Court Opinion

ID: 9466181
Source: CourtListenerOpinion
Date Created: 2023-08-05 01:07:30.552261+00
Date Added: 2024-06-11T17:39:35.209711
License: Public Domain

SWYGERT, Circuit Judge,
dissenting.
The question is whether Leo P. Portnoy, a Cabot Corporation stockholder, has standing to sue on its behalf for the recovery of short-swing profits under section 16(b) of the Securities Exchange Act of 1934. Actually, the more precise question is whether Cabot may currently be considered the issuer of Kawecki Berylco Industries common stock. The following diagram may help to understand the complicated nature of this case, involving a number of corporate entities.

On May 21, 1978 KBI was merged with Tuckerton Corporation, the wholly-owned subsidiary of CSMC which, in turn, was the wholly-owned subsidiary of Cabot.1 Although plaintiff lost his status as a stock*770holder of KBI as the result of the merger, he was and remains a shareholder of Cabot. As such, does he have standing to bring this action?2
Plaintiff’s standing hinges on whether Cabot Corporation may for purposes of section 16(b) be considered the “issuer” of KBI’s common stock. KBI as a separate legal entity (or at least as an independent business entity, see supra, n. 1) ceased to exist after the merger. Cabot through CSMC and. Tuckerton became its successor-in-interest. Although Cabot was not the issuer of the KBI stock when it was issued and therefore does not fit the literal term of the statute, it succeeded to that status upon completion of the merger.
This was the same conclusion Judge Weinfeld came to in Blau v. Oppenheim, 250 F.Supp. 881 (S.D.N.Y.1966). Although the facts there were somewhat different from those here, the cases are analogous and, in my view, legally indistinguishable. (In Blau the insurer’s corporation, Van Winkle, sold its assets to M & T Chemicals, a wholly-owned subsidiary of American Can Company and M & T assumed Van Winkle’s liabilities. For consideration, American delivered a specified number of its share to Van Winkle which then distributed these shares to its stockholders. Van Winkle then merged into M & T and went out of existence upon being dissolved. The plaintiff was a subsequent purchaser of American stock. The defendant charged with violating section 16(b) was an officer and director of Van Winkle.) Judge Weinfeld held that section 16(b) “is broad enough to embrace an issuer’s successor in interest or a surviving corporation to which has been transferred all its assets, properties and choses in action.” He then went on to say:
There is no support for the defendant’s position that Congress intended that suits for the recovery of short-swing profits be restricted to the initial issuer whose securities were the subject of the illicit gains and its security holders, thus leaving no remedy in those instances where, as here, the issuer by a transfer of all its assets to another corporation has become extinct and is without its original security holders. It is true, as defendant states, that the section makes no reference to surviv- or or successor corporations of an issuer— but neither does it contain any bar against the maintenance of 16(b) suits by such corporations or their security owners. To deny them the right to maintain suit would serve to defeat the purpose of the law; to accord them the right serves to further it.
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*771In sum, the essential argument which the defendant advances is one of language. But language alone can never be dispositive of a statute’s meaning. Section 16(b) must be read in its context— against the background of its purpose, of the evils which it was enacted to rectify, and of the subsequent construction which the courts have given it.
250 F.Supp. at 886-88. Judge Weinfeld’s discussion and holding are equally applicable to the case at bar.
Citing section 2(11) of the Securities Act of 1933 as an example, the majority says: “Although the plaintiff’s contention is not absurd on policy grounds, we cannot rewrite the statute to accommodate this situation. Congress has spoken clearly. When it wanted a broader definition of issuer, it drafted one.” But we need not rewrite the statute. Common sense tells us that by construction Cabot has become the issuer of the KBI stock within the definition of the statute. Put another way, KBI’s identity for purposes of section 16(b) has been retained in Cabot. We should not expect Congress to divine — and provide for — all the possible corporate restructuring that, whether intentionally or not, can defeat the salutary purposes of the statute. The task of accommodating a statute to a given set of facts is for the courts. By such accommodation the purposes of section 16(b) can be satisfied and the laments of the majority for not being able to reach the result it. seemingly longs for could be avoided.

. Defendant Cabot Corporation in its motion for summary judgment averred: “As of the end of May, 1978, 100% of the interest of KBI was acquired by Cabot Corporation and KBI was merged into Tuckerton Corporation, a wholly-owned subsidiary of Cabot. KBI now no longer exists as a corporate entity.” KBI’s and IMC’s motions for summary judgment contained identical averments. Interestingly, the brief of defendant-appellee IMC, in its attempt to distinguish Blau v. Oppenheim, 250 F.Supp. 881 (S.D.N.Y.1966), asserted: “In the present *770case, KBI, the issuing corporation still exists as a viable corporate entity.” IMC brief at 14. See also KBI/Cabot Corporation brief at 3 (“On May 31, 1978, Tuckerton merged into KBI. The surviving corporation, KBI, became a wholly-owned subsidiary of CSMC, which remained wholly-owned by Cabot.”) The defendants’ positions on this factual question have evidenced remarkable adaptability.

. The May 12, 1978 KBI proxy statement contained the following paragraph:
The Company has been advised by its counsel, Messrs. Donovan Leisure Newton & Irvine, that questions reasonably exist as to whether there could be any recovery of profits realized by one or more of the Sellers, and as to the amount of any recovery which might be obtained. The value of such right, if any, as the Company may have to such recovery is not reflected in the financial information included elsewhere in this Proxy Statement. Neither the Company nor Cabot has any present intention of asserting any possible claim it may have under Section 16(b) arising out of the transactions described above. If the Merger is consummated, Cabot will be the Company’s only shareholder and its other present shareholders will have no interest in any recovery of profits realized on account of the transactions described above. If, on the other hand, the Merger is not consummated, the Company will give further consideration to taking legal action in this connection. If any shareholder commences suit on behalf of the Company to assert any possible claim under Section 16(b), he may, upon the effectiveness of the Merger, lose his standing to continue to maintain such suit. However, in determining the value of the shares of dissenting shareholders, a pro rata portion of any possible Section 16(b) claim may be taken into account. See “Appraisal Rights of Dissenting Shareholders”.