Court Opinion

ID: 9470998
Source: CourtListenerOpinion
Date Created: 2023-08-05 03:22:50.083662+00
Date Added: 2024-06-11T17:42:13.805146
License: Public Domain

GARZA, Circuit Judge,
dissenting:
I respectfully dissent. The majority opinion is highly persuasive and its interpretation of Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582, 93 S.Ct. 1736, 36 L.Ed.2d 503 (1973) is certainly consistent with the “weight” of the law as it exists.
However, due to the particular facts of this case I would extend the rationale of Kern County, supra.
Section 16(b) provides that a statutory insider must surrender to the issuing corporation any profit realized from the purchase and sale of an equity security of the issuer within a period less than six months.
The statute itself states that it was enacted “for the purpose of preventing the unfair use of information which may have been obtained by [a statutory insider] ... by reason of his relationship to the issuer.” The statute itself is a strict liability statute designed to deter insiders from exploiting information not generally available to others in order to secure quick profits.
In Kern County, supra, the Supreme Court recognized that the nature of certain “unorthodox” transactions were such that a narrow exception to the otherwise strict liability rule was permissible. The facts of this case, I believe, would bring it within that narrow exception to the otherwise strict liability rule.
Texas International (TI) correctly argues that there are many similarities between the present case and that presented to the Supreme Court in Kern County. The putative “insider” in both cases was a party seeking to institute a “hostile” takeover of the issuer. It is evident from the record in this case that in both cases the party seeking takeover had no “inside information” upon which it could obtain short swing profits. In both cases the statutory stockholder failed in its attempt to take over the target company. The Supreme Court recognized in Kern County that after the merger agreement was approved, Occidental had no choice but to take action to protect its own interest.
In this case TI moved to protect its own interest when it agreed to sell its stock to the takeover company, Pan American World Airways, Inc. (Pan Am), after it became apparent that TI had lost the takeover battle. Unfortunately for TI, the sale took place forty-eight days before the statutory period had run.
Admittedly, the forced merger present in Kern County distinguishes that case from the present one. However, the facts of this case present a scenario which favors extension of the “unorthodox” exception.
Like Occidental, no one can argue that TI actually made use of inside information to obtain any short swing profits. The reason for the existence of § 16(b) is in no way promoted by its application to the present transaction. Furthermore, TI’s sale of *543stock was to the parent corporation for the purpose of protecting its own interests and cooperating in the merger transaction which Pan Am was attempting to effectuate.
The record clearly evidences that at the time of the sale by TI to Pan Am, no present or past shareholders of National Airlines had in any way been monetarily damaged by TI’s purchase and sale of stock. In fact, it can be argued that the attempted takeover of National by TI helped to increase the value of National Airlines’ stock. TI did not receive a higher price for the stock than any other shareholder. ALL shareholders of National Airlines received $50 per share.
Application of § 16(b) in this case serves only to permit Pan Am to avoid that portion of its contract with TI in which it agreed to pay $50 per share. The award in this case is nothing more than a “windfall” to Pan Am as the successor of National Airlines.
There is language in Kern County which, at first glance, as held by the majority opinion, appears to foreclose TI’s present argument. At one point in that opinion the court stated:
Although traditional cash-for-stock transactions that result in a purchase and sale or a sale and purchase within the six-month statutory period are clearly within the purview of § 16(b), the courts have wrestled with the question of inclusion or exclusion of certain “unorthodox” transactions.
TI’s sale was clearly a “cash-for-stock” transaction; however, the situation before us, like Kern County, involved a hostile takeover which failed. The “hostile” takeover situation is hardly the “traditional cash-for-stock sale” which § 16(b) was designed to encompass. Rather, it is more of a “borderline” or “unorthodox” transaction and the above language can arguably be used to support such a finding.
The majority opinion cites the following language in Kern County:
Occidental could, of course, have disposed of its shares of Old Kern for cash before the merger was closed. Such an act would have been a § 16(b) sale and would have left Occidental with a prima facie § 16(b) liability. It was not, therefore, a realistic alternative for Occidental....
in holding that this language forecloses TI’s argument; however, it is unclear whether it would have made a difference to the Supreme Court if the disposition of shares had been to the takeover company or a third party.
I agree that if Occidental in Kern County or TI in this case had sold its shares after the merger agreement to a third party, § 16(b) would have been clearly implicated. On the other hand, such is not the case if the sale was to the takeover company itself and the statutory insider, TI, received no more than any other shareholder of the issuer. In the case before us, no potential for abuse would have arisen or could arise and it is unclear from the court’s statement quoted above, if it was referring to a disposition of shares to a third party or to any party including the takeover company. My view is that the above language need not foreclose TI’s argument. TI did what every other shareholder of National Airlines had to do and the fact that it did it forty-eight days before the six-month period expired should not work to the detriment of TI and as a windfall to Pan Am who bought the shares for the price stated in the merger agreement.
In summary then, I would hold that the “spirit” of Kern County suggests that in an “unorthodox” transaction as the one before us, where the policies of § 16(b) are in no way implemented (and in fact, where such rule permits a party to void an otherwise legal contract) liability against the statutory “insider” should not be enforced.
Under the facts of the case before us, the hostile takeover scenario is more closely analogous to the “unorthodox” transaction rather than the “traditional” cash-for-stock sale.
Under similar situations I would not make any distinction between a cash-for-stock and a stock-for-stock sale.
*544Accordingly, I would hold that § 16(b) was not applicable to TI and I would reverse the court below.