Source: https://supreme.justia.com/cases/federal/us/411/582/
Timestamp: 2019-04-23 02:38:38
Document Index: 361319207

Matched Legal Cases: ['§ 78', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 78']

Kern County Land Co. v. Occidental Petr. Corp. :: 411 U.S. 582 (1973) :: Justia US Supreme Court Center
Justia › US Law › US Case Law › US Supreme Court › Volume 411 › Kern County Land Co. v. Occidental Petr. Corp.
WHITE, J., delivered the opinion of the Court, in which BURGER, C.J., and MARSHALL, BLACKMUN, POWELL, and REHNQUIST, JJ., joined. DOUGLAS, J., filed a dissenting opinion, in which BRENNAN and STEWART, JJ., joined, post, p. 411 U. S. 605.
Section 16(b) of the Securities Exchange Act of 1934, 48 Stat. 896, 15 U.S.C. § 78p(b), [Footnote 1] provides that officers,
On May 8, 1967, after unsuccessfully seeking to merge with Kern County Land Co. (Old Kern), [Footnote 2] Occidental Petroleum Corp. (Occidental) [Footnote 3] announced an offer, to expire on June 8, 1967, to purchase on a first-come, first-served basis 500,000 shares of Old Kern common stock [Footnote 4] at a price of $83.50 per share plus a brokerage
Immediately upon the announcement of Occidental's tender offer, the Old Kern management undertook to frustrate Occidental's takeover attempt. A management letter to all stockholders cautioned against tender and indicated that Occidental's offer might not be the best available, since the management was engaged in merger discussions with several companies. When Occidental extended its tender offer, the president of Old Kern sent a telegram to all stockholders again advising against tender. In addition, Old Kern undertook merger discussions
with Tenneco, Inc. (Tenneco), [Footnote 8] and, on May 19, 1967, the Board of Directors of Old Kern announced that it had approved a merger proposal advanced by Tenneco. [Footnote 9] Under the terms of the merger, Tenneco would acquire the assets, property, and goodwill of Old Kern subject to its liabilities, through "Kern County Land Co." (New Kern), [Footnote 10] a new corporation to be formed by Tenneco to receive the assets and carry on the business of Old Kern. The shareholders of Old Kern would receive a share of Tenneco cumulative convertible preference stock in exchange for each share of Old Kern common stock which they owned. On the same day, May 19, Occidental, in a quarterly report to stockholders, appraised the value of the new Tenneco stock at $105 per share. [Footnote 11]
Occidental, seeing its tender offer and takeover attempt being blocked by the Old Kern-Tenneco "defensive" merger, countered on May 25 and 31 with two mandamus actions in the California courts seeking to obtain extensive inspection of Old Kern books and records. [Footnote 12] Realizing that, if the Old Kern-Tenneco merger were approved and successfully closed, Occidental would have to exchange its Old Kern shares for Tenneco stock, and would be locked into a minority position in Tenneco, Occidental took other steps to protect itself. Between May 30 and June 2, it negotiated an arrangement with Tenneco whereby Occidental granted Tenneco Corp., a subsidiary of Tenneco, an option to purchase at $105 per share all of the Tenneco preference stock to which Occidental would be entitled in exchange for its Old Kern stock when and if the Old Kern-Tenneco merger was closed. [Footnote 13] The premium to secure the option, at $10 per share, totaled $8,866,230, and was to be paid immediately upon the signing of the option agreement. [Footnote 14] If the option were exercised, the premium was to be applied to the purchase price. By the terms of the option agreement, the option could not be exercised prior to December
Meanwhile, the Securities and Exchange Commission had refused Occidental's request to exempt from possible § 16(b) liability Occidental's exchange of its Old Kern stock for the Tenneco preference shares that would take
The option granted by Occidental on June 2, 1967, was exercised on December 11, 1967. Occidental, not having previously availed itself of its right, exchanged certificates representing 887,549 shares of Old Kern stock for a certificate representing a like number of shares of Tenneco preference stock. The certificate was then endorsed over to the optionee-purchaser and, in return, $84,229,185 was credited to Occidental's accounts at various banks. Adding to this amount the $8,886,230 premium paid in June, Occidental received $93,905,415 for its Old Kern stock (including the 1,900 shares acquired prior to issuance of its tender offer). In addition, Occidental received dividends totaling $1,793,439.22. Occidental's
On appeal, the Court of Appeals reversed and ordered summary judgment entered in favor of Occidental. Abrams v. Occidental Petroleum Corp., 450 F.2d 157 (CA2 1971). The Court held that neither the option nor the exchange constituted a "sale" within the purview of
Congress recognized that short-swing speculation by stockholders with advance, inside information would threaten the goal of the Securities Exchange Act to "insure the maintenance of fair and honest markets."
S.Rep. No. 792, 73d Cong., 2d Sess., 9 (1934). [Footnote 23]
Although traditional cash-for-stock transactions that result in a purchase and sale or a sale and purchase within the six-month statutory period are clearly within the purview of § 16(b), the courts have wrestled with the question of inclusion or exclusion of certain "unorthodox" transactions. [Footnote 24] The statutory definitions of "purchase"
and "sale" are broad and, at least arguably, reach many transactions not ordinarily deemed a sale or purchase. [Footnote 25] In deciding whether borderline transactions are within the reach of the statute, the court have come to inquire whether the transaction may serve as a vehicle for the evil which Congress sought to prevent realization of short-swing profits based upon access to inside information [Footnote 26] -- thereby endeavoring to implement congressional
In the present case, it is undisputed that Occidental became a "beneficial owner" within the terms of § 16(b) when, pursuant to its tender offer, it "purchased" more than 10% of the outstanding shares of Old Kern. We must decide, however, whether a "sale" within the ambit of the statute took place either when Occidental became irrevocably bound to exchange its shares of Old Kern for shares of Tenneco pursuant to the terms of the merger agreement between Old Kern and Tenneco or
It cannot be contended that Occidental was an insider when, on May 8, 1967, it made an irrevocable offer to purchase 500,000 shares of Old Kern stock at a price substantially above market. At that time, it owned only 1,900 shares of Old Kern stock, far fewer than the 432,000 shares needed to constitute the 10% ownership required by the statute. There is no basis for finding
It is also wide of the mark to assert that Occidental, as a sophisticated corporation knowledgeable in matters of corporate affairs and finance, knew that its tender offer would either succeed or would be met with a "defensive merger." If its takeover efforts failed, it is argued, Occidental knew it could sell its stock to the target company's merger partner at a substantial profit. Calculations of this sort, however, whether speculative or not and whether fair or unfair to other stockholders or to Old Kern, do not represent the kind of speculative abuse at which the statute is aimed, for they could not have been based on inside information obtained from substantial stockholdings that did not yet exist. Accepting both that Occidental made this very prediction and that it would recurringly be an accurate forecast in tender offer situations, [Footnote 29] we nevertheless fail to perceive how the fruition of such anticipated events would require, or in any way depend upon, the receipt and use of inside information. If there are evils to be redressed by way of deterring those who would make tender offers,
The possibility that Occidental had, or had the opportunity to have, any confidential information about Old Kern before or after May 11, 1967, seems extremely remote. Occidental was, after all, a tender offeror, threatening to seize control of Old Kern, displace its management, and use the company for its own ends. The Old Kern management vigorously and immediately opposed Occidental's efforts. Twice it communicated with its stockholders, advising against acceptance of Occidental's offer and indicating, prior to May 11 and prior to Occidental's extension of its offer, that there was a possibility of an imminent merger and a more profitable exchange. Old Kern's management refused to discuss with Occidental officials the subject of an Old Kern-Occidental merger. Instead, it undertook negotiations with Tenneco and forthwith concluded an agreement, announcing the merger terms on May 19. Requests by Occidental for inspection of Old Kern records were sufficiently frustrated
There is, therefore, nothing in connection with Occidental's acquisition of Old Kern stock pursuant to its tender offer to indicate either the possibility of inside information's being available to Occidental by virtue of its stock ownership or the potential for speculative abuse of such inside information by Occidental. Much the same can be said of the events leading to the exchange of Occidental's Old Kern stock for Tenneco preferred, which is one of the transactions that is sought to be classified a "sale" under § 16(b). The critical fact is that the exchange took place and was required pursuant to a merger between Old Kern and Tenneco. That merger was not engineered by Occidental, but was sought by Old Kern to frustrate the attempts of Occidental to gain control of Old Kern. Occidental obviously did not participate in or control the negotiations or the agreement between Old Kern and Tenneco. Cf. Newmark v. RKO General, 425 F.2d 348 (CA2), cert. denied, 400 U.S. 854 (1970); Park & Tilford v. Schulte, 160 F.2d 984 (CA2), cert. denied, 332 U.S. 761 (1947). Once agreement between those two companies crystalized, the course of subsequent events was out of Occidental's hands. Old Kern needed the consent of its stockholders, but, as it turned out, Old Kern's management had the necessary votes without the affirmative vote of Occidental. The merger agreement was approved by a majority of the stockholders of Old Kern, excluding the votes to which Occidental was entitled by virtue of its ownership of Old Kern shares. See generally Ferraiolo v. Newman, 259 F.2d 342 (CA6 1958), cert. denied, 359 U.S. 927 (1959); Roberts v. Eaton, 212 F.2d 82 (CA2 1954). Occidental, although registering its opinion that the merger would be beneficial to Old Kern shareholders, did not in fact, vote at the
Once the merger and exchange were approved, Occidental was left with no real choice with respect to the future of its shares of Old Kern. Occidental was in no position to prevent the issuance of a ruling by the Internal Revenue Service that the exchange of Old Kern stock for Tenneco preferred would be tax-free; and, although various lawsuits were begun in state and federal courts seeking to postpone the merger closing beyond the statutory six-month period, those efforts were futile. The California Corporation Commissioner issued the necessary permits for the closing that took place on August 30, 1967. The merger left no right in dissenters to secure appraisal of their stock. Occidental could, of course, have disposed of its shares of Old Kern for cash before the merger was closed. Such an act would have been a § 16 sale, and would have left Occidental with a prima facie § 16(b) liability. It was not, therefore, a realistic alternative for Occidental as long as it felt that it could successfully defend a suit like the present one. See generally Petteys v. Butler, 367 F.2d 528 (CA8 1966); cert denied, 385 U.S. 1006 (1967); Ferraiolo v. Newman, supra; Lynam v. Livingston, 276 F.Supp. 104 (Del. 1967); Blau v. Hodgkinson, 100 F.Supp. 361 (SDNY 1951). We do not suggest that an exchange of stock pursuant to a merger may never result in § 16(b) liability. But the involuntary nature of Occidental's exchange, when coupled with the absence of the possibility of speculative abuse of inside information, convinces us that § 16(b) should not apply to transactions such as this one.
Petitioner also claims that the Occidental-Tenneco option agreement should itself be considered a sale, either because it was the kind of transaction the statute was designed to prevent or because the agreement was an option in form but a sale in fact. But the mere execution of an option to sell is not generally regarded as a "sale." See Booth v. Varian Associates, 334 F.2d 1 (CA1 1964), cert. denied, 379 U.S. 961 (1965); Allis-Chalmers Mfg. Co. v. Gulf & Western Industries, 309 F.Supp. 75 (ED Wis.1970); Marquette Cement Mfg. Co. v. Andreas, 239 F.Supp. 962 (SDNY 1965). And we do not find in the execution of the Occidental-Tenneco option agreement a sufficient possibility for the speculative abuse of inside information with respect to Old Kern's affairs to warrant holding that the option agreement was itself a "sale" within the meaning of § 16(b). The mutual advantages of the arrangement appear quite clear. As the District Court found, Occidental wanted to avoid the position of a minority stockholder with a huge investment in a company over which it had no control and in which it had not chosen to invest. On the other hand, Tenneco did not want a potentially troublesome minority stockholder that had just been vanquished in a fight for the control of Old Kern. Motivations like these do not smack of insider trading, and it is not clear to us, as it was not to the Court of Appeals, how the negotiation and execution of the option agreement gave Occidental any possible opportunity to trade on inside information it might have obtained from its position as a major stockholder of Old Kern. Occidental wanted to get out, but only at a date more than six months thence. It was willing to get out at a price of $105 per share, a price at which it had publicly valued Tenneco preferred on May 19 when the Tenneco-Old Kern agreement was announced.
The option, therefore, does not appear to have been an instrument with potential for speculative abuse, whether or not Occidental possessed inside information about the affairs of Old Kern. In addition, the option covered Tenneco preference stock, a stock as yet unissued, unregistered, and untraded. It was the value of this
Nor can we agree that we must reverse the Court of Appeals on the ground that the option agreement was, in fact, a sale because the premium paid was so large as to make the exercise of the option almost inevitable, particularly when coupled with Tenneco's desire to rid itself of a potentially troublesome stockholder. The argument has force, but resolution of the question is very much a matter of judgment, economic and otherwise, and the
450 F.2d at 165.
Occidental, pursuant to a cash tender offer, acquired in excess of 880,000 shares of Old Kern during May and June, 1967. It is undisputed that these acquisitions were purchases within the meaning of the section. [Footnote 2/2] On August
The question presented to us is whether this exchange of shares constituted a "sale" of the Old Kern shares. The term "sale," as used in the Securities Exchange Act, includes "any contract to sell or otherwise dispose of." 15 U.S.C. § 78c(a)(14). Clearly, Occidental "disposed" of its Old Kern shares through the Old Kern-Tenneco consolidation. Its status as a shareholder of Old Kern terminated, and it became instead a shareholder of Tenneco, privy to all the rights conferred by the Tenneco shares. [Footnote 2/3] See Newmark v. RKO General, 425 F.2d 348 (CA2 1970); Park & Tilford v. Schulte, 160 F.2d 984 (CA2 1947). [Footnote 2/4] In my view, we
The congressional investigations that led to the enactment of the Securities Exchange Act revealed widespread use of confidential information by corporate insiders to gain an unfair advantage in trading their corporations' securities. [Footnote 2/5] Unlike other remedial provisions
425 F.2d at 353. "In sum," the court concluded,
The majority takes heart from those decisions of lower federal courts which endorse a "pragmatic" approach to
It is this "objective standard" that the Court hung to so tenaciously in Reliance Electric, but now apparently would abandon to a large extent. In my view, the Court
323 F.Supp. 570, 579-580. Since the actual sale pursuant to the exercise of the option did not occur within the six-month period, the only reasonable interpretation of this conclusion of law is that the District Court found that the execution of the option was, in fact and substance, a sale. The majority does not contest that an option agreement may
428 F.2d at 698.
By comparison, the exercise price here was $105, and the premium to secure the option was $10 per share, or $8,866,230, also to be credited against the purchase price if the option were exercised and forfeited in the event of nonexercise if the merger was consummated. Thus, the effective exercise price was nearly 10% below the estimated value of the Tenneco shares to be received in
In concluding that this case was not controlled by Bershad, the Court of Appeals emphasized the undisputed testimony [Footnote 2/21] that the forfeitable downpayment was a reasonable, noncoercive price. The basis for this was the deposition of one of Occidental's vice-presidents stating that a New York investment firm had advised him that $9 to $12 per share was a reasonable premium for an option on stock selling at $95. This deposition should not suffice to support summary judgment. First, it is not clear what assumptions the investment firm had made in giving this advice. Second, while it may be that $10 per share premium was a reasonable price for an option based upon factors available to the general investing public, it is by no means clear that an option