1118 (1980). Rather, the Chiarella Court
clarified the scope of 10b-5, holding that in order to be liable under that section for
failing to disclose a material fact, an entity must have a prior duty to disclose that
fact. Id. As under the common law, such a duty “arises when one party has
information ‘that the other [party] is entitled to know because of a fiduciary or
other similar relation of trust and confidence between them.’” Id. at 228, 100 S.
Ct. at 1114 (quoting Restatement (Second) of Torts § 551(2)(a) (1976)). The
Court noted, for instance, that “a purchaser of stock who has no duty to a
prospective seller because he is neither an insider nor a fiduciary has been held to
have no obligation to reveal material facts” in connection with the stock purchase.
Id. at 229, 100 S. Ct. at 1115 (citing Gen. Time Corp. v. Talley Indus., Inc., 403
F.2d 159, 164 (2d Cir. 1968), cert. denied, 393 U.S. 1026, 89 S. Ct. 631 (1969));
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see also Roder v. Alpha Indus., Inc., 814 F.2d 22, 26 (1st. Cir. 1987) (recognizing
the logical corollary of Chiarella that “[e]ven if information is material, there is no
liability under Rule 10b-5 unless there was a duty to disclose it”). Thus, there can
be no liability for a failure to disclose under Rule 10b-5 or the common law in the
absence of a duty to disclose.
Following Chiarella, this Court has also recognized that “a defendant’s
omission to state a material fact is proscribed only when the defendant has a duty
to disclose.” Ziemba v. Cascade Int’l, Inc., 256 F.3d 1194, 1206 (11th Cir. 2001)
(quoting Rudolph v. Arthur Andersen & Co., 800 F.2d 1040, 1043 (11th Cir. 1986)
(alteration omitted)). See also Williams v. Dressler Indus., Inc., 120 F.3d 1163,
1173 (11th Cir. 1997) (recognizing in dicta that “a duty to disclose . . . does not
exist absent a fiduciary relationship or some other similar relationship of trust and
confidence”). In Ziemba, we noted that this duty arises both “‘where the law
imposes special obligations, as for accountants, brokers, or other experts’” and
“‘[w]here a defendant’s failure to speak would render the defendant’s own prior
speech misleading or deceptive.’” 256 F.3d at 1206 (quoting Rudolph, 800 F.2d at
1043).
In this case, the parties agree that Southern Farm and PSC were engaged in
an arm’s-length transaction; PSC has not asserted the existence of a fiduciary
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relationship or other similar relationship of trust and confidence between PSC
shareholders and Southern Farm. Rather, at trial, PSC proceeded on the theory
that both the Valuation and statement that the Valuation represented a “fair price”
constituted prior speech by Southern Farm that was misleading or deceptive
without the omitted information. PSC argued that the legal duty to disclose arose
because the omissions made the Valuation and the fair price statement materially
misleading. We are doubtful that a buyer’s assessment of the value of a seller’s
debt instrument, or a buyer’s accompanying statement that the assessment is fair,
could ever constitute misleading or deceptive prior speech giving rise to a duty to
disclose. See Kidwell ex rel. Penfold v. Meikle, 597 F.2d 1273, 1295 (9th Cir.
1979) (purchaser of corporate assets owed no duty to disclose material facts to
members of selling corporation, because selling corporation “should be presumed
to have known as much about its own assets and affairs” as purchaser in an
arm’s-length deal); see also Restatement (Second) of Torts § 542 cmt. d (“If the
subject matter of the transaction is one upon which both parties have an
approximately equal competence to form a reliable opinion, each must trust to his
own judgment and neither is justified in relying upon the opinion of the other.”).
Indeed, we are aware of no case suggesting that, in an arm’s-length transaction,
the buyer’s opinion of the value of the seller’s asset, unaccompanied by a
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misstatement of fact on which the value is based, could constitute an affirmative
statement which could be rendered misleading by an omission. We need not
decide, however, whether the Valuation or accompanying statement could have
given rise to such a duty to disclose in this case because errors in Jury Instruction
11 require reversal.
Instruction 11 imposed on Southern Farm a duty to disclose certain material
information to PSC shareholders if Southern Farm “knew or was severely reckless
as to whether material information had not been fully disclosed to the shareholders
or that the disclosures made by [Southern Farm] to [PSC] were materially
misleading.” Thus, Instruction 11 allowed the jury to hold Southern Farm liable
for failing to disclose material information to PSC shareholders either if: (1)
Southern Farm “knew or was severely reckless as to whether material information
had not been fully disclosed to the shareholders” or (2) Southern Farm had made
disclosures to PSC that were “materially misleading.” The first condition of this
disjunction permitted the jury to find Southern Farm liable for merely knowing
that material information had not been disclosed to PSC shareholders, even if
Southern Farm itself had no legal duty to disclose that information, i.e., even if
Southern Farm had no duty as described in Chiarella and its progeny. Because
Instruction 11 omitted the requirement that Southern Farm must have had a legal
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duty to disclose material information to PSC shareholders in order to be held liable
under Rule 10b-5 for withholding that information, the instruction contains an
incorrect statement of the law under Chiarella and our own subsequent cases.
Although the foregoing error in Instruction 11 is clear, at oral argument
Plaintiffs argued that Southern Farm never objected in the district court to the
instruction on this specific ground. We have carefully reviewed those portions of
the record cited by Southern Farm as evidence that it preserved its objection to
Instruction 11 and think the objection probably was not properly preserved. In
general, a party must object to a jury instruction prior to deliberations in order to
preserve the issue on appeal, and the failure to make a timely objection waives the
right to raise the issue on appeal. Landsman Packing Co. v. Cont’l Can Co., 864
F.2d 721, 726 (11th Cir. 1989). Thus, if Southern Farm did not make this
objection in the district court, it could not prevail on this particular challenge on
appeal unless it could show that the “error affects substantial rights.” Fed. R. Civ.
P. 51(d)(2) (“A court may consider a plain error in the instruction that has not been
preserved . . . if the error affects substantial rights.”). Although this error may
well have been “responsible for an incorrect verdict, leading to substantial
injustice,” Farley v. Nationwide Mut. Ins. Co., 197 F.3d 1322, 1330 (11th Cir.
1999) (internal quotation omitted), we need not decide whether the stringent
15
standard for plain error is satisfied in this case, because Southern Farm’s other
challenge to Instruction 11 was clearly preserved, and is clearly meritorious.
Thus, we now turn to Southern Farm’s argument that Instruction 11
erroneously imposed upon it a duty to disclose material information directly to
PSC’s shareholders.
2. Southern Farm’s Duty to Disclose Directly to PSC Shareholders
Southern Farm further argues that, even if it had a duty to disclose certain
material facts to PSC in the course of negotiations regarding the debenture
purchase,1 Jury Instruction 11 erred by imposing on Southern Farm a duty to
disclose those facts directly to PSC shareholders. Any duty to disclose, Southern
Farm argues, would have been satisfied by disclosure to PSC’s officers or
directors. This objection was clearly preserved before the district court. We agree
that Instruction 11 was erroneous for this reason, and accordingly reverse the
judgment on this ground.
Instruction 11 states, in relevant part:
[I]f the Plaintiffs prove that the Defendant knew or was severely
reckless as to whether material information had not been fully
disclosed to the shareholders or that the disclosures made by the
Defendant to the corporation were materially misleading, then the
1
Of course, the preceding section of this opinion suggests that there probably was
no such owed duty to PSC.
16
Defendant had a duty to disclose the material information directly to
the shareholders, to insure that the shareholders got proper disclosure
or to decline to enter the transaction.
The district court formulated Instruction 11 upon determining that “[t]he law
imposes a duty to make full disclosure to whomever the investor or decision maker
is in this case.” Trial Tr., Dkt. 256 at 151. The court therefore reasoned that,
because the shareholders had the right to vote on the debenture sale, Southern
Farm’s duty to disclose material information in relation to the sale ran directly to
the shareholders.
This is an incorrect statement of the law. In fact, courts have uniformly
declined to find a duty to disclose running from one party in an arm’s-length
securities transaction to the shareholders of the counterparty to the transaction,
absent some fiduciary or other special relationship between them. See Regents of
Univ. of Ca. v. Credit Suisse First Boston, Inc., 482 F.3d 372, 384 (5th Cir. 2007)
(stating that general duty of banks “not to engage in a fraudulent scheme” did not
create on behalf of banks a duty to disclose to a company’s investors a series of
transactions between banks and the company, because banks were not fiduciaries
and were not otherwise obligated to the investors); Arent v. Distrib. Scis., Inc.,
975 F.2d 1370, 1373-74 (8th Cir. 1992) (holding that party to a potential merger
had no duty to disclose to counterparty’s shareholders fact that merger would fall
17
through because “unrelated parties to a merger agreement normally deal at arms’
length until the merger is consummated, unless a different relationship is defined
in the agreement to merge”); Kidwell, 597 F.2d at 1295 (noting that purchaser of
corporate assets owed no duty to disclose material facts to members of selling
corporation, in part because selling corporation “should be presumed to have
known as much about its own assets and affairs” as purchaser in an arm’s-length
deal); Wright v. Heizer, 560 F.2d 236, 248 (7th Cir. 1977) (holding that corporate
lender and shareholder who did not control nor serve on the board of the
corporation was entitled to act solely in its own interest in dealing with the
corporation’s management, whose responsibility it was to advise the corporation’s
shareholders); In re Digital Island Sec. Litig., 223 F. Supp. 2d 546, 551-52 (D.
Del. 2002) (citing Sheehan, infra, to hold that “an acquiring company owes no
duty to the target shareholders, absent a special relationship”); Sheehan v. Little
Switzerland, Inc., 136 F. Supp. 2d 301, 310 (D. Del. 2001) (holding that, although
the defendants committed an omission giving rise to a duty to disclose, only the
shareholders’ own board of directors, not the acquiring corporation, were liable
under § 10b-5 for failure to disclose because the acquiring corporation “owed no
duty to the [] shareholders or the plaintiffs in this case”); Lerner v. FNB Rochester
Corp., 841 F. Supp. 97, 103 (W.D.N.Y. 1993) (stating that an acquiring
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corporation owes no duty of disclosure to target company’s shareholders); Gordon
v. Diagnostek, Inc., 812 F. Supp. 57, 60 (E.D. Pa. 1993) (holding that an acquiring
corporation “owed no special fiduciary responsibility to the shareholders of a
separate corporation whose stock it was planning to acquire as part of an
arms-length transaction”); see also Chiarella, 445 U.S. at 229, 100 S. Ct. at 1115
(“A purchaser of stock who has no duty to a prospective seller because he is
neither an insider nor fiduciary has been held to have no obligation to reveal
material facts.”). In addition to this great weight of authority, we also note that
Plaintiffs cite no precedent for the proposition that, in the absence of some
fiduciary or special relationship, a duty to disclose directly to shareholders could
arise in a situation such as this.
The district court, and Plaintiffs on appeal, relied primarily on Wright v.
Heizer for the proposition that Southern Farm’s duty to disclose the allegedly
omitted material facts ran directly to PSC’s shareholders. The argument is
grounded in Wright’s assertion that “[w]hen shareholder approval is required by
state corporation law . . . it is the shareholders who represent the corporation and it
is they who are entitled to disclosure of all material facts.” 560 F.2d at 247. It
appears the district court reasoned from this statement that if Southern Farm had a
duty to disclose material facts related to the debenture sale, that duty ran directly
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to PSC shareholders because the shareholders were entitled to vote on that
transaction. The Plaintiffs now urge us to accept the same reasoning. The flaw in
the district court’s reasoning is that Wright applied that principle, and imposed
that duty, only when determining the obligations of a defendant who owed a
fiduciary duty to the shareholders. The Plaintiffs’ argument elides important facts
about the relationships between the Wright parties giving rise to the duty to
disclose in that case, and in doing so misstates Wright’s holding.
The Wright plaintiffs, who were minority shareholders of IDC, brought a
derivative action alleging that the defendant, Heizer Corporation, defrauded IDC
in a series of five transactions by failing to make appropriate disclosures about
those transactions. Id. at 245-46. The court determined that Heizer was only
liable for omitting material information concerning the final two transactions
because Heizer exercised voting control over IDC during those transactions, and
therefore occupied a fiduciary position with respect to IDC:
In the first three transactions Heizer was a lender to, and shareholder
of, a corporation it did not control and on whose board it was not
represented. We may assume that as such it was entitled to act solely
in its own interest in dealing with IDC’s management, whose
responsibility it was to advise the shareholders. By the time of the
fourth transaction, however, Heizer had gained voting control of IDC
and had placed two of its officers on IDC’s board of directors. Thus
it stood in a fiduciary position and could no longer act for itself
alone. When Heizer chose to continue its participation in
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communications to the IDC shareholders, it owed them the duty of
full disclosure. As we have already noted, Heizer breached that duty
by failing to disclose any of the material facts concerning the
transaction.
Id. at 248. The rule properly derived from Wright is that a party to a transaction
has a duty to disclose to the counterparty’s shareholders only when failure to
disclose would result in the breach of a fiduciary or other duty.
The Plaintiffs have never asserted the existence of any fiduciary relationship
between Southern Farm and PSC. Thus, Wright does not support the district
court’s conclusion that Southern Farm owed a duty to disclose material
information directly to PSC’s shareholders. The district court’s application of
Wright conflates two distinct questions: (1) whether shareholders are owed
disclosure of certain material facts, and (2) whose duty it is to disclose those facts.
While Wright supports the proposition that PSC shareholders had a right to
disclosure of material facts related to the debenture sale, it does not, contrary to
the district court’s reasoning, support the proposition that such a duty fell to
Southern Farm. Rather, any duty to disclose pursuant to Wright must fall on
parties who occupy a fiduciary or other special relationship to the shareholders. In
this case, such a duty would fall on PSC’s officers and directors rather than on
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Southern Farm.2
In addition to finding no support in the law, the direct disclosure
requirement advocated by PSC also raises practical concerns. The district court’s
rule would have required Southern Farm to circumvent both Brashear, with whom
Southern Farm was negotiating, and the PSC board of directors in order to issue its
own statement to the PSC shareholders. It is unclear whether it is even feasible for
a company such as Southern Farm to make a statement directly to another
company’s shareholders. For example, there is no reason to assume that Southern
Farm even has access to a list of PSC shareholders to which to send such a
statement.
Because it is undisputed that the transaction in this case occurred at arm’s-
length, we need not define the parameters of a buyer’s duty to disclose to
shareholders of a seller’s corporation under circumstances in which the buyer has
conspired with or otherwise exerted improper influence over the seller’s board of
2
Other cases cited by Plaintiffs also fail to persuade us that the direct disclosure
duty described in Wright runs from one party in an arm’s-length transaction to the shareholders
of the counterparty, because each of those cases discussed whether a duty to disclose existed on
the part of shareholders’ own boards of directors, rather than on the part of a disinterested third
party. See, e.g., Ray v. Karris, 780 F.2d 636, 642-43 (7th Cir. 1985) (discussing deception under
Rule 10b-5 in the context of a suit by minority shareholders against board of directors);
Maldonado v. Flynn, 597 F.2d 789, 796 (2d Cir. 1979) (finding no deception for the purposes of
Rule 10b-5 where amendments to stock option plan were validly enacted by a vote of
disinterested board members who had been fully informed of all material facts, and whose
knowledge was therefore attributable to the corporation).
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directors. Here, there is no suggestion that Southern Farm exerted improper
control over PSC’s officers or board of directors, or that Southern Farm conspired
with PSC’s agents to deprive PSC shareholders of material information. Cf.
Schoenbaum v. Firstbrook, 405 F.2d 215, 219 (2d Cir. 1968) (en banc) (affirming
district court’s dismissal of a complaint alleging securities fraud upon determining
that “there is no reason to believe that [the defendant] was in any position to
influence the judgment of the [plaintiff’s board of directors] by any improper
means”). Finally, we note that if PSC’s shareholders believe that they were
materially misinformed with regard to the debenture sale, they are free to sue
PSC’s agents for breaching their fiduciary duties.
In conclusion, Jury Instruction 11’s statement that Southern Farm’s duty to
disclose ran directly to PSC shareholders is an incorrect statement of the law. We
are convinced that this instruction “mis[led] the jury with respect to the applicable
principles of law,” Yun, 327 F.3d at 1281, and requires reversal of the judgment
against Southern Farm.
B. Legal Sufficiency of Proof Underlying Bases of Liability
As an additional ground for reversal, Southern Farm argues that the
judgment below cannot stand because liability was based on Southern Farm
omitting one or more material facts in its disclosures to PSC, yet the evidence is
23
insufficient as a matter of law to show that at least some of those omissions
occurred. The verdict form’s special interrogatories pertaining to the securities
fraud claim asked the jury: “Do you find from a preponderance of the evidence . .
. [t]hat the Defendant’s conduct in connection with the transaction violated Rule
10b-5(b) by making a false representation of a material fact, or omitting a material
fact (as explained in the Court’s instructions)?” Verdict Form: Special Interrogs.,
Dkt. 212 at 1. The jury answered “Yes.” As noted above, the alleged omissions
set forth in the instructions were:
(a) that [Southern Farm] was attempting to extend the Charter Treaty and
that it could not do so without the consent of the debenture holder;
(b) that Florida Holding and the Florida Federation would only consent
to the extension of the Charter Treaty if [Southern Farm] first
purchased the debenture;
(c) that the Tillinghast Valuation did not consider (i) the Defendant’s
attempts to extend the Charter Treaty, (ii) Plaintiffs’ control of any
such extension, and (iii) [Southern Farm]’s need to purchase the
debenture because Florida Holding and Florida Federation would
only consent to the extension of the Charter Treaty if [Southern Farm]
first purchased the debenture;
(d) that contemporaneous with [Southern Farm]’s purchase of the
debenture, it purchased a future income interest held by the Alabama
Farm Bureau Federation using a discount rate of 4.9%; and
(e) that in order to obtain the consent of the Texas Farm Bureau to extend
the Charter Treaty, [Southern Farm] agreed to increase payouts to all
ten (10) farm bureau federations by $82 million.
24
Jury Instructions, Dkt. 208 at 11-12, 19-20. Instruction 9, which set forth the
elements of a § 10b-5 claim, required the jury to find only that the Southern Farm
omitted “one or more”of these material facts. Jury Instructions, Dkt. 208 at 12.
Instruction 10, which set forth the elements of a common-law fraud claim,
expressly instructed the jury that “[i]t is not necessary that the Plaintiffs prove all
of them in order to recover.” Jury Instructions, Dkt. 208 at 20.
Southern Farm argues that the unrefuted evidence shows that PSC’s
attorney, Brashear, had full knowledge of at least two of these alleged omissions.
In light of our holding that Southern Farm did not have a duty to disclose material
facts directly to PSC shareholders, we further hold that it was error to permit the
jury to find liability on the basis of omissions that were known to Brashear, who
was acting as PSC’s agent.
At trial, undisputed evidence showed that Brashear was fully aware of facts
(a) and (b). In fact, upon learning that Southern Farm was attempting to extend
the Charter Treaty, it was Brashear who wrote to Florida Holding to remind it that
it could not vote to extend the Treaty without PSC’s consent. PSC even conceded
at trial that “Mr. Brashear knew the functionality of the debenture as a veto power
over anything that the Federation wanted to do with respect to extending or
altering the value of Florida Holding.” Trial Tr., Dkt. 254 at 185.
25
Because Brashear acted as an agent of PSC in his dealings with both Florida
Holding and Southern Farm, Brashear’s knowledge with respect to those
transactions is imputed to PSC:
The general rule is well established that a corporation is charged
with constructive knowledge, regardless of its actual knowledge, of
all material facts of which its officer or agent receives notice or
acquires knowledge while acting in the course of his employment
within the scope of his authority, even though the officer or agent
does not in fact communicate his knowledge to the corporation.
Am. Standard Credit, Inc. v. Nat’l Cement Co., 643 F.2d 248, 271 n.16 (5th Cir.
1981) (quoting 3 W. Fletcher, Cyclopedia of the Law of Private Corporations s
790, at 12 (rev. perm. ed. 1975)) (alteration omitted).3 Thus, because Brashear
knew “that [Southern Farm] was attempting to extend the Charter Treaty and that
it could not do so without the consent of the debenture holder,” Southern Farm
cannot be held liable for failing to disclose that information to PSC.
The verdict form did not require the jury to state which omission(s)
provided the basis for its liability finding, and it is clear that at least some of the
alleged omissions cannot support the verdict. Unless PSC “can support
submission of each theory of liability submitted to the jury, we must remand the
3
In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc), we
adopted as binding precedent all decisions of the former Fifth Circuit handed down before
October 1, 1981.
26
case for a new trial.” Royal Typewriter Co. v. Xerographic Supplies Corp., 719
F.2d 1092, 1099 (11th Cir. 1983). Because some of PSC’s theories of liability that
are based on certain omissions are legally deficient, and because we cannot know
from the verdict form whether the jury imposed liability on Southern Farm based
on one of these impermissible theories, the judgment of the district court must be
reversed on this additional ground.
For the foregoing reasons,4 we reverse judgment below and remand this case
for proceedings consistent with this opinion.
REVERSED and REMANDED.
4
Because we conclude that there are multiple grounds for reversing the judgment
below, we need not reach Southern Farm’s additional arguments that the jury’s determinations of
scienter, materiality, or damages were against the great weight of the evidence, or that the district
court erred in calculating the rate of prejudgment interest to apply to the damages award.
27