Document: 411 U.S. 582 93 S.Ct. 1736 36 L.Ed.2d 503 KERN COUNTY LAND COMPANY, Petitioner,v.OCCIDENTAL PETROLEUM CORPORATION. No. 71—1059 Argued Dec. 5 and 6, 1972. Decided May 7, 1973. Syllabus During a tender-offer campaign, respondent bought more than 10% of the outstanding stock petitioner's predecessor (Old Kern). Respondent was blocked in its takeover efforts by defensive merger between Old Kern Tenneco, which stockholders were to receive new Tenneco on share-for-share basis. Less month after initial tender offer, thereupon negotiated binding option sell at date over six months offer expired all would be entitled when took place. Sale postmerger yielded profit some $19 million, petitioner sought recover suit under § 16(b) Securities Exchange Act 1934, prohibiting profitable short-swing speculation statutory insiders. The District Court's summary judgment for reversed Court Appeals. Held: transactions, not based insider's information susceptible speculative abuse that designed prevent, did constitute 'sales' within meaning provision. Pp. 591—604. (a) There nothing connection with respondent's acquisition or exchange thereof gave 'inside information,' once merger, engineer, approved Kern-Tenneco involuntary. 596—600. (b) agreement itself 'sale'; grounded mutual advantages as minority stockholder wanted terminate an investment it had chosen make whose management want potentially troublesome stockholder; source potential abuse, since no inside about stock. 601—604. 450 F.2d 157, affirmed. David R. Hyde, New York City, petitioner. Whitney North Seymour, respondent. Mr. Justice WHITE delivered opinion Court. 1 Section 48 Stat. 896, 15 U.S.C. 78p(b),1 provides officers, directors, holders listed any company shall liable profits realized from purchase sale such occurring period months. Unquestionably, one purchases occur company, seeking gain control another, acquires latter through made shareholders. But is 'sale' target defends merging into third offeror then exchanges his surviving also grants exercisable six-month period? This question before us this case. 2 * On 8, 1967, unsuccessfully merge County Land Co. Kern),2 Occidental Petroleum Corp. (Occidental)3 announced expire June first-come, first-served basis 500,000 shares common stock4 price $83.50 per share plus brokerage commission $1.50 share.5 By 10, shares, Kern,6 been tendered. 11, extended encompass additional shares. At close owned 887,549 Kern.7 3 Immediately upon announcement Occidental's undertook frustrate attempt. A letter cautioned against indicated might best available, engaged discussions several companies. When president sent telegram again advising tender. In addition, Inc. (Tenneco),8 and, 19, Board Directors proposal advanced Tenneco.9 Under terms acquire assets, property, goodwill Kern, subject liabilities, 'Kern Co.' (New Kern),10 corporation formed assets carry business Kern. shareholders cumulative convertible preference each they owned. same day, Occidental, quarterly report stockholders, appraised value $105 share.11 4 seeing attempt being 'defensive' countered 25 31 two mandamus actions California courts obtain extensive inspection books records.12 Realizing that, if successfully closed, have locked position other steps protect itself. Between 30 2, arrangement whereby granted Corp., subsidiary closed.13 premium secure $10 share, totaled $8,866,230 paid immediately signing agreement.14 If exercised exercised, applied price. agreement, could prior December 9, day expiration offer. ownership executed option.15 Soon thereafter, oppose dismissed state court suits Kern.16 plan presented their meeting July 17, 1967. refrained voting but read stated determined consider unfair inequitable.17 Indeed, voting, voted favor merger. 6 Meanwhile, Commission refused request exempt possible liability take place transaction closed. Various interests mind, delay consummation instituting various lawsuits federal courts.18 These attempts unsuccessful, however, preparations neared completion Internal Revenue Service ruling result tax-free taxable loss shareholders, issuance necessary approval closing Commissioner Corporations. 7 closed August 30. became irrevocably stock, dissolved including 'all claims, demands, rights choses action accrued accrue virtue 1934 . .,' transferred 8 having previously availed right, exchanged certificates representing certificate like number endorsed optionee-purchaser, return $84,229,185 credited accounts banks. Adding amount $8,886,230 June, received $93,905,415 (including 1,900 acquired offer). dividends totaling $1,793,439.22. total $19,506,419.22 obtained 9 October instituted dealings complaint alleged execution Occidental-Tenneco pursuant 30, both coverage 16(b). Since acts owner asserted required surrender Occidental.19 eventually moved judgment, 27, 1970, Abrams v. 323 F.Supp. 570 (SDNY 1970). held ordered disgorge interest. supplemental opinion, refund 10 appeal, Appeals entered Occidental. 157 (CA2 1971). neither nor constituted purview s 16(b).20 We certiorari. 405 1064, 92 1498, 793 (1972). affirm. II 11 provides, inter alia, insider21 must issuing 'any him sale, purchase, equity security22 issuer less months.' As specified introductory clause, enacted '(f)or purpose preventing use may (a insider) reason relationship issuer.' Congress recognized shortswing advance, threaten goal 'insure maintenance fair honest markets.' 78b. Insiders exploit generally available others quick profits. we noted, 'the only method deemed effective curb evils insider trading flat rule taking out class transactions possibility believed intolerably great.' Reliance Electric Emerson Co., 404 418, 422, 596, 599, 575 Senate Committee, bill aimed protecting public 'by principal speculating others.' S.Rep.No.792, 73d Cong., 2d Sess., (1934).23 12 Although traditional cash-for-stock six-month, are clearly 16(b), wrestled inclusion exclusion certain 'unorthodox' transactions.24 definitions 'purchase' broad least arguably, reach many ordinarily purchase.25 deciding whether borderline statute, come inquire serve vehicle evil prevent—the realization access information26—thereby endeavoring implement congressional objectives without extending statute beyond intended limits. requires inside, trader 'purchases' time period, proof actual information, intent information. these strict terms, prevailing view apply application goals. '(W)here alternative constructions possible, those given construction serves curbing corporate insiders.' U.S., 424, S.Ct., 600. See Blau Lamb, 363 507 1966), cert. denied, 385 1002, 87 707, 17 542 (1967). Thus, '(i)n interpreting 'sale,' properly asked particular type involved gives rise abuse.' supra, 424 n. 4, 600.27 13 present case, undisputed 'beneficial owner' when, 'purchased' decide, ambit either bound so acquired.28 III 14 signed, Concededly, viewed though day. But, even so, involve 16(b)? agree not, think totally unrealistic assume infer facts likely afford opportunity reap speculative, disposition purchases. It cannot contended irrevocable substantially above market. time, far fewer 432,000 needed statute. finding commenced, enjoyed Kern's affairs. 16 wide mark assert sophisticated knowledgeable matters affairs finance, knew succeed met 'defensive merger.' failed, argued, company's partner substantial profit. Calculations sort, do represent kind aimed, stockholdings yet exist. Accepting very prediction recurringly accurate forecast situations,29 nevertheless fail perceive how fruition anticipated events require, way depend upon, receipt there redressed deterring who offers, does appear task. thus include another quite unconvinced, situation changed materially respect possibilities Perhaps increase likelihood ultimate success occurrence again, expectation benefits unrelated unavailable members sufficient funds intention offered 18 had, have, confidential seems extremely remote. was, all, offeror, threatening seize displace management, own ends. vigorously opposed efforts. Twice communicated acceptance indicating extension imminent exchange. discuss officials Kern-Occidental Instead, negotiations forthwith concluded announcing 19. Requests records sufficiently frustrated force litigate desired. 19 is, therefore, classified indicate Much can said leading preferred, wought critical fact Tenneco. That engineered obviously participate Cf. Newmark RKO General, 425 348 (CA2), 400 854, 91 64, 27 (1970); Park Tilford Schulte, 160 984 332 761, 68 L.Ed. 347 (1947). Once companies crystallized, course subsequent hands. consent turned out, votes affirmative vote majority excluding Ferraiolo Newman, 259 342 (CA6 1958), 359 927, 79 606, 629 (1959); Roberts Eaton, 212 82 1954). although registering beneficial stockholders' obtained. law, abstention tantamount Moreover, ratification previous dealing always been, fully disclosed. 20 approved, left real choice future prevent preferred tax free; begun postpone futile. Corporation issued permits right dissenters appraisal could, course, disposed cash Such act prima facie liability. realistic long felt defend one. Petteys Butler, 367 528 (CA8 1006, 712, 545 (1967); supra; Lynam Livingston, 276 104 (Del.1967); Hodgkinson, 100 361 1951). suggest never involuntary nature exchange, coupled absence convinces should IV 21 Petitioner claims considered because form fact. mere regarded 'sale.' Booth Varian Associates, 334 (CA1 1964), 379 961, 85 651, 556 (1965); Allis-Chalmers Mfg. Gulf & Western Industries, 309 75 (ED Wis.1970); Marquette Cement Andreas, 239 962 1965). And find warrant holding clear. found, avoid huge invest. hand, just vanquished fight Motivations smack trading; clear us, Appeals, negotiation trade major get thence. willing publicly valued Tenneco-Old announced. event, putative owners undoubtedly Tenneco's leverage incredible rather large 22 Neither drafted parties, measurable abuse. What 'call' option. buy months, buy. fixed preferred. rising market Silverman Landa, 306 422 1962). fell suffer further deteriorated point where forced sell. option, form, almost sure remained relatively steady. difficult declined chose exercise Note, Put Call Options Act, 69 Yale L.J. 868 (1960); H. Filer, Understanding 96—111 G. Leffler, Stock Market 363—378 (2d ed. 1957). 23 instrument possessed covered unissued, unregistered, untraded. underlay able exercise, exploitation signed Whatever known expected giving presumed insights item intelligence purposes speculation. Also, future, itself, assumed dissipate whatever advantage imputed Comment, Exchanges Pursuant Corporate Consolidation: 'Purchase Sale?,' 117 U.Pa.L.Rev. 1034, 1054 (1969); supra. enshrining also, taken accomplish purpose, limited possibilities. Nor forgotten absolute assurance controlled consummated. event close, become null void. 24 reverse ground inevitable, particularly desire rid stockholder. argument has force, resolution much matter economic otherwise, rejected argument. emphasized what experts worth, drop following unlikely, here, unlike Bershad McDonough, 428 693 (CA7 1970), optionor practically emoluments executing special circumstances parties understood sale.30 see satisfactory disagreeing respect.31 26 So ordered. DOUGLAS, whom BRENNAN STEWART concur, dissenting. 28 Court, resorting ad hoc analysis 'possibility charts interpretation 78p(b), my mind undermines purpose. I respectfully dissent. 29 'The written broadly, imposes strict.' 431, 603, (Douglas, J., dissenting). Except narrowly drawn exceptions, all-inclusive.1 operative language provides: '(A)ny owner, director, officer) security (other exempted security) unless good faith debt contracted, inure recoverable issuer, irrespective part officer entering purchased repurchasing sold exceeding (Emphasis added.) section subsumes technically sales applies advantage. Feder Martin Marietta 406 260, 262 1969). conclusion inescapable (Occidental) Kern) 'round trip' literal 32 excess 880,000 during acquisitions section.2 newly Kern), (Tenneco), Corporation's parent. 1967 (within offer), shareholder receive, 33 term used includes contract otherwise dispose of.' 78c(a)(14). Clearly, 'disposed' consolidation. Its status terminated, instead privy conferred shares.3 Newmark, 1970); 1947).4 view, need look further. Brother Blackmun, Circuit Judge, dissent 528, 538 1966): 34 'My reaction means literally says not; provide done language; aim consistently protectively served construed objectively non-literally subjectively case-by-case application. inevitably weakening process.' 35 finesses impact examining willfulness concludes: 'But one.' Ante, approach plainly contrary legislative preamble: 'preventing ..' investigations led enactment revealed widespread insiders corporations' securities.5 Unlike remedial provisions most noteworthy 10(b), 78j(b), objective rule, 'prophylactic' effect. Lehman, 368 403, 414, 451, 457, 403. Heli-Coil Webster, 352 156, 165—166 (CA3 1965); Smolowe Delendo 136 231, 235 1943). Thomas Corcoran, drafts man explained Congress: 37 'You hold after, will absolutely impossible prove existence expectation, you crude thumb, undertake burden director intended, he bought, short swing.'6 38 Electric, noted 599 (emphasis added). Certainly, mergers transactions.7 example, merged RKO. found 'not knowledge transpire influence events.' F.2d, 353. 'In sum,' concluded, Central fraught opportunities abort.' Id., 354. 39 resisted operation responded follows Special Committee Regulation Association Bar City York:8 40 'We removing 'teeth' discourage allow create surrounding significant outweighed conflict. know persons unwittingly caught situations falling our interest investors better area unrestricted section.' 41 true cases lend themselves abuses draftsmen carefully weighed eventuality opted bright-line rule. Corcoran stated: general work hardship, hardship sacrifice necessity rule.'9 42 reinforces first instance10 relevant transactions.11 236. Had hinge anomalous limit months.12 limitation, definition insider, conclusive presumption turns capitalized departs benign effects assumes 'totally 596. abides assumption order 43 takes heart decisions lower endorse 'pragmatic' Many conversion sale.13It parse holdings because, Louis Loss describes, 'generalization-defying nature.'14In 1966 exemptive power adopt Rule 16b—9,15 conditions excludes relieve developed analyses narrow area. sanctioning cases, brings Loss' prophecy 'continue graves,'16 henceforth certainly analogy consolidations. 44 up transaction, determining economics modus operandi exists Instead easy administer clearcut discourages litigation, fosters litigation decision holds hope short, destroys section's prophylactic '(e)very reasonably defined (should) defined, possibly encompassed 16(b).' 342, 345 (CA6, 1958) (Stewart, Judge). Certainly fall classic conception escape confines thing interpret liberally evidence civil eliminate; abandon test bounds. allows abused surprising, unwillingly. 45 quoted 693, 696 1970): 46 achieve goals, arbitrary capable administration. standard regardless maximized ability eradicate reducing difficulties proof. sweeping insure optimum effect.' 47 'objective standard' hung tenaciously now apparently extent. improperly task refashioning contours 16(b)17 changing essential thrust. conclude below grounds proper direct entry accepted notwithstanding failure move To say least, extroardinary procedure.18 Even justified circumstances—for record doubt whatsoever nonmoving party law—this 49 consequence $20 .. falls 570, 579—580. reasonable law substance sale. contest reality distinguishes reject Bershad. Rather, 'see disagreeing' 'no basis' 'sold' option.19 agree. 50 Bershad, defendants, approximately 18% Cudahy $6.75 obligating $9 share. $9.125. optionee $350,000 (14% price) forfeited nonexercise. defendants proxy optioned defendant McDonough colleagues resigned board directors. '(t)he effectively transferred, practical purposes, option.' 698. 51 comparison, here $105, $8,866,230, nonexercise nearly estimated consolidation.20 executed, attorney authorized acquisition, until apparent relieved obligation. abandoned demand seats board, well records. 52 concluding case testimony21 forfeitable down payment reasonable, noncoercive deposition vice presidents stating firm advised $12 selling $95. suffice support judgment. First, assumptions advice. Second, while factors investing public, judged terms.22 eventual 'sure thing.' 'locked into' $17 million profit.23 Finally, effect, any, size payment—nearly million—had exercise. With uncertainties remanded hearing 'compelled' Mourning Family Publications Service, Inc., 356, 383, 1652, 1667, 318, dissenting); White Motor United States, 372 253, 263, 83 696, 702, 738; J. Moore, Federal Practice 56.12, p. 2243 1972). 'For Suit competent jurisdiction name behalf refuse bring sixty days diligently prosecute thereafter; brought years realized. subsection cover involved, rules regulations comprehended subsection.' 78p(b). estate holdings, oil-producing lands, oil-exploration activities, cattle ranching, cattle-feeding operations, manufacture automotive parts, electronic systems devices, farm machinery equipment. After reorganization described text, 600 dissolution California, production oil, gas, coal, sulphur, fertilizers. registered amended, 78l. nonexempt, 63 5/8 Friday, last reached high 64 7/8 low 57 3/8 76 1/4 3/4 1966, 71 56 1965, 70 1964. $85-per-share represented 4,328,000 outstanding. 18, filed Form 3, Initial Statement Beneficial Ownership Securities, 507,055 stock; Changes May, 376,326 31, 883,381 An additional, 4,168 figure included open April Delaware corporation, diversified industrial operations natural gas transmission, oil chemicals, packaging, manufacturing, shipbuilding. litigation. combination referred 'merger' similarly denominated opinion. significance characterization required, provided dissenters. wholly turn, owns capital controlling nonpipeline operating subsidiaries. incorporated, KCL annual dividend $5.50 double current $2.60 Each 3.6 1/2 7/8. contrast be, ultimately as, free gains tax. Prior petitions, voluntarily permitted ledger, consolidated financial statements, journal entries, details receipts supporting trial balances, six-day period. list withheld. 886,623 926 discrepancy results uncertainty outside banking date, $95 Seeking matched establishing liability, 6. 'did interest, Shareholders (oppose) transaction.' However, worked KCL, Shareholder's Meeting 1967.' applicable opposing history reviewed Harjean 284 843 (N.D.Tex.1968). answered asserting defenses counterclaims. Two already subsequently begun. four consolidated. disposition, contentions calculating awards prejudgment improper. appealed dismissal appeal moot. For officer.' refers 'more centum 75l (§ 12) title.' 78p(a). 'equity security' similar security; convertible, consideration, security, carrying subscribe right; deem appropriate, prescribe protection investors, treat security.' 78c(a)(11). reveals effort them policy. 'Among vicious practices unearthed hearings subcommittee flagrant betrayal fiduciary duties directors officers corporations positions trust came positions, aid activities. Closely allied unscrupulous employment who, destinies enable S.Rep.No.1455, 55 (1934). S.E.C.Ann.Rep. (1944); aims predatory owe duty. (16(b)) rendered unlawful intrusted administration vested infor- mation advantage.' draftsmen. '(Section 16(b)) receiving short-term swings securities companies, go corporation. You swing.' Hearings Practices Banking Currency, pt. 15, 6557 H.R. 7852 8720 House Interstate Foreign Commerce, (1934); Practices, 6463—6581 7—9 55—68 H.R.Rep.No.1383, 13—14 231 1943), 320 751, 46, 88 446 (1943); Yourd, Trading Directors, Officers Stockholders: Mich.L.Rev. 133 (1939); Meeker Cooney, Problem Definition Determining Insider Liabilities Va.L.Rev. 949 1034 (1969). term, L. Loss, 1069 1961), conversions, reorganizations, reclassifications, options, rights, warrants. 'When chapter, context requires— '(13) 'buy' buy, acquire. '(14) 'sell' 78c(a)(13), (14). Several so-called 'objective' applying See, e.g., (1947); 156 decisions, types prevent. greater weight authority effect 827, 44, 99 652 (1954); Max Factor 304 (CA9), 382 892, 86 180, 150 discussion 'approaches' Lowenfels, 16(b): Trend Regulating Trading, 54 Cornell L.Q. (1968); Litigation: Return Objective Approach?, 58 907 (1972); Gadsby Treadway, Recent Developments N.Y.L.F. 687 (1971). Our differences scope mistaken, mandate different result, remedy fashion. Both occurred control. Similarly, merger' tactic incumbent arsenal antitender-offer weapons, foregone response often, invariably, employed. Incumbent might, instance, choose exhort tender, employ techniques elevate attractive, institute legal proceedings, Any devices attractive highly detrimental enterprise. Defensive Tactics Employed Managements Contesting Tender Offers, Stan.L.Rev. 1104 greater-than-ten-percent Cudahy, Smelting Refining Mining Seventh grant distinguished follows: 'That appeals district presented, formally later. relied circumstances, associate few replaced optionee. words, 'option' accompanied wink eye, sustained this. Here finding, 165. simply different, insufficiently persuasive, Judge Friendly colleagues. full: acquire.' 78c(a)(13). 78l single percent stock.' 579. ruled 10%, surrendered. issue. surrendered equivalents. Cf., 507, 523—525 1966); 304, 308—309 (CA9 10(b). E.g., SEC National 393 453, 89 564, 668; Dasho Susquehanna 380 1967). Clark, adopted straightforward defining 'acquisition': 'Defendants convert; afterward. Therefore Act.' 984, 987. 'disposition.' Examples practice chronicled elsewhere. 429—430, 602—603, nn. 3—6 dissenting) sources cited therein. recount here. Cases, 84 Harv.L.Rev. 1012, 1018 Letter Nov. 24, 1965. Hearings, 6558. yield flexible eliminate evade discussion, infra, 612—613. preamble section, expresses constitutionality guiding Commission's rulemaking authority. 236 1943); 1041 1961). wherein 'security contracted 1954); 1958); 1966). 3029 (Supp. Release 7826. No inferences refusal. believe structure policies 'exempting' Congress. 56.12 finding. reasons above, presume confronted erroneous. argues $94.75. contends reflected board's proposed discount becomes certainty. reflects risk returned appraise consolidation accomplished. rebut hearsay testimony prevail motion judgment; moreover, faced cross-motion. 'ally,' indicates, arrange agreement. Shortly Armand Hammer, President commented expected. weeks' work.'

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