Legal Document

471 U.S. 681 105 S.Ct. 2297 85 L.Ed.2d 692 LANDRETH TIMBER COMPANY, Petitionerv.Ivan K. et al. No. 83-1961. Argued March 26, 1985. Decided May 28, Syllabus Respondents father and sons, who owned all of the common stock a lumber business that they operated, offered their for sale through brokers. The company's sawmill was subsequently damaged by fire, but potential purchasers were told mill would be rebuilt modernized. Thereafter, purchase agreement executed, ultimately petitioner company formed purchasers. Respondent agreed to stay on as consultant some time help with daily operations mill. After acquisition completed, did not live up purchasers' expectations. Eventually, sold at loss went into receivership. Petitioner then filed suit in Federal District Court rescission damages, alleging respondents had violated registration provisions Securities Act 1933 (1933 Act) antifraud Exchange 1934 (1934 Act). court granted summary judgment respondents, holding under "sale business" doctrine, could considered "security" purposes Acts because managerial control passed hands purchasers, bought 100% stock. concluded transaction thus commercial venture rather than typical investment. Appeals affirmed. Held: issue here is within definition Acts, United Housing Foundation, Inc. v. Forman, 421 837, 95 2051, 44 621, distinguished, doctrine does apply. Pp. 685-697. (a) Section 2(1) § 3(a)(10) define including "stock" other listed types instruments. Although fact instruments bear label itself sufficient invoke Acts' coverage, when an instrument both called bears stock's usual characteristics identified supra, purchaser justifiably may assume federal securities laws involved possesses traditionally associated Moreover, reading apply comports Congress' remedial purpose enacting legislation protect investors. 685-688. (b) When labeled traditional stock, required look economic substance determine whether meaning Acts. A contrary rule supported this Court's prior decisions involving unusual easily characterized "securities." Nor intended, asserted cover only "passive investors" privately negotiated transactions transfer "entrepreneurs." 688-692. (c) An bearing name presents clearest case coverage plain language definition. "Stock" distinguishable from most if categories, viewed being category interpreting "security." 693-694. (d) Application depends has purchaser. Even though corporation's normally transfers control, no intention running themselves. applied here, it also have cases which less sold, inevitably leading difficult questions line-drawing. As explained Gould Ruefenacht, 701, 2308, 708, unknown unknowable parties sold. Such uncertainties attending applicability intolerable. 694-697. 731 F.2d 1348 (CA9 1984) reversed. James Linwood Quarles, III, Washington, D.C., petitioner. A. Smith, Jr., Seattle, Wash., respondents. Justice POWELL delivered opinion Court. 1 This question subject (the Acts). 2 * Ivan Landreth his sons outstanding operated Tonasket, Washington. family Washington out-of-state Before found, heavily fire. Despite brokers continued offer sale. Potential advised damage, completely 3 Samuel Dennis, Massachusetts tax attorney, received letter offering On basis letter's representations concerning rebuilding plans, predicted productivity mill, existing contracts, expected profits, Dennis became interested acquiring He talked John Bolten, former client retired Florida, about joining him investigating offer. having audit inspection conducted, negotiated, company. Pursuant terms agreement, assigned he purchased B & D Co., corporation sole merged company, forming Timber Co. Bolten acquired petitioner's Class representing 85% equity, six investors together remaining 15% equity. 4 Rebuilding costs exceeded earlier estimates, new components turned out incompatible equipment. seeking $2,500,000 widely without registering 1933, 15 U.S.C. 77a seq. alleged negligently or intentionally made misrepresentations failed state material facts worth prospects violation 1934, 78a 5 moved ground covered so-called those respondents' motion dismissed complaint want jurisdiction. It acknowledged statutes include one constituting "security," possessed conventional Nonetheless, joined what termed "growing majority" courts held do closely corporation. App. Pet. Cert. 13a. Relying 621 (1975), SEC W.J. Howey 328 293, 66 1100, 90 L.Ed. 1244 (1946), ruled unless entered anticipation earning profits derived efforts others. Finding investment, complaint. 6 States Ninth Circuit affirmed application doctrine. (1984). bound every realities indicated applied. Because Courts are divided over its we certiorari. 469 1016, 427, 83 354 We now reverse. II 7 axiomatic "[t]he starting point construction statute itself." Blue Chip Stamps Manor Drug Stores, 723, 756, 1917, 1935, 539 (1975) (POWELL, J., concurring); accord, Teamsters Daniel, 439 551, 558, 99 790, 795, 58 808 (1979). Act, 48 Stat. 74, amended set forth 77b(1), defines 8 "any note, treasury bond, debenture, evidence indebtedness, certificate interest participation any profit-sharing collateral-trust certificate, preorganization subscription, transferable share, investment contract, voting-trust deposit security, fractional undivided oil, gas, mineral rights, . or, general, commonly known 'security,' in, temporary interim for, receipt guarantee of, warrant right subscribe purchase, foregoing."1 9 observed past, quite broad, Marine Bank Weaver, 455 556, 102 1220, 1223, 71 409 (1982), includes whose names alone carry well-settled meaning, well "more variable character [that] necessarily designated more descriptive terms," such "investment contract" "instrument 'security.' " C.M. Joiner Leasing Corp., 320 344, 351, 64 120, 123, 88 (1943). face shows title likely Id., 850, S.Ct., 2059. 10 recognized Rather, must possess "some significant typically with" id., 851, 2060, recognizing characteristics, "a [may] apply," usually (i) receive dividends contingent upon apportionment profits; (ii) negotiability; (iii) ability pledged hypothecated; (iv) conferring voting rights proportion number shares owned; (v) capacity appreciate value.2 2060. 11 Under there "securities" That entitling lease apartment housing cooperative. bore none above circumstances, likelihood been misled use word thinking governed purchases. intended acquire low-cost subsidized living space personal use; believed purchasing securities. Ibid. 12 In contrast, undisputed Forman Indeed, so found. unlike context here—the corporation—is kind much investor believe laws. circumstances case, statutory mandates treated 13 Reading "compelling full fair disclosure relative issuance 'the many our world fall ordinary concept security.' U.S., 299, 1103 (quoting H.R.Rep. 85, 73d Cong., 1st Sess., (1933)). recognize Congress intend provide comprehensive remedy fraud, think improperly narrow broad hold falls outside coverage. III 14 might consider analysis outlined answer compelling petitioner.3 urge, however, previous opinions, requires beyond mandated transaction. rejected view covered, saw "no principled way," F.2d, 1353, justify treating notes, bonds, definitional categories differently. address these concerns turn. say entirely clear proper method determining decided looked transaction, just form, example, leasehold interests land near proposed oil drilling. "securities," noted "the reach stop obvious commonplace." 123. devices leaseholds "if proved matter dealt courses dealing established commerce 'investment contracts,' 'any Ibid, 124. 16 further elucidated suggestion dictated. At units citrus grove development coupled contract cultivating marketing fruit remitting proceeds constituted because, looking realities, "involve[d] money enterprise come solely others." 301, 1104. 17 "Howey test" second part decision primarily rely. discussed above, see Part II, first issue, while "stock," argument contracts." Applying test, likewise virtue contracts" showed parted reaping others, commodity consumption. 858, 2063. 18 contend based4 require us reject characteristics. Instead, argue instance test met. According sought earn buy manage control. passive protect, active entrepreneur, "use consume" apartments after Thus, urge 19 disagree interpretation cases. First, important understand contexts decided. All rely See n. 4, supra. all, reality underlying actually type security. bar, plainly There need cases, 20 Contrary implication, never foreclosed possibility found simply purports be. (1943), "[W]e nothing words Act; merely accept them. [proving documents securities] done proving document itself, share stock." 355, 125. different result. correct eschewed "literal" approach carried "stock." not, eliminate label. 686-687. 21 Second, note designed particular contract," fits examples Our consistent view.5 795 (appropriate turn "determine financial relationship constitutes contract"); (1975); 689. applying make enumeration superfluous. Golden Garafalo, 678 1139, 1144 (CA2 1982). Tcherepnin Knight, 389 332, 343, 548, 564 (1967). 22 Finally, cannot agree contains several specifically governing tender offers, corporate officers principal stockholders, recovery short-swing gained persons. See, e.g., §§ 14, 16, 78n, 78p. Eliminating where contravene provisions. Accord, Daily Morgan, 701 496, 503 (CA5 1983). Furthermore, although 4(2) 77d(2), exempts public Act's provisions, comparable exemption structure refute position.6 23 Appeals' concern specific provable means definition, same way. decide notes reasons why 24 Instruments seem "represents people, trained untrained matters, paradigm security." 500. Thus persons trading high expectation activities relatively easy identify lends 686. Unlike instruments, therefore, susceptible approach. 25 Professor Loss observes "goes against grain" L. Loss, Fundamentals Regulation 211-212 (1983). explains: 26 "It thing cooperative dweller home, security; installment 'note' person charges restaurant meal signinghis credit card slip selling security even signature 'evidence indebtedness.' But (except residential wrinkle) quintessentially foreclose analysis." 212 (emphasis original). 27 equated "notes" "bonds" standardized enough rest names. dictum. recently suggested Industry Assn. Board Governors, FRS, 468 137, 104 2979, 82 107 (1984), "note" term encompasses varying depending issued consumer context, paper, context. 149-153, 2985-2988. expressly leave until another day shown "by [only] scope IV 28 perceive strong policy employing case.7 By own admission, each argued applied, since assertion open question, apparently stayed affairs business. Some commentators support exert chooses deserve protection engaged management Easley, Recent Developments Sale-of-Business Doctrine: Toward Transactional Context-Based Analysis Jurisdiction, 39 Bus.Law. 929, 971-972 (1984); Seldin, Stock Not Security: "Sale Business" Doctrine Laws, 37 637, 679 (1982). undertake extensive factfinding, requested supplemental memoranda before able case. 29 More importantly, lead depend percentage transferred, factors veto parties. explain fully 704-706, 708 today companion These hardly best either party Cf. 559, 9, 1225, (rejecting transformed, chameleon-like, once pledged). adopting will increase workload converting common-law fraud claims claims. find daunting, prospect know engage extended discovery litigation often elusive passage 1145-1146 V 30 sum, conclude therefore 31 Reversed. 32 STEVENS, dissenting.* 33 my opinion, described Act:1 34 "The 'security' 77b(1). 35 ante, 686, 1. presumably adopted sweeping "to prevent community evading regulation inventing light purposes." Sutter Groen, 687 197, 201 (CA7 "broad preceded statement mentioned otherwise requires. .' 36 legislative history makes concerned traded market. observed: primary serious abuses largely unregulated focus capital market system: raise profit-making purposes, exchanges traded, appended thereto." 849, 38 I wanted access inside information position themselves obtaining appropriate contractual warranties. level analysis, placing limits "unusual instruments" 690, negotiation individual mortgage surely literally Chemical Arthur Andersen 726 930, 937 (CA2), cert. denied, 884, 253, 190 large portfolio loans, Sanders Nuveen 463 1075, 1079-1080 (CA7), 1009, 93 443, 302 (1972). 40 entire relevant "notes," contracts," hybrid Providing regulations publicly stock—whether exchange over-the-counter market—was heart program, private sales am persuaded, latter takes form assets, hinges matters irrelevant liabilities, assignability Government licenses intangible allocation accrued liabilities going concern. If permitted bargain availability 41 short, inapplicable involves market; negotiate warranties insist consummating Of course, precise contours standard marked series litigated proceedings, uncertainty unavoidable. Nevertheless, persuaded certainty predictability simple "bright-line" "justify expanding liability substantive evils far legislature's concern."2 202. 42 Both closely-held negotiations between buyer seller. buyers unable obtain independent evaluation entering transactions.3 govern substantial ownership operating businesses structured instead assets. 43 affirm 83-1961 reverse 84-165. repeatedly definitions virtually identical term. 555, 3, (1982); 847, 12, 2058, (1975). specify wish Various preferred still suggests sufficient. infra, (1967), determination call like rely, fit squarely enumerated kinds withdrawable savings loan association, Weaver profit sharing agreement. 557, 5, 1224, explanation definition's "certificate deposit, contention whenever determines quote 11, (1979), 'embodies essential attributes run defining security' 852, 2060). read bit dicta broadly do. reference least "instrument[s] stated, perceived distinction, present contract' 'instrument ' added). true, reason analyze differently falling similarly general definition—an criticizing agrees. considers "comes dangerously close heresy saying transactions; nobody, apparently, temerity distributed shareholders liquidating dividend involve (1983) original) (footnote omitted). STEVENS dissents [a business] transactio[n] w[as] [a] sal[e] assets." Post, 700. "in market." 698. true indication (1985). silent—as respect Commission judicial half century adopted. One mention expansive 10(b) Rule 10b-5 Commission. What said relevant: "When deal actions 10b-5, oak grown little acorn. growth congressional enactment role judiciary it, J.I. Case Borak, [377 426, 84 1555, 423 (1964) ], disingenuous suggest 1942 foreordained law 10b-5. consider, addition already discussed, considerations flesh portions neither nor administrative conclusive guidance." 737, 1926. Ernst Hochfelder, 425 185, 196-197, 96 1375, 1382-1383, 47 668 (1976). Stamps, interpretation. accordance understanding Forman. addition, stated consider—as today—policy construing applies 84-165, Ruefenacht al., Milnarik M-S Commodities, Inc., 457 274, 275-276 (CA7) (Stevens, court) ("we conceivable arrangement dictionary included security"), 887, 113, 144 final relies "policy considerations." 694-697, especially 7. While prefer principally policies reflected history. extrinsic given effect, place weight conflicting policies, strongly should presume displace authority intent so. Bennett New Jersey, 470 632, 654-655, 1568, 572 (1985) (STEVENS, dissenting); Garcia States, 70, 89-90, 479, 489-490, 472 (1984) Michigan Long, 1032, 1067, 103 3469, 3490, 77 1201 Altobella, 442 310, 316 1971) court). Minnesota Clover Leaf Creamery 449 456, 477, 101 715, 730, 659 (1981) dissenting). 83-1961, lengthy Purchase Agreement containing protections 206-263.

Classification Label: 7