Opinion ID: 406453
Heading Depth: 1
Heading Rank: 4

Heading: the pro-rata distribution of rpi stock to rlc shareholders: was rathborne a purchaser?

Text: 28 Appellant argues that RLC's pro rata distribution of RPI stock to RLC shareholders was itself a sale of securities and that as a recipient of that stock, the plaintiff was a purchaser. The district court rejected these contentions and held that plaintiff was not a statutory purchaser with standing to assert a 10b-5 claim. We agree. 17 29 The distribution of RPI securities to RLC shareholders was not a garden variety purchase or sale transaction. The recipients did not pay for the securities, nor did the distributing corporation sell them in the ordinary sense of the word. However, the fact that no value was paid is not necessarily dispositive. 18 This court has consistently held that a statutory purchase or sale for the purposes of Rule 10b-5 may in some cases encompass transactions that bear little resemblance to conventional common law purchases and sales. Junker v. Crory, 650 F.2d 1349, 1359 n.15 (5th Cir. 1981); Alley v. Miramon, 614 F.2d 1372, 1380 (5th Cir. 1980); Smallwood v. Pearl Brewing Co., 489 F.2d 579, 590 (5th Cir. 1974). In determining whether a party to a securities transaction is a purchaser or seller, we must ask whether the transaction has wrought a fundamental change in the nature of the plaintiff's investment. Watts v. Des Moines Register and Tribune, 525 F.Supp. 1311, 1318 (S.D.Ia.1981); McCloskey v. McCloskey, 450 F.Supp. 991, 995 (E.D.Pa.1978). The crucial question is not whether the transaction fulfills the requisites of a common law sale; the core issue is whether the transaction has transformed the plaintiff into the functional equivalent of a purchaser or seller-has the plaintiff been forced to exchange his stock for shares representing a participation in a substantially different enterprise? 19 We must focus upon the economic reality of the transaction, United Housing Foundation v. Forman, 421 U.S. 837, 848, 95 S.Ct. 2051, 2058, 44 L.Ed.2d 621 (1975); Watts v. Des Moines Register and Tribune, supra; McCloskey v. McCloskey, supra ; and determine whether the transaction has transformed the plaintiff's interests in any real sense. McCloskey, supra at 995. 20 30 Applying this economic reality test to the facts of the instant case, we find that the plaintiff was not subjected to the kind of fundamental change in the nature of his investment which is necessary to constitute a statutory purchase or sale. Prior to RLC's distribution of RPI shares, RLC held all of RPI's outstanding stock. At that point, Rathborne's one-eighth interest in RLC represented a participation in both RLC and RPI. After the distribution, Rathborne continued to hold stock representing a one-eighth interest in RLC and RPI. Thus, he continued to possess the same proportionate interests in the same enterprises, with the same assets, and the same prospects. His voting rights did not change, nor did his degree of control. 31 In sum, the plaintiff has failed to allege any facts which could support a finding that the nature of his investment substantively changed as a result of the pro rata distribution of RPI stock. Accordingly, we reject his contention that he experienced a purchase as a consequence of this transaction. 21