Court Opinion

ID: 9495662
Source: CourtListenerOpinion
Date Created: 2023-08-05 16:08:04.731301+00
Date Added: 2024-06-11T17:57:08.720227
License: Public Domain

JACOBS, Circuit Judge,
dissenting:
It is stipulated that Steel Partners, a corporate insider by statutory definition, purchased the Bell shares at issue in October 1999 for $5.30 per share, received an extraordinary per share distribution of $1.30 from liquidation of company assets, sold the shares at $6.37 on December 20, and disgorged under § 16(b) only the $1.07 difference between the purchase price and sale price. The question presented is whether the additional $1.30 pocketed by Steel Partners is “any profit” under § 16(b) of the Securities and Exchange Act of 1934. 15 U.S.C. § 78p(b) (West 2001).
The majority frames that question in terms of the nature and extent of the insider’s influence or knowledge concerning the distribution, and concludes that the extraordinary distribution should be disregarded for these purposes because Steel Partners did not cause or influence the liquidation resulting in the distribution and had no non-public information about those transactions. I respectfully dissent (1) because I disagree with the framing of the issue, and (2) because I conclude that, even as the issue is framed by the majority, the extraordinary distribution should be disgorged.
1
The extraordinary distribution represented the proceeds from liquidation of a part of the company’s assets. It follows that the market price per share thereafter would be reduced by that amount unless the company’s assets increased in the interim, or its prospects improved, to offset the distribution of proceeds from the asset liquidation. The $1.30 paid in the distribution was about a quarter of the company’s per share value when Steel Partners purchased the shares; yet the shares were worth as much (and more) when Steel Partners sold them. The relevant inquiry is whether the increment that caused the sale price to equal or exceed the $5.30 purchase price should count as “any profit,” notwithstanding an intervening distribution of proceeds from the liquidation of a quarter of the company’s assets; that inquiry has nothing to do with Steel Partners’ role in the distribution.
At the end of the various transactions, Steel Partners had absorbed the $1.30 value from the sale of a quarter of the company’s assets, and yet sold its shares at an undiminished price. It is proverbial that the cake Steel Partners now has cannot be the cake it has eaten. Incremental value, from some source or for some reason, caused the sale price in December to equal or exceed its share price in October notwithstanding the intervening liquidation and distribution of assets. Because Steel Partners was a statutory insider that whole time, it is required to disgorge that increment as profit — regardless of whether it had power or inside information about the distribution, or about anything else.
2
The majority concedes that section 16(b) would “ordinarily” require Steel Partners to disgorge the extraordinary distribution, but concludes nevertheless that disgorgement is inappropriate under the facts and circumstances of this case. In so doing, the majority cites a judicially created exception to § 16(b), which had been narrowly limited to dividends regularly paid in the ordinary course, and expands it to *129preclude the disgorgement of a “dividend” that distributes a quarter of the company’s assets. I believe that this approach undermines the statutory purpose of § 16(b).

A

Section 16(b) presumes that the insider possesses improper knowledge and imposes “strict liability for all transactions that meet its mechanical requirements.” Gwozdzinsky v. Zell/Chilmark Fund, 156 F.3d 305, 308, 310 (2d Cir.1998). By its plain language, the statute requires that “any profit” be disgorged, regardless of the insider’s actual knowledge or intent.
We have previously defined “any profit” under § 16(b) as “the total result of the ownership of the particular shares, i.e., the net result of the purchase, ownership benefits, and sale”. Adler v. Klawans, 267 F.2d 840, 848-49 (1959) (emphasis added). Under that definition, dividends and distributions should categorically qualify as “ownership benefits”. Cf. Adler, 267 F.2d at 848 (“A dividend received on a particular share cannot logically be considered as profit separate and apart from the difference between purchase and sale price.”); see also Marquette Cement Mfg. Co. v. Andreas, 239 F.Supp. 962, 968 (S.D.N.Y.1965). Because the sum of parts is no greater than the whole, the price of a stock drops immediately after distribution of a dividend. See Ross, et al., Corporate Finance 462 & n. 1 (Irwin/McGraw-Hill 5th ed. 1999) (“In a world with neither taxes nor transaction costs, the stock price would be expected to fall by the amount of the dividend.”). Ordinary dividends build up and get paid out at regular intervals and their value (arguably) is built into a share price that represents the present value of the future dividend stream. But when share price recovers from an extraordinary distribution, it is due to new, positive market information, and the incremental value is “profit” under the statute and as commonly understood.
As the majority emphasizes, however, “[t]he judicial tendency, especially in this circuit, has been to interpret Section 16(b) in ways that are most consistent with legislative purpose, even departing where necessary from the literal statutory language.” Feder v. Martin Marietta Corp., 406 F.2d 260, 263 (2d Cir.1969), cert. denied, 396 U.S. 1036, 90 S.Ct. 678, 24 L.Ed.2d 681 (1970); Gwozdzinsky, .156 F.3d at 308, 310 (noting that courts look to policy “to avoid the harsh results of this inflexible rule”). Thus, whether or not a “borderline transaction” should be included as profit under the statute turns ultimately on the degree to which exclusion would “serve as a vehicle for the evil which Congress sought to prevent — the realization. of short-swing profits based upon access to inside information.” Kern County Land Company v. Occidental Petroleum Corp., 411 U.S. 582, 595, 93 S.Ct. 1736, 36 L.Ed.2d 503 (1973); see also Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 424, 92 S.Ct. 596, 30 L.Ed.2d 575 (1972) (“Where alternative constructions of the terms of § 16(b) are possible, those terms are to be given the construction that best serves the congressional purpose of curbing short-swing speculation by corporate insiders.”); Blau v. Lamb, 363 F.2d 507, 519 (2d Cir.1966) (noting statutory policy of avoiding “unfair use of inside information by corporate insiders”). To advance this legislative purpose, any benefit (by 'dividend or otherwise) is deemed “profit” within the meaning of § 16(b), and should be disgorged “without further inquiry ” if there is “at least the possibility of abuse.” Blau, 363 F.2d at 519 (emphasis added). We have applied this principle of § 16(b) analysis to determine
[i] whether a “purchase and sale” has in fact occurred, see Gwozdzinsky, 156 F.3d at 310 (“[C]ourts have looked *130into the substance of borderline transactions alleged to have violated Section § 16(b) ... and, where the possibility of speculative abuse was not shown, ... [have] refuse[d] to impose liability even though there was arguably a ... purchase and sale by an insider within six months.”) (emphasis added); and
[ii] whether someone qualifies as an insider, see C.R.A. Realty Corp. v. Crotty, 878 F.2d 562, 566 (2d Cir.1989) (“The general approach established by our Court ... is consistent with that of the Supreme Court in § 16(b) cases in which the Court has emphasized that potential access to inside information is the key to finding liability, rather than rigid application of statutory designations.”) (citing Foremost-McKesson, Inc. v. Provident Securities Co., 423 U.S. 232, 251-54, 96 S.Ct. 508, 46 L.Ed.2d 464 (1976)) (emphasis added).
In the past, this Court has exempted from dividends disgorgement in two circumstances only: (1) where the issuer historically issued a modest dividend on a “regular” basis, or (2) where the issuer declared the dividend before the insider attained insider status. See Blau, 363 F.2d at 528 (holding that “[where corporation] had paid regular quarterly dividends ... the dividend was not part of a scheme of short-swing speculation”); Adler v. Klawans, 267 F.2d 840, 848-849 (2d Cir.1959) (holding that dividends declared before appellant became insider were not subject to profit calculations under § 16(b)). Each exception relies on circumstances that lend themselves to stipulation; thus neither interferes with § 16(b)’s “mechanical,” strict penalties. See Gwozdzinsky, 156 F.3d at 310 (“The statute, as written, establishes strict liability for all transactions that meet its mechanical requirements.”).
Adler held that no disgorgement is required [1] where the dividend paid was not in respect of the shares sold; [2] where the trader was not an insider at time of purchase, and the purchase was made after the dividend was declared; and [3] where the trader was not an insider at the time the dividend was declared. Id. 848-49. These are circumstances in which the statutory presumption — that an insider is in a position which could be used to influence the sale price — finds no footing. Id. at 848 (“Our primary holding simply gives effect to the statutory mandate that, at some moment before making a sale of stock, the insider was in an official position which he could have used to influence the sale price.”) (emphasis added).
Blau held that a regular quarterly dividend was “too incidental” to merit inclusion. Blau, 363 F.2d at 528. Such ordinary dividends are excluded because regular payment of a steady dividend by a company enjoying steady profits can be deemed an assumption built into the value of the stock: the value of the anticipated dividend builds up through each quarter and the stock drops by the amount of the dividend as soon as the dividend is paid.
Blau assumes that, absent circumstances potentially suggesting otherwise, the payment of a steady dividend in the ordinary course is the time-value of investment in a company that regularly distributes its steady profits, and is not an event upon which an insider can profitably trade. Obviously, however, shares fluctuate for many reasons other than the expectation of regular dividends, even under circumstances in which a regular dividend is one cyclical influence. And it may therefore happen that a down-tick attributable to the recent payment of a dividend may be masked or rapidly recovered by other events that an insider may influence or about which the insider may enjoy inside knowledge. Thus, both Adler and Blau *131allow that “[situations may well arise relative to dividends where they are so inextricably connected with the ‘purchase and sale’ of stock and possible manipulation by insiders ... as to compel the formulation of a rule ... in order to prevent the frustration of the statutory purpose.” Id. at 849; see also Blau, 363 F.2d at 522 n. 22 (“Section 16(b) might apply [to a dividend] if a sale of the common occurred within six months from the purchase of the convertible security”).
Under Adler and Blau, a dividend may be counted as profit where it is received by an insider who thereafter sells the stock (within six months of its purchase), unless [i] the dividend was declared before the buyer purchased the stock or before the buyer acquired insider status, Adler, 267 F.2d at 848, and [ii] the bracketed purchase and sale take place at about the same interval in a regular cycle of ordinary dividend payments, Blau, 363 F.2d at 528.

B

The majority concedes that neither of these clearly delineated exceptions apply here. See supra p. 125. Certainly, the distribution at issue was no ordinary dividend — Bell had paid no dividend for years. Cf. Blau, 363 F.2d at 528 (finding, dividend to be “regular, quarterly” pay-out to shareholders based on company’s “dividend payment history”). The decision to make the $1.30 distribution was prompted by the sale of a division, which is a transaction that is extraordinary rather than regular. Moreover, the dividend was declared and the record date fixed after Steel Partners’ purchase of the shares.
The majority holds nevertheless that no disgorgement is required because Steel Partners “had neither access to inside information nor control or influence over Bell’s corporate affairs,” and therefore no possibility of speculative abuse existed. See supra p. 126. The mitigating facts upon which the majority relies are that Steel Partners [i] was mounting an (unsuccessful) hostile takeover of Bell, and had no access to inside information; [ii] had no representative on Bell’s Board of Directors; [in] was not consulted before Bell’s decision to declare a cash dividend; and [iv] learned of the decision to pay the disputed dividend along with all other Bell shareholders. These facts do not, however, preclude the possibility of abuse or manipulation, and therefore under Blau they do not justify exemption from disgorgement. See Blau, 363 F.2d at 519 (requiring disgorgement “without further inquiry” if there is “at least the possibility of abuse”).
Steel Partners was a statutory insider at the time the asset sale giving rise to the extraordinary dividend received shareholder approval and was consummated. True, the agreement to engage in that transaction had been announced before Steel Partners bought the shares at issue, but the agreement was subject to approval by Bell stockholders (including Steel Partners, which then controlled more than ten percent), and no doubt other contingencies. Had the asset sale not been consummated (and the dividend not been paid), Steel Partners would have been faced with an undesirable choice — to risk holding the stock for the statutory six-month period, or to sell the stock (at a price reflecting the value of all its divisions) and disgorge the entire profit. Instead, shareholder approval of the asset sale provided Steel Partners with an exit strategy if its takeover bid failed. Once its bid failed, Steel Partners disgorged the capital gains resulting from its short-swing sale, but held onto the dividends.
In any event, it is unsound to assume that hostile bidders are without influence. *132Thus the board of the target may seek to blunt their appeal to other shareholders by preemptively implementing their proposals; and even if the hostile bidders are pariah to the target’s board, the board for that reason may arrange for them to go away happy. It does not matter whether such influence exists, or is indulged; the possibility of influence or manipulation is all that matters.
For those reasons, I would affirm the judgment of the district court.