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June 18, 1985

FRANK R. NUTIS, et al.

The opinion of the court was delivered by: LUONGO

 Plaintiffs in this action are minority shareholders in Penn Merchandising Corporation ("Old Penn"). Plaintiffs' complaint alleges that various officers, directors and controlling shareholders of Old Penn violated federal securities laws in executing a plan to eliminate minority shareholders at an inadequate price. The complaint also charges violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968, and of state law. Presently before me is defendants' motion to dismiss or, in the alternative, for summary judgment. For the reasons stated below, I will dismiss the complaint.

 I. Factual Background

 In September of 1983, Old Penn's Board of Directors approved an agreement of merger between Old Penn and New Penn Merchandising Corporation ("New Penn"). New Penn, a privately held corporation formed in order to effectuate the planned merger, owned 73% of Old Penn's issued and outstanding common stock. The agreement provided that Old Penn would be merged into New Penn, with New Penn being the surviving corporation. Common shareholders other than New Penn were to receive $ 4.00 per share of Old Penn common stock. *fn1"

 Plaintiffs, minority shareholders of Old Penn common stock, allege that $ 4.00 per share does not represent the fair value of the stock. They claim that defendants, *fn2" including Old Penn, New Penn, and persons in control of the two corporations, had formulated a plan to eliminate Old Penn's minority shareholders. Old Penn, pursuant to the alleged plan, offered on March 31, 1983 to purchase up to 350,000 shares of Old Penn common stock at $ 4.00 per share. Old Penn ultimately purchased 399,500 shares. In connection with the tender offer, defendants did not disclose any intention to take Old Penn private. Plaintiffs assert that Old Penn common stock was worth substantially more than $ 4.00 per share, but that defendants' failure to disclose their alleged plan resulted in an artificially low selling price.

 In October of 1983, defendants sent out a proxy statement soliciting minority shareholder approval of the merger agreement which the board had adopted in September. According to plaintiffs, this proxy statement revealed for the first time defendants' plan to eliminate the minority shareholders by forcing them to sell their common stock for $ 4.00 per share.

 Plaintiffs allege that defendants, in effectuating their plan to take Old Penn private, violated the federal securities laws in several respects. The first count of their complaint charges that defendants violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. According to plaintiffs, defendants planned to eliminate the minority shareholders by acquiring their stock at an unfairly low price. Pursuant to this plan, defendants knowingly and recklessly made false and misleading statements in the tender offer documents dated March 31, 1983 and the proxy statement dated October 12, 1983. In Count II, plaintiffs allege that defendants violated § 14(a) of the 1934 Act, 15 U.S.C. § 78n(a), and Rule 14a-9, 17 C.F.R. § 240.14a-9, by issuing a false and misleading proxy statement. Count III, charges that defendants, except for Old Penn, are liable under § 20 of the 1934 Act, 15 U.S.C. § 78t, as "controlling persons" who participated in the alleged fraudulent scheme. Count IV charges violations of the RICO statute, 18 U.S.C. §§ 1961-1968. Counts V and VI set forth state law claims, charging common law fraud and breach of fiduciary duty. Plaintiffs seek rescission of the merger or a declaration that the merger is void, actual damages, treble damages under RICO, and attorneys' fees and costs of suit.

 Defendants have moved to dismiss the complaint under Fed.R.Civ.P. 12(b)(6) or, in the alternative, for summary judgment. According to defendants, the overriding theme of plaintiffs' complaint is that the minority shareholders were treated unfairly. Citing Santa Fe Industries v. Green, 430 U.S. 462, 51 L. Ed. 2d 480, 97 S. Ct. 1292 (1977), defendants note that such a charge may give rise to a state law claim, but cannot be the basis for an action under the federal securities laws. Defendants argue that plaintiffs, notwithstanding their vigorous attempts to circumvent the Santa Fe rule, have not sufficiently alleged the element of deception required to state a cause of action under federal law. If the claims under the securities laws are without merit, the RICO charges, based on substantially the same allegations of wrongdoing, must also fall, and the pendent state law claims must be dismissed. *fn3"

 Plaintiffs have not yet had the opportunity to conduct discovery. Because summary judgment is generally inappropriate at this stage of a case, I will consider only defendants' motion to dismiss. See Allen Organ Co. v. North American Rockwell Corp., 363 F. Supp. 1117, 1124 (E.D.Pa. 1973). In deciding defendants' motion, I am mindful of my obligation to accept as true the factual allegations of the complaint, together with any reasonable inferences therefrom. Dismissal of the complaint is appropriate only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). See also In re Catanella, 583 F. Supp. 1388, 1393 & n.2 (E.D.Pa. 1984).

 II. Plaintiffs' Federal Securities Law Claims

 As defendants have noted, plaintiffs' complaint and memoranda opposing defendants' motion to dismiss represent a tortuous effort to bring what are essentially state law claims within the jurisdiction of a federal court. Although plaintiffs have struggled to characterize defendants' activities as manipulative and deceptive, the heart of their complaint is that defendants treated the minority shareholders of Old Penn unfairly. The Supreme Court has made clear that such a claim is not cognizable under the federal securities laws. Santa Fe Industries v. Green, 430 U.S. 462, 51 L. Ed. 2d 480, 97 S. Ct. 1292 (1977).

 Santa Fe establishes that a breach of fiduciary duty, absent deception, misrepresentation or nondisclosure, does not violate § 10(b) or Rule 10b-5. Id. at 476. A plaintiff cannot circumvent the Santa Fe holding simply by alleging that a defendant made misrepresentations concerning whether a transaction was fair to minority shareholders. Biesenbach v. Guenther, 588 F.2d 400, 402 (3d Cir. 1978). According to the Third Circuit:

It is bemusing, and ultimately pointless, to charge that directors perpetrated a "material omission" when they failed to (a) discover and adjudge faithless motives for their actions and (b) announce such a discovery in reporting the products of their managerial efforts and judgment. The securities laws, while their central insistence is upon disclosure, were never intended to attempt any such measures of psychoanalysis or reported self-analysis. The unclean heart of a director is not actionable, whether or not it is "disclosed," unless the impurities are translated into actionable deeds or omissions both objective and external.

 Id. (quoting Lavin v. Data Systems Analysts, Inc., 443 F. Supp. 104, 107 (E.D.Pa. 1977), aff'd mem., 578 F.2d 1374 (3d Cir. 1978)). As the Ninth Circuit has noted, a contrary holding would "eviscerate the obvious purpose of the Santa Fe decision, and . . . permit evasion of that decision by artful legal draftsmanship." Panter v. Marshall Field & Co., 646 F.2d 271, 289 (7th Cir.), cert. denied, 454 U.S. 1092, 70 L. Ed. 2d 631, 102 S. Ct. 658 (1981) (quoting Hundahl v. United Benefit Life Insurance Co., 465 F. Supp. 1349, 1366 (N.D.Tex. 1979)). See also Bucher v. Shumway, 452 F. Supp. 1288, [1979-1980 Transfer Binder] Fed. Sec. L. Rep. (CCH) P 97, 142 (S.D.N.Y. 1979), aff'd mem., 622 F.2d 572 (2d Cir.), cert. denied, 449 U.S. 841, 101 S. Ct. 120, 66 L. Ed. 2d 48 (1980).

 Having set forth the general principles applicable to claims brought by minority shareholders, I will examine plaintiffs' specific allegations. Reduced to essentials, plaintiffs' amended complaint alleges the following:

 1. That defendants failed to disclose at the time of the tender offer their intention to take Old Penn private, thereby establishing an artificial ceiling ...

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