Plaintiffs-appellants appeal the dismissal of their complaint in an action brought under § 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) (1976), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1977).

The complaint alleged that an "Information Statement" that accompanied a proposed exchange of stock contained various material omissions and misrepresentations. The defendants moved to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b) for failure to state a claim upon which relief can be granted and for failure to plead with particularity the circumstances constituting the fraud. The district court granted the motion. Joyce v. Joyce Beverages, Inc., 430 F. Supp. 676 (S.D.N.Y.1977).

We find that the complaint sufficiently complies with the requirements of Fed.R.Civ.P. 9(b), and therefore proceed to a consideration of the other alleged deficiencies.

The plaintiffs are William J. Joyce and the members of his immediate family: his wife, children, and son-in-law. In March of 1973, they owned a large block of the stock of four companies ("Operating Companies") engaged in the business of bottling Seven-Up and other soft drinks. The defendants are John M. Joyce, William J. Collier, and Joyce Beverages, Inc. ("JBI"). John M. Joyce was the Chairman of the Board of the New York Operating Company. He is now the Chairman of the Board of JBI. William J. Collier, who formerly served as the personal attorney of William J. Joyce, is a director of JBI and also serves as its General Counsel. As General Counsel, he was responsible for the legal matters relating to the preparation of the documents used in the instant transaction. JBI is a Delaware corporation that was formed to serve as a holding company for the four Operating Companies. The complaint alleges that John M. Joyce and William J. Collier, together with John M. Joyce's immediate family and another, own and at all relevant times have owned not less than 47.56% Of the outstanding stock of JBI, that they have controlled a majority of the board of directors of JBI, and that they have acted in concert so that they hold a controlling interest in the company.

A plan was developed to reorganize and consolidate the four Operating Companies through the device of a holding company. As noted above, JBI was formed for this purpose. Pursuant to this plan, JBI proposed to the stockholders of the Operating Companies that they exchange their stock for shares of JBI. The offer was made by mail. The package sent to each shareholder included a letter containing the offer, an Agreement and Plan of Reorganization setting out the terms of the exchange, and an "Information Statement." The Information Statement was a lengthy, wide-ranging disclosure document akin to the form of proxy statement outlined in Schedule A, Item 14, which is required when § 14 of the Securities Exchange Act is applicable. In response to this offer, plaintiffs exchanged their shares in the Operating Companies for JBI stock. According to the complaint, they now hold 37% Of the outstanding stock of JBI.

All of the companies involved in this case have at all times been privately held. The four Operating Companies were incorporated in Illinois; JBI is a Delaware corporation. It is not disputed that the New York Operating Company was the weakest of the four. Nor is it disputed that this fact was adequately disclosed.

* The complaint charges that there were three materially misleading statements in the Information Statement:

1. The first section of the statement delineated the reasons for the proposed consolidation. Essentially, it stressed the operating economies that would result from the consolidation of the four companies. It also stressed that the consolidation would produce a financially stronger entity that would be in a better position to obtain financing.

The plaintiffs allege that the real purpose of the consolidation was to benefit defendants' New York company, which, as everybody knew, was the weakest financially. They allege that the plan was to have JBI float loans to the New York company out of the funds generated by the other Operating Companies, "all to the detriment of the Operating Companies other than New York."

2. The Information Statement contained a section explaining that the exchanged JBI shares could not be resold since they had not been and would not be registered. Inter alia, it advised that Rule 144, 17 C.F.R. § 230.144 (1977), would allow resale if its terms were met, and that the stockholders should consult their investment advisors about the availability of Rule 144. Plaintiffs claim that this statement was misleading in that it implied that a Rule 144 exemption might be available when defendants knew that was not so.

3. As noted above, the Operating Companies were Illinois corporations; JBI is incorporated in Delaware. The Information Statement described certain changes in stock rights effected by this changeover: the loss of preemptive rights1 and the discontinuance of cumulative voting.2 Plaintiffs claim that by listing some but not all of the changes, defendants misled them. Specifically, they claim that defendants should have included the fact that: several types of stockholder approval votes could be effected by simple majorities instead of two third votes as under Illinois law;3 vacancies on the Board of Directors could be filled by the vote of the remaining directors instead of the stockholders;4 certain appraisal rights would be lost;5 and, under Delaware law, JBI's officers and directors would have broader rights of indemnification.

The district court held that, as a matter of law, none of these alleged misrepresentations or omissions was material. It understood the first claim to allege that the weakness of the New York company, and the fact that it stood to benefit by obtaining loans, was not adequately disclosed. The court held that it was not fraudulent to fail to say that the weakest company would benefit from the consolidation. It did not find anything misleading about the Rule 144 statement. With regard to the changes in stockholders' rights resulting from the change in states of incorporation, it held that the defendants' duty to disclose was discharged by the disclosure of the changeover and the inclusion of the names of the states involved. 430 F. Supp. at 678.

While we agree with the district court's conclusions as to the first claim, we cannot go along with its views as to the materiality of the second and third claims.

On this motion to dismiss for failure to state a claim, plaintiffs' allegations must be accepted as true and must be read in the manner most favorable to them. This is especially true when dealing with questions of materiality which, since they are "mixed questions of law and fact," require

delicate assessments of the inferences a "reasonable shareholder" would draw from a given set of facts and the significance of those inferences to him, and these assessments are peculiarly ones for the trier of fact.

TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 450, 96 S. Ct. 2126, 2133, 48 L. Ed. 2d 757 (1976).6 The issue on this Rule 12(b)(6) motion is whether the plaintiffs can prove any set of facts that, had they been disclosed, would have been considered by the reasonable shareholder to have "significantly altered the 'total mix' of information made available." Id. at 449, 96 S.Ct. at 2133.

We cannot say that this is not the case with respect to the second and third claims here.

The statements about the availability of Rule 144 and the omissions regarding Delaware law raise substantial issues. The statement about the potential availability of Rule 144 could have misled the reasonable shareholder into thinking that it was, in fact, available to him. Similarly, the discussion of the loss of preemptive rights and the discontinuance of cumulative voting as a result of the changeover to Delaware law, could have misled him into thinking that the changeover did not otherwise affect his rights.

Of course, we intimate no views on the merits of this case. It may develop that plaintiffs cannot demonstrate to the trier of fact that the reasonable shareholder would have been misled. It may develop, once discovery has begun, that the plaintiffs actually knew or could not have cared less about the very facts that they claim were misrepresented. We stress only that the difficult question of materiality should not ordinarily be disposed of on a Rule 12(b)(6) motion.

Accordingly, we reverse and remand for further proceedings not inconsistent with this opinion.

I most respectfully dissent.

I agree with Judge Pollack below that none of the asserted omissions or representations is sufficiently material to avoid dismissal. I shall deal seriatim with the three statements alleged to be misleading.

First, the representation that a purpose of the consolidation was to permit financing to be obtained more easily and at lower cost is not a representation that the stronger companies' excess funds would not be used to strengthen the financial position of the New York Operating Company. Any consolidation implies to a reasonable stockholder, it seems to me, that there will be intercorporate loans, quite likely from the stronger to the weaker entities of the consolidation. Excessive lending, charging an unreasonably low rate of interest or imperiling the stronger corporation's capital may give rise to a state cause of action for waste of assets or for mismanagement. However, as the majority and I agree, the omission to state that there will be such lending does not rise to the level of a 10b-5 claim.

Second, the reference to Rule 144, surely a boilerplate provision in the Information Statement, presents a somewhat closer question, but the statement issued did say that the shares of JBI "must be held indefinitely unless they are subsequently registered under the Act or an exemption from such registration is available." That was true, and it was followed by another true statement that Rule 144 permits resale of restricted shares in limited quantities after a holding period of two years "in accordance with the terms and conditions of that Rule." To my mind this language would put a reasonable shareholder on notice that unless "that Rule" were subsequently complied with,1 he would have to hold them "indefinitely."Finally, the reference to Delaware as the state of JBI's incorporation and to two Delaware corporate law provisions particularly burdensome on these minority stockholders relating to lack of preemptive rights and unavailability of cumulative voting was factually accurate. Such a reference should have alerted even the most unsophisticated stockholder to the possibility that Delaware law had additional, perhaps more esoteric traps for the unwary which, to avert, might well require advice of counsel. But I should have thought that it has long been a matter of common knowledge to the business world generally that Delaware's corporation law quite generally favors management and controlling interests, and disfavors minority stockholders. To my knowledge, the SEC has not yet required merger information or proxy statements to bear a sticker warning against the laws of Delaware. More to the point, perhaps, no allegation in the complaint indicates that any of the Delaware laws not mentioned in the Information Statement here have in some way been utilized by the controlling interests adversely to those of appellants.

I suspect that the proof may show that appellants received poor legal advice when they went into the exchange of stock. This might give them a state cause of action for negligence or other breach of fiduciary duty if, since allegedly their attorney benefited from the transaction, indeed, appellants have suffered loss. But I agree with Judge Pollack that the Information Statement does not give rise to a cause of action under federal securities law, and accordingly would affirm.