Federal Securities Law Should Protect Some Purchasers of All or Substantially All of a Corporation’s Stock


The federal securities laws were designed to protect purchasers of securities by ensuring adequate disclosure of material information regarding the security, issuer, and selling intermediaries. The author notes that a series of recent federal court decisions has formulated a virtual per se rule disallowing application of the federal securities law protections to transactions involving the purchase of all or substantially all the stock of a business. Although literally such "stock" would be subject to the securities law protections due to its inclusion in the statutory definition of 'Security," these recent decisions have held that acquisition of substantially all of the stock of a business conveys enough management control that disclosure and antifraud protection under the Acts is not warranted The author examines the emergent trend created by these decisions as well as Golden v. Garofolo, a Second Circuit decision which manifests a strong contrary reaction. He also examines the congressional intent behind/federal securities law protections and the true economic reality of investment decision making employed in the purchase of all or substantially all the stock of a business. The author concludes that the analysis employed in the recent trend of decisions and the emergence of a virtual per se rule contradict fundamental premises for federal securities law protections. He reasons that acquisition of management control, rather than being the determinative factor in denying securities law protections, is itself a critical factor in making an investment decision--one which is vulnerable to information failure and which consequently requires federal securities law protection.


securities, Golden v. Garofolo

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32 Case Western Reserve Law Review 595 (1982)