Opinion ID: 545494
Heading Depth: 2
Heading Rank: 2

Heading: Judicial Construction of Sec. 16(b)

Text: 14 Since its passage the Supreme Court has construed Sec. 16(b) in a number of cases. In the earliest, Blau v. Lehman, 368 U.S. 403, 82 S.Ct. 451, 7 L.Ed.2d 403 (1962), it refused to hold an entire partnership liable for short-swing profits as an insider when one of its members was a director of the issuer because the plain language of Sec. 16(b) did not provide for partnership liability, though the director was susceptible to suit in his individual capacity for the profits he realized. Id. at 411-14, 82 S.Ct. at 455-57. In Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582, 93 S.Ct. 1736, 36 L.Ed.2d 503 (1973), a tender-offeror that purchased more than ten percent of the stock of Kern County Land Co. had its shares of Kern converted into new Tenneco stock when Tenneco merged with Kern in a defensive transaction. The tender-offeror negotiated a contract to sell to Tenneco the shares it would receive after the merger. Writing that traditional cash-for-stock purchases fall within Sec. 16(b), but that certain unorthodox transactions are not so easy to resolve, the Court observed that these borderline transactions are within the statute's reach if they are a vehicle promoting the evil Congress sought to prevent. Id. at 593-94, 93 S.Ct. at 1744. The Court noted that the transaction in question was not based on a statutory insider's information and therefore was not vulnerable to the speculative abuse barred by Sec. 16(b), and held that neither the exchange of shares in the merger nor the execution of the option contract constituted a sale under Sec. 16(b). See id. at 600-01, 93 S.Ct. at 1747-48. 15 In Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 92 S.Ct. 596, 30 L.Ed.2d 575 (1972), Emerson Electric, a holder of more than ten percent of Dodge Manufacturing Co., made two sales of stock within six months after purchasing it, the first of which reduced its holdings to less than ten percent. The question was whether the profits from the second sale, made within six months of its purchase but not while Emerson was a ten percent holder, were recoverable by the corporation under Sec. 16(b). In holding that they were not, the Supreme Court observed that a ten percent owner must under the statute be such  'both at the time of the purchase and sale ... of the security involved,'  15 U.S.C. Sec. 78p(b), and since Emerson Electric was not such an owner at the time of the second sale, the method it had used to avoid liability was one permitted by the statute. 404 U.S. at 422-23, 92 S.Ct. at 599-600. The Court reasoned that, because liability under the statute is predicated upon objective proof, a trader's intent and/or motive is irrelevant and hence, Emerson Electric was not liable under Sec. 16(b). Id. at 425, 92 S.Ct. at 600. In Reliance the statutory language was clear; only where differing constructions of Sec. 16(b)'s terms are possible may a court interpret the statute in a way that serves Congress' purpose. Id. at 424, 92 S.Ct. at 600. Here, we are faced with the latter scenario.