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Matched Legal Cases: ['§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 78', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 15', '§ 16', '§ 15', '§ 15', '§ 15', '§ 15', '§ 15', '§ 15', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 16', '§ 17', '§ 77', '§ 10', '§ 78', '§ 10', '§ 240', '§ 16', '§ 16', '§ 16', '§ 78', '§ 16', '§ 16', '§ 240', '§ 16', '§ 16']

Foremost Mckesson Inc Vs Provident Securities Co - Citation 104077 - Court Judgment | LegalCrystal
Foremost-mckesson, Inc. Vs. Provident Securities Co. - Court Judgment
LegalCrystal Citation legalcrystal.com/104077
Case Number 423 U.S. 232
Appellant Foremost-mckesson, Inc.
Respondent Provident Securities Co.
foremost-mckesson, inc. v. provident securities co. - 423 u.s. 232 (1976) u.s. supreme court foremost-mckesson, inc. v. provident securities co., 423 u.s. 232 (1976) foremost-mckesson, inc. v. provident securities co. no. 74-742 argued october 7, 1975 decided january 13, 1976 423 u.s. 232 certiorari to the united states court of appeals for the ninth circuit syllabus respondent, a personal holding company contemplating liquidation, sold assets to petitioner corporation. respondent received from petitioner as part of the purchase price convertible debentures which, if converted into petitioner's common stock, would make respondent a holder of more than 10% of petitioner's outstanding common stock. a few days later,.....
Foremost-McKesson, Inc. v. Provident Securities Co. - 423 U.S. 232 (1976)
U.S. Supreme Court Foremost-McKesson, Inc. v. Provident Securities Co., 423 U.S. 232 (1976)
Held: By virtue of the exemptive provision, a beneficial owner is accountable under § 16(b) in a purchase-sale sequence such as was involved here only if he was such an owner "before the purchase." Thus, the fact that respondent was not a beneficial owner before the purchase removed the transaction from the operation of § 16(b). Pp. 423 U. S. 239 -259.
(a) The legislative history of the exemptive provision reveals a legislative intent to deter beneficial owners from making both
a purchase and a sale on the basis of inside information, which is presumptively available only after the purchase. Pp. 423 U. S. 243 -250.
(b) Had it been Congress' design when it enacted § 16(b) to impose liability in cases such as this, it should have done so expressly or by unmistakable inference. Pp. 423 U. S. 251 -252.
(c) Congress may have sought to distinguish between purchases by persons who have not yet acquired inside status through stock ownership of at least 10% and purchases by directors and officers because the latter are more intimately involved in corporate affairs. Pp. 423 U. S. 253 -254.
(d) Other sanctions remain available against fraudulent use of inside information in transactions not covered by § 16(b). Pp. 423 U. S. 254 -256.
(e) Other provisions exempting certain transactions from § 16(b) are not inconsistent with the "before the purchase" construction reached here. Pp. 423 U. S. 256 -259.
of the Securities Exchange Act of 1934 (At), 48 Stat. 896, 15 U.S.C. § 78p(b). That section of the Act was designed to prevent a corporate director or officer or "the beneficial owner of more than 10 per centum" of a corporation [ Footnote 1 ] from profiteering through short-swing securities transactions on the basis of inside information. It provides that a corporation may capture for itself the profits realized on a purchase and sale, or sale and purchase, of its securities within six months by a director, officer, or beneficial owner. [ Footnote 2 ] Section 16(b)'s last sentence,
Eventually a compromise was reached, and Provident and Foremost executed a purchase agreement embodying their deal on September 25, 1969. The agreement provided that Foremost would buy two-thirds of Provident's assets for $4.25 million in cash and $49.75 million in Foremost convertible subordinated debentures. [ Footnote 3 ] The agreement further provided that Foremost would register under the Securities Act of 1933 $25 million in
On October 21, Provident, Foremost, and a group of underwriters executed an underwriting agreement to be closed on October 28. The agreement provided for sale to the underwriters of the $25 million debenture. On October 24, Provident distributed the $15 million and $7.25 million debentures to its stockholders, reducing the amount of Foremost common into which the company's holdings were convertible to less than 10%. On October 28 the closing under the underwriting agreement was accomplished. [ Footnote 4 ] Provident thereafter distributed the cash proceeds of the debenture sale to its stockholders and dissolved.
Provident's holdings in Foremost debentures as of October 20 were large enough to make it a beneficial owner of Foremost within the meaning of § 16. [ Footnote 5 ] Having
Provident's principal argument below for nonliability was based on Kern County Land Co. v. Occidental Corp., 411 U. S. 582 (1973). There, we held that an "unorthodox transaction" in securities that did not present the possibility of speculative abuse of inside information was not a "sale" within the meaning of § 16(b). Provident contended that its reluctant acceptance of Foremost debentures in exchange for its assets was an "unorthodox transaction" not presenting the possibility of speculative abuse, and therefore was not a "purchase" within the meaning of § 16(b). Although the District Court's pre- Kern County opinion had adopted this type of analysis, 331 F.Supp. 787 (ND Cal.1971), the Court of Appeals rejected it, reasoning that Provident's acquisition of the debentures was not "unorthodox," and that the circumstances did not preclude the possibility of speculative abuse. 506 F.2d at 604-605.
The first was Provident's argument that it was not a beneficial owner "at the time of . . . sale." After the October 24 distribution of some debentures to stockholders, the debentures held by Provident were convertible into less than 10% of Foremost's outstanding common stock. Provident contended that its sale to the underwriters did not occur until the underwriting agreement was closed on October 28. If this were the case, the sale would not have been covered by § 16(b), since Provident would not have been a beneficial owner "at the time of . . . sale." [ Footnote 6 ] The Court of Appeals rejected this argument because it found that the sale occurred on October 21 upon execution of the underwriting agreement. [ Footnote 7 ]
The Court of Appeals then turned to the theory of nonliability based on the exemptive provision that we consider here. [ Footnote 8 ] It held that, in a purchase-sale sequence, the phrase "a the time of the purchase" "must be construed to mean prior to the time when the decision to purchase is made." 506 F.2d at 614. Thus, although Provident became a beneficial owner of Foremost by acquiring the debentures, it was not a beneficial owner "at the time of the purchase." Accordingly, the exemptive provision prevented any § 16(b) liability on Provident's part.
The meaning of the exemptive provision has been disputed since § 16(b) was first enacted. The discussion has focused on the application of the provision to
a purchase-sale sequence, the principal disagreement being whether "at the time of the purchase" means "before the purchase" or "immediately after the purchase." [ Footnote 9 ] The difference in construction is determinative of a beneficial owner's liability in cases such as Provident's where such owner sells within six months of purchase the securities the acquisition of which made him a beneficial owner. The commentators divided immediately over which construction Congress intended, [ Footnote 10 ] and they remain divided. [ Footnote 11 ] The Courts of Appeals also are in disagreement over the issue.
The question of what Congress intended to accomplish by the exemptive provision in a purchase-sale sequence came to a Court of Appeals for the first time in Stella v. Graham-Paige Motors Corp., 232 F.2d 299 (CA2), cert. denied, 352 U.S. 831 (1956). There, the Court of Appeals for the Second Circuit, without discussion but over a dissent, affirmed the District Court's
"If the ['before the purchase'] construction urged by [Graham-Paige] is placed upon the exemption provision, it would be possible for a person to purchase a large block of stock, sell it out until his ownership was reduced to less than 10%, and then repeat the process, ad infinitum. "
104 F.Supp. 957, 959 (SDNY 1952). The District Court may have thought that "before the purchase" seemed an unlikely construction of the exemptive provision in a sale-repurchase sequence, so it could not be the proper construction in a purchase-sale sequence. [ Footnote 12 ] The Stella construction of the exemptive provision has been adhered to in the Second Circuit, Newmark v. RKO General, Inc., 425 F.2d 348, 355-356, cert. denied, 400 U.S. 854 (1970); [ Footnote 13 ] Perne v.
William Norton & Co., 509 F.2d 114, 118 (1974), and adopted by the Court of Appeals for the Eighth Circuit. Emerson Electric Co. v. Reliance Electric Co., 434 F.2d 918, 923-924 (1970), aff'd on other grounds, 404 U. S. 418 (1972). [ Footnote 14 ] But in none of the foregoing cases did the court examine critically the legislative history of § 16(b).
The Court of Appeals considered this case against the background, sketched above, of ambiguity in the pertinent statutory language, continued disagreement among the commentators, and a perceived absence in the relatively few decided cases of a full consideration of the purpose and legislative history of § 16(b). The court found unpersuasive the rationales offered in Stella and its progeny for the "immediately after the purchase" construction. It noted that construing the provision to require that beneficial ownership status exist before the purchase in a purchase-sale sequence would not foreclose an "immediately after the purchase" construction in a sale-repurchase sequence. [ Footnote 15 ] 506 F.2d at 614-615. More significantly, the Court of Appeals challenged directly the premise of the earlier cases that a "before the purchase" construction in a purchase-sale sequence would allow abuses Congress intended to abate. The court reasoned that, in § 16(b), Congress intended to reach only those beneficial owners who both bought and sold on the basis of inside information, which was presumptively
available to them only after they became statutory "insiders." 506 F.2d at 608-614. [ Footnote 16 ]
The general purpose of Congress in enacting § 16(b) is well known. See Kern County Land Co., 411 U.S. at 411 U. S. 591 -592; Reliance Electric Co., 404 U.S. at 404 U. S. 422 , and the authorities cited therein. Congress recognized that insiders may have access to information about their corporations not available to the rest of the investing public. By trading on this information, these persons could reap profits at the expense of less well informed investors. In § 16(b), Congress sought to
Reliance Electric Co., supra, at 404 U. S. 422 . It accomplished this by defining directors, officers, and beneficial owners as those presumed to have access to inside information, [ Footnote 17 ] and enacting a flat rule
that a corporation could recover the profits these insiders made on a pair of security transactions within six months. [ Footnote 18 ]
404 U.S. at 404 U. S. 424 (footnote omitted). From these premises, Foremost argues that the Court of Appeals' construction of the exemptive provision must be rejected [ Footnote 19 ] because it makes § 16(b) inapplicable to some possible abuses of inside information that the statute would reach under the Stella construction. [ Footnote 20 ] We find this approach unsatisfactory in its focus on situations that § 16(b) may not reach, rather than on the language and purpose of the exemptive provision itself. Foremost's approach also invites an imposition of § 16(b)'s liability without fault that is not consistent with the premises upon which Congress enacted the section.
The exemptive provision, which applies only to beneficial owners and not to other statutory insiders, must have been included in § 16(b) for a purpose. Although the extensive legislative history of the Act is bereft of any explicit explanation of Congress' intent, see Reliance Electric Co., supra at 404 U. S. 424 , the evolution of § 16(b) from its initial proposal through passage does shed significant light on the purpose of the exemptive provision.
In the next version of the legislation, H.R. 8720, 73d Cong., 2d Sess. (1934), § 15(b) read almost identically to § 16(b) as it was eventually enacted: [ Footnote 21 ]
Thomas G. Corcoran, a spokesman for S. 2693's drafters, explained § 15(b) as forbidding an insider "to carry on any short-term specu[la]tions in the stock. He cannot, with his inside information, get in and out of stock within six months." Hearings on H.R. 7852 and H.R. 8720 before the House Committee on Interstate and Foreign Commerce, 73d Cong., 2d Sess., 133 (1934). The Court of Appeals concluded that § 15(b) of S. 2693
would have applied only to a beneficial owner who had that status before a purchase-sale sequence was initiated, 506 F.2d at 609, and we agree. Foremost appears not to contest this point. Brief for Petitioner 29. The question thus becomes whether H.R. 8720's change in the language imposing liability and its addition of the exemptive provision were intended to change S. 2693's result in a purchase-sale sequence by a beneficial owner. We think the legislative history shows no such intent.
S. 2693 and its House counterpart, H.R. 7852, 73d Cong., 2d Sess. (1934), met substantial criticism on a number of scores, including various provisions of § 15. See Hearings on Stock Exchange Practices before the Senate Committee on Banking and Currency, 73d Cong., 2d Sess., pt. 15 (1934); Hearings on H.R. 7852 and H.R. 8720, supra at 1-623. [ Footnote 22 ] S. 2693 was recast into H.R. 8720 to take account of the criticisms that the bill's drafters thought valid. Hearings on H.R. 7852 and H.R. 8720, supra at 625, 674. The primary substantive criticism directed at § 15(b) of S. 2693 was that it did not prevent the use of inside information to reap a short-term profit in a sale-repurchase situation. See Hearings on Stock Exchange Practices, supra at 6557-6558. Criticism was also directed at making liability for short-term profits turn on ownership "as of record and/or beneficially." See id. at 6914. H.R. 8720 remedied these perceived shortcomings by providing in § 15(b):
owner, director, or officer from any purchase and sale or sale and purchase . . . shall inure to and be recoverable by the issuer. [ Footnote 23 ]"
It was possible to construe the phrase "owning . . . 5 per centum" to apply to directors and officers as well as to mere stockholders, so that trading by directors and officers would not be subject to § 15(b) if their previous holdings did not exceed 5. But Corcoran made clear that the requirement of preexisting
The legislative record thus, reveals that the drafters focused directly on the fact that S. 2693 covered a short-term purchase-sale sequence by a beneficial owner only if his status existed before the purchase, and no concern was expressed about the wisdom of this requirement. But the explicit requirement was omitted from the operative language of the section when it was restructured to cover sale-repurchase sequences. In the same draft, however, the exemptive provision was added to the section. On this record, we are persuaded that the exemptive provision was intended to preserve the requirement of beneficial ownership before the purchase. Later discussions of the present § 16(b) in the hearings are consistent with this interpretation. [ Footnote 24 ] We hold that,
in a purchase-sale sequence, a beneficial owner must account for profits only if he was a beneficial owner "before the purchase." [ Footnote 25 ]
Section 16(b) imposes a strict prophylactic rule with respect to insider, short-swing trading. In Kern County Land Co., 411 U.S. at 411 U. S. 595 , we noted:
In short, this statute imposes liability without fault within its narrowly drawn limits. [ Footnote 26 ]
As noted earlier, Foremost recognizes the ambiguity of the exemptive provision, but argues that, where "alternative
constructions" of § 16(b)'s terms are available, we should choose the construction that best serves the statute's purposes. Foremost relies on statements generally to this effect in Kern County Land Co., supra at 411 U. S. 595 , and Reliance Electric Co., 404 U.S. at 404 U. S. 424 . In neither of those cases, however, did the Court adopt the construction that would have imposed liability, thus, recognizing that serving the congressional purpose does not require resolving every ambiguity in favor of liability under § 16(b). We reiterate that nothing suggests that the construction urged by Foremost would serve better to further congressional purposes. Indeed, the legislative history of § 16(b) indicates that, by adding the exemptive provision, Congress deliberately expressed a contrary choice. But even if the legislative record were more ambiguous, we would hesitate to adopt Foremost's construction. It is inappropriate to reach the harsh result of imposing § 16(b)'s liability without fault on the basis of unclear language. If Congress wishes to impose such liability, we must assume it will do so expressly or by unmistakable inference.
It is not irrelevant that Congress itself limited carefully the liability imposed by § 16(b). See Reliance Electric Co., supra, at 404 U. S. 422 -425. Even an insider may trade freely without incurring the statutory liability if, for example, he spaces his transactions at intervals greater than six months. When Congress has so recognized the need to limit carefully the "arbitrary and sweeping coverage" of § 16(b), Bershad v. McDonough, 428 F.2d 693, 696 (CA7 1970), cert. denied, 400 U.S. 992 (1971), courts should not be quick to determine that, despite an acknowledged ambiguity, Congress intended the section to cover a particular transaction.
Our construction of § 16(b) also is supported by the distinction Congress recognized between short-term trading by mere stockholders and such trading by directors and officers. The legislative discourse revealed that Congress thought that all short-swing trading by directors and officers was vulnerable to abuse because of their intimate involvement in corporate affairs. But trading by mere stockholders was viewed as being subject to abuse only when the size of their holdings afforded the potential for access to corporate information. [ Footnote 27 ] These
It would not be consistent with this perceived distinction to impose liability on the basis of a purchase made when the percentage of stock ownership requisite to insider status had not been acquired. To be sure, the possibility does exist that one who becomes a beneficial owner by a purchase will sell on the basis of information attained by virtue of his newly acquired holdings. But the purchase itself was not one posing dangers that Congress considered intolerable, since it was made when the purchaser owned no shares or less than the percentage deemed necessary to make one an insider. [ Footnote 28 ] Such a stockholder is more analogous to the stockholder who never owns more than 10%, and thereby is excluded entirely from the operation of § 16(b), than to a director or officer whose every purchase and sale is covered by the statute. While this reasoning might not compel our construction of the exemptive provision, it explains why Congress may have seen fit to draw the line it did. Cf. Adler v. Klawans, 267 F.2d 840, 845 (CA2 1959).
Section 16(b)'s scope, of course, is not affected by whether alternative sanctions might inhibit the abuse of inside information. Congress, however, has left some problems of the abuse of inside information to other remedies. These sanctions alleviate concern that ordinary investors are unprotected against actual abuses of inside information in transactions not covered by § 16(b). For example, Congress has passed general antifraud statutes that proscribe fraudulent practices by insiders. See Securities Act of 1933, § 17(a), 48 Stat. 84, 15 U.S.C. § 77q(a); Securities Exchange Act of 134, § 10(b), 15 U.S.C. § 78j(b); 3 Loss, supra, n 11, at 1423-1429, 1442-1445. Today an investor who can show harm from the misuse of material inside information may have recourse, in particular, to § 10(b) and Rule 10b-5, 17 CFR § 240.10b-5 (1975). [ Footnote 29 ] It also was thought that § 16(a)'s publicity requirements [ Footnote 30 ]
would afford indirect protection against some potential misuses of inside information. [ Footnote 31 ] See Hearings on H.R. 7852 and H.R. 8720, supra at 134-135; H.R.Rep. No. 1383, 73d Cong., 2d Sess., 13 (to accompany H.R. 9323, 73d Cong., 2d Sess., passed by the House, May 4, 1934, without the present § 16(b)).
Foremost and amicus Allis-Chalmers Manufacturing Co. point to §§ 16(d) and (e) of the Act, 15 U.S.C. §§ 78p(d) and (e), as congressional actions that would not have been necessary unless one selling the securities the acquisition of which made him a beneficial owner is liable under § 16(b). Section 16(d), in part, exempts from § 16(b) certain transactions by a securities "dealer in the ordinary course of his business and incident to the establishment or maintenance by him of a primary or secondary market." [ Footnote 32 ] Section 16(e) provides an exemption for certain "foreign or domestic arbitrage transactions." [ Footnote 33 ] They argue similarly that the SEC's
Rule 16b-2, 17 CFR § 240.16b-2 (1975), is unnecessary if our construction of § 16(b) is correct. Rule 16b-2 exempts from § 16(b) specified transactions in connection with the distribution of a "substantial block of securities." [ Footnote 34 ]
We do not consider these provisions to be inconsistent with our holding. Nothing on their faces would make them applicable to one selling the securities the purchase of which made him a beneficial owner. But the exemptions would be necessary to protect stockholders already qualifying as beneficial owners when they purchased, [ Footnote 35 ] and they would, of course, apply to transactions by directors and officers as well.
Foremost and the amicus also remind us that the interpretation of the exemptive provision for which they contend has been adopted by the SEC in the past. See Brief for SEC as Amicus Curiae in Reliance Electric Co. v. Emerson Electric Co., O.T. 1971, No. 779, pp. 22-27. But the Commission has not appeared as an amicus in this case. In any event, even if the Commission's views have not changed, we would not afford them the deference to which the views of the agency administering a statute are usually entitled, for in Reliance Electric Co., 404 U.S. at 404 U. S. 425 -427, the Court rejected the basic theory on which the SEC based its interpretation
Newmark describes a possible abuse of inside information covered only under the Stella construction. See n. 423 U. S. 13 , supra.
The Court granted certiorari on Reliance's petition to review this construction of "at the time of . . . sale," and affirmed. The construction of "at the time of the purchase," however, was not before the Court. 404 U.S. at 404 U. S. 420 -422. Emerson thus remained liable for the 3.24% sale, although it would have had no liability under our holding today. The Court of Appeals for the Seventh Circuit has noted correctly that the construction of "at the time of . . . sale" in Reliance Electric Co. is superfluous in light of the construction of "at the time of the purchase" adopted by the Court of Appeals for the Ninth Circuit, which we affirm here. See Allis-Chalmers Mfg. Co., 527 F.2d at 348 n. 12. But the procedural posture of Reliance Electric Co. prevented a full consideration of the meaning of the exemptive provision. See ibid. We express no opinion on the interpretation of the provision by which the Court of Appeals for the Seventh Circuit sought to avoid the apparent superfluity of the "at the time of . . . sale" language. Id. at 348; supra, n 16.