Schoenbaum v. Firstbrook

United States Court of Appeals for the Second Circuit · 1968 · Corporations

405 F.2d 200 (1968)

Updated August 22, 2026

CorporationsSecurities RegulationShareholder Derivative ActionsRule 10b-5ExtraterritorialitySection 10(b)extraterritorial jurisdictionAmerican investors

Facts

Banff Oil Ltd., a Canadian corporation whose stock was registered with the SEC and traded on the American Stock Exchange and the Toronto Stock Exchange, sold treasury shares in Canada to Aquitaine and later to Paribas at then-current market prices. The complaint alleged that defendants knew Banff had made a valuable oil discovery in the Rainbow Lake area and caused Banff to sell shares before the market reflected that value. Defendants submitted affidavits on personal knowledge denying any conspiracy, and plaintiff responded only with allegations on information and belief. The Aquitaine-affiliated directors abstained from the board vote authorizing the Aquitaine sale, and the non-interested directors who approved the sale were fully informed of the material facts.

Issue

Whether federal courts had jurisdiction under the Securities Exchange Act over these foreign sales of a foreign corporation's stock listed on an American exchange, and if so, whether the complaint stated a § 10(b)/Rule 10b-5 claim where Banff's fully informed directors authorized arm's-length sales of treasury stock at allegedly inadequate prices.

Rule

The Securities Exchange Act may apply to transactions outside the United States when the transactions involve stock registered and listed on a national securities exchange and are detrimental to the interests of American investors. But § 10(b) and Rule 10b-5 require a manipulative or deceptive device; a corporation is not deceived when the persons authorized to act for it in the transaction are fully informed and their knowledge is properly imputable to the corporation, even if the transaction may constitute a breach of fiduciary duty.

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North Fjord Minerals Ltd., a corporation organized in British Columbia, has stock registered with the SEC and listed on a national securities exchange in the United States. In Vancouver, it sells treasury shares to a Swiss investment vehicle at a price a derivative plaintiff claims was far below true value, allegedly diminishing the value of shares held by investors in Boston and Phoenix.

Assuming the other statutory elements are met, is a federal court most likely to have subject matter jurisdiction under the Exchange Act over the derivative claim?

Explanation. The majority held that the Exchange Act may apply extraterritorially at least when the challenged foreign transaction involves stock registered and listed on a national securities exchange and is detrimental to the interests of American investors. A sale of treasury shares at an allegedly unfairly low price can reduce corporate equity and thereby affect the domestic market value of U.S. investors’ shares. Jurisdiction does not depend on first proving the merits.