Birnbaum v. Newport Steel Corp.

Newport Steel Corporation was controlled by Russell Feldman (defendant), a director and holder of 40 percent of the company’s stock. Thousands of small investors held the remainder of Newport’s stock. In June 1950, Follansbee Steel Corporation proposed a merger with Newport which would have been highly profitable to Newport’s shareholders. Feldman and the other directors of Newport (defendants), whom Feldman controlled, rejected Follansbee’s offer. Feldman instead sold his Newport stock to Wilport Company (defendant) at twice the market rate. Wilport, a consortium of manufacturers, intended to use Newport’s production capacity as a captive supply of steel during an international shortage. Prior to the sale of his stock, Feldman wrote to Newport’s shareholders and stated that the negotiations with Follansbee had been terminated due to an uncertain internal situation. After the sale, the incoming president of Newport informed the shareholders of Feldman’s sale of stock but did not disclose the sale price or Wilport’s intentions with the company. A group of shareholders of Newport brought a derivative suit on behalf of the corporation against Feldman, the other directors, Wilport, and Wilport’s new directors and officers. They alleged that a fraud had been perpetrated upon the shareholders of Newport in connection with the sale of Feldman’s stock, in violation of SEC Rule 10b-5. The trial court granted the defendants’ motion to dismiss, holding that Rule 10b-5 protected only purchasers or sellers of stock. The shareholders appealed.