Pittsburgh Terminal Corp. v. Baltimore & Ohio R.R. Co.

In 1956 the Baltimore & Ohio Railroad Company (B & O) (defendant) issued convertible debentures that could be converted into 10 shares of B & O stock for every $1,000 of debenture face value. The debenture indenture stated that B & O would notify the debenture holders before paying a dividend on its common stock, giving the holders an opportunity to convert their debentures into common stock before the dividend was issued. B & O had a wholly owned subsidiary, Mid-Allegheny Corporation (MAC). In 1977 B & O decided distribute MAC stock to its common shareholders. If the convertible-debenture holders had decided to convert their debentures to common stock prior to the dividend of MAC stock, B & O would have had to register the dividend with the Securities and Exchange Commission. To avoid the registration, B & O decided to announce the dividend of MAC stock on the same day the dividend was recorded, depriving the debenture holders of the opportunity to convert their debentures into common stock in time to receive the dividend. A group of debenture holders (the plaintiff debenture holders) (plaintiffs) filed a lawsuit in federal district court, alleging that B & O had violated § 10(b) of the Securities Exchange Act of 1934 by failing to timely notify them of the dividend. The district court held that B & O had not violated § 10(b) because it had no duty to disclose the dividend to the convertible-debenture holders. The plaintiff debenture holders appealed.