Legal Document

423 U.S. 232 96 Supreme Court Reporter 508 46 United States Reports Lawyer’s Edition 2d Series KF101.8 U54 464 FOREMOST-McKESSON, INC., Petitioner,v.PROVIDENT SECURITIES COMPANY. Number 74-742. Argued Oct. 7, 1975. Decided Jan. 13, 1976. Syllabus Respondent, a personal holding company contemplating liquidation, sold assets to petitioner corporation. Respondent received from as part of the purchase price convertible debentures which if converted into petitioner's common stock would make respondent holder more than 10% Of outstanding stock. A few days later, pursuant an underwriting agreement, one was group underwriters for cash in amount exceeding its face value. After making debenture and distributions stockholders, dissolved. Under § 16(b) Securities Exchange Act 1934 (Act) corporation may recover itself profits realized by officer, director, or beneficial owner shares sale within six-month period. An exemptive provision specifies, however, that shall not be construed cover any transaction where such both "at time of" securities involved. Since large enough meaning 16, disposal period exposed suit on underwriters, sought declaratory judgment nonliability under 16(b). The District granted summary respondent, Appeals affirmed, though different reasons. Held: By virtue is accountable purchase-sale sequence involved here only he "before purchase." Thus, fact before removed operation Pp. 239-259. (a) legislative history reveals intent deter owners basis inside information, presumptively available after purchase. 251-252. (b) Had it been Congress' design when enacted impose liability cases this, should have done so expressly unmistakable inference. (c) Congress distinguish between purchases persons who yet acquired status through ownership at least And directors officers because latter are intimately corporate affairs. 253-254. (d) Other sanctions remain against fraudulent use information transactions covered 254-256. (e) provisions exempting certain inconsistent with purchase" construction reached here. 256-259. 506 Federal Reporter, 2nd 601, affirmed. Mr. Justice POWELL delivered opinion Court. 1 This case presents unresolved issue (Act), 48 Statutes-at-Large 896, 15 Code KF62 78p(b). That section designed prevent director officer "the 10 per centum" corporation1 profiteering short-swing information. It provides capture sale, purchase, six months owner.2 Section 16(b)'s last sentence, "shall security . ." question presented whether person purchasing put his holdings above Level must account those months. Ninth Circuit answered this negative. 601 (1974). We affirm. 2 * Provident Co., company. In 1968 decided tentatively liquidate dissolve, engaged agent find purchaser assets. Petitioner, Foremost-McKesson, Inc., emerged potential purchaser, but extensive negotiations were required resolve disagreement over nature consideration Foremost pay. wanted order facilitate dissolution, while pay own securities. 3 Eventually compromise reached, executed agreement embodying their deal September 25, 1969. provided buy two-thirds Provident's $4.25 million $49.75 subordinated debentures.3 further register 1933 $25 principal participate public. At closing October 15, 1969, $40 subsequently exchanged two amounts $15 million. also a.$2.5 escrow date. On 20 $7.25 representing balance price. These immediately Foremost's 4 21 Provident, Foremost, closed 28. debenture. 24 distributed reducing company's less 10%. 28 accomplished.4 thereafter proceeds stockholders 5 16.5 Having disposed these months, faced prospect underwriters. therefore sued declaration liable 6 argument below based Kern County Land versus Occidental Corp., 411 582, 93 1736, 36 503 (1973). There we held "unorthodox transaction" did present possibility speculative abuse "sale" contended reluctant acceptance exchange presenting "purchase" Although Court's pre-Kern had adopted type analysis, 331 F.Supp. 787 (N.D.Cal.1971), rejected it, reasoning acquisition "unorthodox" circumstances preclude abuse. F.2d, 604-605. 7 then considered theories provision: "This subsection first sale." distribution some occur until If case, 16(b), since sale."6 found occurred upon execution agreement.7 8 turned theory consider here.8 phrase purchase," "must mean prior decision made." 614. although became acquiring debentures, Accordingly, prevented part. II 9 has disputed enacted. discussion focused application sequence, being means "immediately purchase."9 difference determinative owner's sells made him owner. commentators divided intended,10 they divided.11 Courts issue. what intended accomplish came Stella Graham-Paige Motors 299 (CA2), cert. denied, 352 831, 77 46, 52 (1956). Second without discussion, dissent, affirmed adoption construction. court impelled concern sale-repurchase reasoning: 11 "If ('before purchase') urged (Graham-Paige) placed exemption provision, possible block stock, sell out reduced 10%, repeat process, ad infinitum." 104 957, 959 (S.D.N.Y.1952). 12 thought seemed unlikely could proper sequence.12 adhered Circuit, Newmark RKO General, 425 348, 355-356, 400 854, 91 64, 27 (1970);13 Perine William Norton & 509 114, 118 (1974), Eighth Circuit. Emerson Electric Reliance 434 918, 923-924 (1970), aff'd other grounds, 404 418, 92 596, 30 575 (1972).14 But none foregoing examine critically 13 background, sketched above, ambiguity pertinent statutory language, continued among commentators, perceived absence relatively full purpose unpersuasive rationales offered progeny noted construing require beneficial-ownership exist foreclose sequence.15 614-615. More significantly, challenged directly premise earlier allow abuses abate. reasoned reach bought them "insiders." 608-614.16 III Atlantic 14 general enacting well known. See 591-592, S.Ct., 1742-1743; U.S., 422, 599, 575, authorities cited therein. recognized insiders access about corporations rest investing trading reap expense informed investors. "curb evils insider (by) taking class believed intolerably great." supra, 599. accomplished defining directors, officers, presumed information17 flat rule pair months.18 points purpose, invokes observation "where alternative constructions terms possible, given best serves congressional curbing speculation insiders." 424, 600 (footnote omitted). From premises argues Appeals' rejected19 makes inapplicable statute construction.20 approach unsatisfactory focus situations rather language itself. invites imposition fault consistent section. B 16 applies insiders, included purpose. bereft explicit explanation intent, see 600, evolution initial proposal passage does shed significant light provision. 17 original version develop S. 2693, 73d Cong., Sess. (1934). 15(b): 18 "It unlawful securities, owning record and/or beneficially centum issuer, registered national 19 "(1) To intention expectation selling same months; profit extending inure recoverable irrespective entering purchased months." next legislation, H.R. 8720, (1934), 15(b) read almost identically eventually enacted:21 "Any owner, equity unless good faith connection debt previously contracted, repurchasing involved, nor Commission rules regulations exempt comprehended preventing unfair obtained reason relationship issuer." 22 Thomas G. Corcoran, spokesman 2693's drafters, explained forbidding "to carry short-term specu(la)tions He cannot, get Hearings 7852 8720 House Committee Interstate Foreign Commerce, Sess., 133 concluded 2693 applied initiated, 609, agree. appears contest point. Brief Petitioner 29. thus becomes 8720's change imposing addition result think shows no intent. 23 counterpart, 7852, met substantial criticism number scores, including various 15. Stock Practices Senate Banking Currency, pt. (1934); 1-623.22 recast take criticisms bill's drafters valid. 625, 674. primary substantive directed situation. Practices, 6557-6558. Criticism turn "as beneficially." id., 6914. remedied shortcomings providing issuer."23 term "such owner" defined 15(a) "who indirectly class" security. structure clause revised unambiguously retain requirement precede sequence. cannot assume easily eliminate bill. clear hearings, complaint it. 25 testimony demonstrates emphatic requirement. explaining bill Corcoran pointed technical flaw language: construe "owning apply mere subject previous exceed 5%. pre-existing specified percentage owners. 26 "Mr. Corcoran. very drawn there. ought every stockholder owns percent way read. Mapes. 'and/or percent' followed 'is officer.' badly drawn. slipped that. 'every officer' big stockholder.' " 133. 29 6555. existed expressed wisdom omitted operative restructured sequences. draft, added persuaded preserve Later discussions hearings interpretation.24 hold that, purchase."25 IV 31 Additional considerations support our reading history. 32 imposes strict prophylactic respect insider, trading. 595, 1745, noted: 33 "The requires (statutorily defined) inside, trader disgorge all 'purchases' 'sales' period, proof actual information." 34 short, narrowly limits.26 35 As earlier, recognizes "alternative constructions" available, choose statute's purposes. relies statements generally effect 600. neither cases, adopt imposed liability, recognizing serving resolving favor reiterate nothing suggests serve better Indeed, indicates adding deliberately contrary choice. even ambiguous, hesitate inappropriate harsh unclear language. wishes will do irrelevant limited carefully 422-425, 599-601. Even trade freely incurring if, example, spaces intervals greater When need limit "arbitrary sweeping coverage" Bershad McDonough, 428 693, 696 (C.A.7 1970), 992, 458, 440 (1971), courts quick determine despite acknowledged ambiguity, particular transaction. 37 Our supported distinction officers. discourse revealed vulnerable intimate involvement viewed size afforded information.27 perceptions simply reflect realities life. 38 requisite acquired. sure, attained newly holdings. posing dangers intolerable, owned deemed necessary insider.28 Such analogous never thereby excluded entirely whose statute. While might compel explains why seen fit draw line did. Cf. Adler Klawans, 267 840, 845 (C.A.2 1959). Contract 39 scope, course, affected inhibit Congress, left problems remedies. alleviate ordinary investors unprotected For passed antifraud statutes proscribe practices insiders. 1933, 17(a), 84, 77q(a); 1934, 10(b), 78j(b); Loss, n. 11, 1423-1429, 1442-1445. Today investor can show harm misuse material recourse, particular, 10(b) Rule 10b-5, Regulations 240.10b-5 (1975).29 16(a)'s publicity requirement30 afford indirect protection misuses information.31 134-135; H.R.Rep.No.1383, (to accompany 9323, House, May 4, 16(b)). V 40 still briefly contention renders enactments unnecessary conflicts interpretation Commission. 41 amicus Allis-Chalmers Manufacturing point §§ 16(d) Act, 78p(d) (e), actions 16(d), part, exempts "dealer course business incident establishment maintenance secondary market."32 16(e) "foreign domestic arbitrage transactions."33 They argue similarly SEC's 16b-2, 240.16b-2 (1975), correct. 16b-2 "in securities."34 42 holding. Nothing faces applicable exemptions protect already qualifying purchased35 would, well. 43 remind us contend SEC past. Amicus Curiae, 22-27, O.T.1971, 70-79, Pages 22-27. appeared case. event, Commission's views changed deference agency administering usually entitled, 425-427, 600-602, basic re-examination confirms view Congress. 44 Affirmed. 45 WHITE joins Court, Part IV-C opinion. STEVENS took "insiders" regulated 16(a) 78p(a), "(e)very (other exempted security) 78l title, issuer security." 78p(b), reads full: "For Suit instituted law competent jurisdiction name behalf fail refuse bring sixty request diligently prosecute thereafter; brought years date realized. subsection." issued acquire assets, used $25,366,666.66 Provident. represented 1011/4% ($25,312,500) plus interest accrued ($54,166.66). established. "equity security" 78l. 1, supra. corporation's Act. 3(a)(10), (11) 78c(a)(10), (11); 16a-2(b), 240.16a-2(b) (1975). registered; (1972). former Was sale" infra. 3(a)(14) 78c(a)(14), defines "sell" include "any contract otherwise dispose of." argued day contractual conditions becoming binding closing. paragraph 7: "7. Termination Agreement: terminated, Registration Statement effective, you Underwriters agreed hereunder aggregate 50% Debentures, your Underwriters, there unfavorable political, financial economic generally." App. A134. 5, provided: several obligations following conditions: "(h) That, change, referred Prospectus), condition Company consolidated subsidiaries whole; will, deliver certificate executive effect." performance ruled satisfied registration statement effective 21, executed. longer risk decline market 607. reasons apparent opinion, address 5(h) risks. 8, disposes precluding properly arguments (1973), sale's having sometimes denominated "simultaneously Appeals. 608. Compare C. Meyer, Page 112 (1934) (adopting "before" construction), Seligman, Problems Va.L.Rev. 19-20 after" construction). Compare, e. g., Munter, 1934: Alternative "Burning Down Barn Order Kill Rats," Cornell L.Q. 69, 74-75 (1966); Note, Insider Liability Short-Swing Profits: Substance Function Pragmatic Approach, 72 Mich.L.Rev. 592, 616-619 (1974); Comment, Stan.L.Rev. 582 (1957) with, L. Regulation 1060 (2d ed. 1961) (favoring weight commentary ALI (Tentative Draft 2, 1973), 1413(d) Comment (6), considers "questionable" proposes amendment codify result. 78j(b), implemented developed fully private remedy 3559. worried now invite 29, infra, rationalize wrote: "(T)he (inside) resulting (the) (that owner) opportunity, public, moment most advantageous him. buyer creates opportunity prevent." 356. (1972), things contexts unique. Mfg. Gulf Western Industries, 527 335 1975), pending, 75-580. express view. Shortly Seventh conclusion somewhat analysis. 347-349. apparently covers Id., 347-348. rely analysis obtaining status. See, 840 Nor occasion assess taken 348-348, 13. stated explicitly "preventing states lieu construction, offers whereby 1060. describes comparing differences minor. Formally, moved front grammatical changes made. sections security, retained 5% Requirement. termed "one important (S. 2693)." 6555 proposed legislation regulation exchanges themselves undesirable regardless performed them. 6465-6466. Most therefore, dealt problems. major effected elimination criminal liability. aspect attention hearings. cf. 6966. thought, out. difficulties proving mental elements led questions civil suits profits. 26, Pecora. practically constitute position confidential enrichment open market, interests body stockholders. main served." 7741. Ferdinand Pecora counsel subcommittee Currency conducted operations enactment draftsmen 2693. 83 13.2% Reliance's predecessor tender offer sales 3.24% 9.96%. 9.96%, certiorari petition review sale," 420-422, 598. remained Sale, today. correctly superfluous affirm 348 12. procedural posture ibid. avoid superfluity 348; 16. You after, absolutely impossible prove existence expectation, crude thumb, undertake burden intended, bought, short swing. "Senator Gore. infer fact. Kean. Suppose got stuck something else, sell? Barkley. All investment. money out, goes sell. Let in, give profit." 22, 6556-6557. especially evident exchange, reporting requirements owners: man want happens percent. Do going file just has? N Dec. Immigration Nationality Decisions so, sir. right Five lot modern Many controlled corporations, getting down interfering individual agree directors. much director. Whether titular not, normally is, practical matter fact, be." 6556. reflected 6555; 24, 7741-7743. according presumption statute, practicalities crucial "purchase," acquisition. considerable time. prudent investigate finance wish effectuate influencing emphasize advance event 10b-5 embrace urges prevent. corporation, debentures. Van Alstyne, Noel S.E.C. 1080 (1969); 1451-1452. known Rule. Shapiro Merrill Lynch, Pierce, Fenner Smith, 495 228 1974); Texas Sulphur 401 833 1968), sub. nom. Coates SEC, 394 976, 89 1454, 756 (1969). improperly "tip" others, 446 1301 (C.A.2), 1005, 561, 558 reduce threat board able cite illustrative purposes necessarily implying approval. 16(a), provides: "Every file, filed (g) ten (and, exchange) close each calendar month thereafter, during month, (and exchange), indicating month." clearly help "(Mr. Corcoran.) (S)ection 15(a), listed commission how many end month. advantage ahead release public company." remarks addressed 132. 78p(d), theretofore investment account, dealer (otherwise 78e title) may, deems appropriate interest, define prescribe market." "Dealer" 3(a)(5) 78c(a)(5). 16(e), 78p(e), foreign contravention section." final "(a) Any extent 240.16b-2, said section, effecting distributing participating faith, business, securities; "(2) (i) transaction, thereof, (ii) stabilizing over-allotment created distribution; "(3) purview favorable equal participation 240.16b-2. However, functions manager receipt bona fide payment performing "(b) therein party thereto render meets 240.16b-2." press accompanying promulgation explained: new (16b-2) affords happen member firm regularly buying Release 34-264 (June 1935).

Classification Label: 7