421 U.S., at 737
In 1963 the United States filed a civil antitrust action against Old Blue Chip Stamp Co., a company providing trading stamps to retailers, and nine retailers who owned 90 percent of its shares.1
In 1967 the action was terminated by entry of a consent decree.2 The decree contemplated a plan of reorganization whereby Old Blue Chip would merge into a newly formed corporation, Blue Chip Stamps.3 The holdings of the majority shareholders would be reduced.4 The new company would offer a substantial number of its shares of common stock to retailers who had used the stamp service in the past but were not shareholders.5 The offering was to be proportional to past stamp usage and packaged in units consisting of common stock and debentures.6
The reorganization plan was carried out.7 The offering was registered with the Securities and Exchange Commission under the Securities Act of 1933.8 A prospectus was distributed to all offerees as required by section 5 of that Act.9 Somewhat more than 50 percent of the offered units were actually purchased.10 In 1970, two years after the offering, Manor Drug Stores, a former user of the stamp service and therefore an offeree of the 1968 offering, filed suit in the United States District Court for the Central District of California against Old and New Blue Chip, eight of the nine majority shareholders of Old Blue Chip, and the directors of New Blue Chip.11
The complaint alleged that the prospectus prepared and distributed in connection with the offering was materially misleading in its overly pessimistic appraisal of Blue Chip's status and future prospects.12 It further alleged that Blue Chip intentionally made the prospectus overly pessimistic.13 This was done to discourage the offerees from accepting the offer.14 The goal was so that the rejected shares might later be offered to the public at a higher price.15 Class members because of and in reliance on the false and misleading prospectus failed to purchase the offered units.16 The complaint sought on behalf of the alleged class some $21,400,000 in damages representing the lost opportunity to purchase the units, the right to purchase the previously rejected units at the 1968 price, and some $25,000,000 in exemplary damages.17
The district court dismissed the complaint for failure to state a claim upon which relief might be granted.18 On appeal to the United States Court of Appeals for the Ninth Circuit, a divided panel reversed the district court.19 After the Ninth Circuit denied rehearing en banc, the Supreme Court granted certiorari.20
Whether offerees of a stock offering, made pursuant to an antitrust consent decree, who neither purchased nor sold any of the offered shares, may maintain a private cause of action for money damages under Rule 10b-5 based on allegations that the prospectus was materially misleading?21
The Birnbaum rule limits the plaintiff class in private damages actions under section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 to actual purchasers and sellers of securities.22 The statutory language requires fraud in connection with the purchase or sale of any security.23 Congress provided express remedies limited to purchasers or sellers in parallel provisions of the 1933 and 1934 Acts.24
No. Manor Drug Stores was a former user of the stamp service and an offeree of the 1968 offering but neither purchased nor sold any of the offered shares.2526 The complaint alleged a materially misleading prospectus intentionally designed to discourage acceptance of the bargain offer.27 Yet the established facts show no actual purchase or sale occurred and the class sought damages for the lost opportunity to buy.28 The Birnbaum rule, consistently applied by lower courts for over two decades and supported by the text of section 10(b), the legislative history including failed attempts to expand the language to attempts to purchase or sell, and policy concerns over vexatious litigation and unverifiable oral testimony, bars standing for such offerees.29
The consent decree created no enforceable contractual rights for nonparties like Manor Drug Stores, distinguishing them from holders of puts, calls, or options who qualify as purchasers or sellers under the Act's definitional provisions.30
Offerees who neither purchased nor sold the securities may not maintain a private cause of action for money damages under Rule 10b-5.
Related opinions on this issue
Joined by Stewart And Marshall, Jj.
Justice Powell concurred to emphasize that the critical statutory phrase in section 10(b) and Rule 10b-5 is in connection with the purchase or sale of any security.31
He observed that respondent was a mere offeree with no contractual right to purchase.32
The definitional provisions of the 1934 Act grant purchaser or seller status to holders of puts, calls, options, and other contractual rights or duties to purchase or sell securities but not to offerees.33
Powell noted that extending liability to offers would invite subjective claims by plaintiffs who failed to purchase securities that later appreciated.34
The offeror would be severely handicapped in challenging the predictable testimony about what the plaintiff would have done.35
He concluded that any such far-reaching change belongs to Congress rather than the courts.36
Joined by Douglas And Brennan, Jj.
Justice Blackmun dissented, contending that the Birnbaum rule is an arbitrary principle of standing that the Court should abandon in favor of a more general test of nexus between the alleged fraud and the sale or purchase of a security.37
He argued that the complaint alleged a deceptive scheme in connection with the court-ordered sale of securities to former users.38
The essential test of a valid Rule 10b-5 claim must be the showing of a logical nexus between the alleged fraud and the sale or purchase of a security.39
Blackmun criticized the majority's reliance on policy considerations about vexatious litigation as speculative.40
He urged that sensible standards of proof and damages would evolve to separate genuine claims from unfounded ones.41