Opinion ID: 510320
Heading Depth: 2
Heading Rank: 1

Heading: The Sale of a Business Doctrine

Text: 36 We first address the argument--advanced by Bond, Four Seasons, Barlow and Peterson--that the trial court was without jurisdiction to consider USI's claim that the 1973 sale of one hundred percent of FEK's stock to HI violated federal securities law. 11 According to the defendants, the sale of FEK's stock involved the acquisition of a business intended to be operated and managed by HI, and not the purchase of a security as an investment by HI with the expectation of deriving profit from the efforts of others. Brief of Appellants Joseph A. Bond and Four Seasons Management Company, at 16. As a consequence, defendants contend, the transaction did not involve a 'security,' and thus is beyond the scope of the federal securities laws and the jurisdiction of the District Court. Id. 37 We do not agree. The position advocated by defendants, commonly known as the sale of a business doctrine, was specifically rejected by the Supreme Court in the companion cases of Landreth Timber Co. v. Landreth, 471 U.S. 681, 105 S.Ct. 2297, 85 L.Ed.2d 692 (1985), and Gould v. Ruefenacht, 471 U.S. 701, 105 S.Ct. 2308, 85 L.Ed.2d 708 (1985). See Schaafsma v. Morin Vermont Corp., 802 F.2d 629, 636 (2d Cir.1986); Penturelli v. Spector, Cohen, Gadon & Rosen, 779 F.2d 160, 164 (3d Cir.1985); St. Philip Towing & Transp. Co. v. Pavers, Inc., 768 F.2d 1233, 1234 (11th Cir.1985). In Landreth and Gould, the Court noted that where an instrument bears the label 'stock' and possesses all the characteristics typically associated with stock, ... a court will not be required to look beyond the character of the instrument to the economic substance of the transaction to determine whether the stock is a 'security' within the meaning of the [Securities] Acts. Gould, 471 U.S. at 704, 105 S.Ct. at 2310. 38 Because it is undisputed that the shares purchased by HI in the present case bear all the indicia of stock, we conclude that they are securities within the meaning of the federal securities laws. Consequently, the trial court properly exercised its jurisdiction.