Voluntary Recapitalization, Fairness, and Rule 10b-5: Life Along the Trail of Santa Fe

In corporate recapitalizations, the board of directors will sometimes propose a recapitalization plan which substantially alters the “bundle of rights” represented by preferred shares. Although these plans cannot usually be completed without the approval of a majority of the preferred shareholders, the preferred shareholders are at a disadvantage to protect their interests for several reasons. Thus preferred shareholders who are dissatisfied with the change in their rights will sometimes call upon state courts to enjoin the recapitalization on the grounds that it is unfair or fraudulent; state courts, however, have provided only slight protection for preferred shareholders. In this article, Professor Campbell examines the possibility of protecting preferred shareholders by applying rule 10b-5 of the Securities Exchange Act of 1934 to recapitalizations. He concludes that rule 10b-5 provides substantial protection to shareholders whose rights are altered in a recapitalization