Starr v. Georgeson S'holder, Inc.

United States Court of Appeals for the Second Circuit · 2005 · Corporations

412 F.3d 103 (2005)

Updated August 22, 2026

CorporationsFederal securities lawSection 10(b)Rule 10b-5Material omissionRelianceShingle theory10b-5

Facts

After mergers involving AirTouch/Vodafone and MediaOne/AT&T, the surviving companies sent shareholders letters instructing them to surrender old stock certificates to EquiServe, the exchange agent, to receive new shares and cash; those letters did not mention any fee and included contact information for further assistance. When some shareholders did not tender their certificates, the surviving companies retained Georgeson to conduct post-merger cleanup services, and Georgeson sent notices offering to process the exchange for stated fees of $3.50 per Vodafone ADS or $7 per AT&T share due. Starr, acting for Elizabeth Sampson, tendered shares through Georgeson in both transactions and paid substantial deducted fees. He claimed the Georgeson notices misled shareholders into believing Georgeson was their only option and unlawfully failed to disclose that EquiServe would perform the exchange without charge.

Issue

Whether the Georgeson post-merger cleanup notices and the failure to state that EquiServe would process exchanges for free stated a claim under Section 10(b) and Rule 10b-5. The court also considered whether Georgeson's allegedly excessive fees were inadequately disclosed under the shingle theory.

Rule

To state a claim under Section 10(b) and Rule 10b-5, a plaintiff must plead a false material representation or omission, scienter, and causation through reliance. Reliance is not justifiable if, through minimal diligence, the investor should have discovered the truth. An omission is material only if there is a substantial likelihood that disclosure would significantly alter the total mix of information reasonably available to shareholders. Under the shingle theory, an exchange agent charging a fee has a duty to disclose the details of an excessive fee, but adequate disclosure of the fee satisfies that duty.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

After a merger, Red Mesa Telecom sent former shareholders in Phoenix two letters directing them to mail old certificates to Harbor Transfer Services, identified as the exchange agent, and gave a toll-free number for questions. Months later, Summit Shareholder Assistance mailed Dana Ruiz a notice offering to process the exchange for $4 per new share, and Dana paid without calling anyone or reviewing the prior letters.

If Dana sues under Rule 10b-5, alleging Summit misled her by failing to state that Harbor would process the exchange without charge, which argument most strongly supports dismissal?

Explanation. The majority held that a plaintiff cannot show justifiable reliance where minimal diligence would have uncovered the truth from information reasonably available to shareholders. Earlier letters identifying the exchange agent and providing contact information made the alternative route available, so paying the later solicitor without inquiry defeats justifiable reliance.