Court Opinion

ID: 9425272
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:14:15.589479+00
Date Added: 2024-06-11T17:22:54.458165
License: Public Domain

*605Mr. Justice Douglas,
with whom Mr. Justice Brennan and Mr. Justice Stewart concur,
dissenting.
The Court, in resorting to an ad hoc analysis of the “possibility for the speculative abuse of inside information,” charts a course for the interpretation of § 16 (b) of the Securities Exchange Act of 1934, 15 U. S. C. § 78p (b), that in my mind undermines the congressional purpose. ' I respectfully dissent.
I
“The statute is written broadly, and the liability it imposes is strict.” Reliance Electric Co. v. Emerson Electric Co., 404 U. S. 418, 431 (Douglas, J., dissenting). Except for narrowly drawn exceptions, it is all-inclusive.1 The operative language provides:
“[A]ny profit realized by [a beneficial owner, director, or officer] from any purchase and sale, or *606any sale and purchase, of any equity security of such issuer (other than an exempted security) within any period of less than six months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months.” (Emphasis added.)
By its own terms, the section subsumes all transactions that are technically purchases and sales and applies irrespective of any actual or potential use of inside information to gain a trading advantage. See Feder v. Martin Marietta Corp., 406 F. 2d 260, 262 (CA2 1969). The conclusion seems inescapable that Occidental Petroleum Corp. (Occidental) purchased and sold shares of Kern County Land Co. (Old Kern) within a six-month period and that this “round trip” in Old Kern stock is covered by the literal terms of § 16 (b).
Occidental, pursuant to a cash tender offer, acquired in excess of 880,000 shares of Old Kern during May and June 1967. It is undisputed that these acquisitions were purchases within the meaning of the section.2 On Au*607gust 30, 1967, Old Kern sold its assets to a newly formed subsidiary of Tenneco Corp., Kern County Land Co. (New Kern), in exchange for cumulative convertible preference stock of Tenneco, Inc. (Tenneco), Tenneco Corp.'s parent. Old Kern was dissolved in October 1967 (within six months of the tender offer), and each shareholder became irrevocably entitled to receive, share for share, for his Old Kern stock the cumulative convertible preference stock of Tenneco.
The question presented to us is whether this exchange of shares constituted a “sale” of the Old Kern shares. The term “sale,” as used in the Securities Exchange Act, includes “any contract to sell or otherwise dispose of.” 15 U. S. C. § 78c (a) (14). Clearly, Occidental “disposed” of its Old Kern shares through the Old KernTenneco consolidation. Its status as a shareholder of Old Kern terminated, and it became instead a shareholder of Tenneco, privy to all the rights conferred by the Tenneco shares.3 See Newmark v. RKO General, 425 F. 2d 348 (CA2 1970); Park & Tilford v. Schulte, 160 F. 2d 984 (CA2 1947).4 In my view, we *608need look no further. As my Brother Blackmun, then Circuit Judge, stated in dissent in Petteys v. Butler, 367 F. 2d 528, 538 (CA8 1966):
“My own reaction is that either the statute means what it literally says or that it does not; that if the Congress intended to provide additional exceptions, it would have done so in clear language; and that the recognized purpose and aim of the statute are more consistently and protectively to be served if the statute is construed literally and objectively rather than non-literally and subjectively on a case-by-case application. The latter inevitably is a weakening process.”
The majority finesses the literal impact of § 16 (b) by examining Occidental’s willfulness and its access to inside information. It concludes: “But the involuntary nature of Occidental’s exchange, when coupled with the absence of the possibility of speculative abuse of inside information, convinces us that § 16 (b) should not apply to transactions such as this one.” Ante, at 600. This approach is plainly contrary to the legislative purpose.
The purpose of § 16 (b) is stated in its preamble: “preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer . . . .” The congressional investigations that led to the enactment of the Securities Exchange Act revealed widespread use of confidential information by corporate insiders to gain an unfair advantage in trading their corporations’ securities.5 Unlike other remedial provisions *609of the Act, the most noteworthy being § 10 (b), 15 U. S. C. § 78j (b), Congress drafted § 16 (b) as an objective rule, designed to have a clearly “prophylactic” effect. Blau v. Lehman, 368 U. S. 403, 414. See Heli-Coil Corp. v. Webster, 352 F. 2d 156, 165-166 (CA3 1965); Smolowe v. Delendo Corp., 136 F. 2d 231, 235 (CA2 1943). As Thomas Corcoran, a principal draftsman of the Act, explained to Congress:
“You hold the director, irrespective of any intention or expectation to sell the security within 6 months after, because it will be absolutely impossible to prove the existence of such intention or expectation, and you have to have this crude rule of thumb, because you cannot undertake the burden of having to prove that the director intended, at the time he bought, to get out on a short swing.” 6
In Reliance Electric, supra, the Court noted that “the only method Congress deemed effective to curb the evils of insider trading was a flat rule taking the profits out of a class of transactions in which the possibility of abuse was believed to be intolerably great.” 404 U. S., at 422 (emphasis added). Certainly, mergers are such a class of transactions.7 In Newmark v. RKO General, supra, for example, RKO signed an option contract to purchase shares of the company which was to be merged into a subsidiary of RKO. When the merger was approved by the necessary parties, RKO exercised its option and the merger was consummated. The court found that RKO “not only acquired knowledge of what would tran*610spire but also could exercise substantial influence over the course of events.” 425 F. 2d, at 353. “In sum,” the court concluded, “the purchase and subsequent exchange of Central shares were fraught with opportunities for the kind of speculative abuse section 16 (b) was intended to abort.” Id.., at 354.
The Securities and Exchange Commission has resisted a rule that would exempt mergers as a class from the operation of § 16 (b). It responded as follows to a proposal of the Special Committee on Securities Regulation of the Association of the Bar of the City of New York:8
“We concluded, however, that removing the ‘teeth’ of Section 16 (b) to discourage the use of inside information would allow insiders to create and take advantage of speculative opportunities during the time surrounding such significant corporate events which outweighed this potential conflict. Also, we know that some persons are unwittingly caught by the section in these as in other situations falling within the provisions of Section 16 (b), but in our opinion the public interest and the interest of investors are better served in this area by the unrestricted operation of the section.”
It is true that in some cases an insider may be required to disgorge profits even though his transactions do not lend themselves to the abuses that underlay the enactment of § 16 (b). The draftsmen carefully weighed this eventuality and opted for a bright-line rule. As Thomas Corcoran stated: “You have to have a general rule. In particular transactions it might work a hardship, but those transactions that are a hardship represent the sacrifice to the necessity of having a general rule.” 9
*611The very construction of § 16 (b) reinforces the conclusion that the section is based in the first instance10 on a totally objective appraisal of the relevant transactions.11 See Smolowe v. Delendo Corp., supra, at 236. Had the draftsmen intended that the operation of the section hinge on abuse of access to inside information it would have been anomalous to limit the section to purchases and sales occurring within six months12 Indeed, the purpose of the six-month limitation, coupled with the definition of an insider, was to create a conclusive presumption that an insider who turns a short-swing profit in the stock of his corporation had access to inside information and capitalized on that information by speculating in the stock. But, the majority departs from the benign effects of this presumption when it assumes that it is “totally unrealistic to assume or infer from the facts before us that Occidental either had or was likely to have access to inside information . . . Ante, at 596. The majority abides by this assumption even for that period after which Occidental became a 10% shareholder and then extended its tender offer in order to purchase additional Old Kern shares.
The majority takes heart from those decisions of lower federal courts which endorse a “pragmatic” approach to *612§ 16 (b). Many involved the question whether a conversion of one security of an issuer into another security of the same issuer constituted a purchase or a sale.13 It would serve no purpose to parse their holdings because, as Louis Loss describes, they have a “generalization-defying nature.” 14 In 1966 the Securities and Exchange Commission exercised its exemptive power under § 16 (b) to adopt Rule 16b-9,15 which under specified conditions excludes a conversion from the operation of § 16 (b). This rule will relieve the courts of much of the burden that has developed from ad hoc analyses in this narrow area. But, by sanctioning the approach of these cases, the majority brings to fruition Louis Loss’ prophecy that they will “continue to rule us from their graves,” 16 for henceforth they certainly will be applied by analogy to the area of mergers and other consolidations.
Thus, the courts will be caught up in an ad hoc analysis of each transaction, determining both from the economics of the transaction and the modus operandi of the insider whether there exists the possibility of speculative abuse of inside information. Instead of a section that is easy to administer and by its clearcut terms discourages litigation, we have instead a section that fosters litigation because the Court’s decision holds out the hope for the insider that he may avoid § 16 (b) liability. In short, the majority destroys much of the section’s prophylactic effect. I would be the first to agree that “[e]very transaction which can reasonably be defined as a purchase [should] be so defined, if the transaction is of a kind *613which can possibly lend itself to the speculation encompassed by Section 16 (b).” Ferraiolo v. Newman, 259 F. 2d 342, 345 (CA6 1958) (Stewart, J., then Circuit Judge). See also Reliance Electric Co. v. Emerson Electric Co., 404 U. S., at 424. Certainly we cannot allow transactions which present the possibility of abuse but do not fall within the classic conception of a purchase or sale to escape the confines of § 16 (b). It is one thing to interpret the terms “purchase” and “sale” liberally in order to include those transactions which evidence the evil Congress sought to eliminate; it is quite another to abandon the bright-line test of § 16 (b) for those transactions which clearly fall within its literal bounds. Section 16 (b), because of the six-month limitation, allows some to escape who have abused their inside information. It should not be surprising, given the objective nature of the rule, if some are caught unwillingly.
In Reliance Electric, supra, at 422, the Court quoted with approval the following language from Bershad v. McDonough, 428 F. 2d 693, 696 (CA7 1970):
“In order to achieve its goals, Congress chose a relatively arbitrary rule capable of easy administration. The objective standard of Section 16 (b) imposes strict liability upon substantially all transactions occurring within the statutory time period, regardless of the intent of the insider or the existence of actual speculation. This approach maximized the ability of the rule to eradicate speculative abuses by reducing difficulties in proof. Such arbitrary and sweeping coverage was deemed necessary to insure the optimum prophylactic effect.”
It is this “objective standard” that the Court hung to so tenaciously in Reliance Electric, but now apparently would abandon to a large extent. In my view, the Court *614improperly takes upon itself the task of refashioning the contours of § 16 (b)17 and changing its essential thrust.
II
Although I conclude that the judgment below should be reversed on the grounds that the exchange of shares constituted a sale, I could not conclude that it was proper for the Court of Appeals to direct entry of summary judgment in favor of Occidental even if I accepted the majority approach to § 16 (b). It did this notwithstanding the failure of Occidental to move for summary judgment in the District Court. To say the least, this is an extraordinary procedure.18 Even if it can be justified in the most limited circumstances — for example, where the record below left no doubt whatsoever that the nonmoving party was entitled to summary judgment as a matter of law — this is not such a case.
The District Court concluded that “[i]n consequence of the option agreement, Occidental disposed of its holdings in Old Kern stock at a profit of about $20 per share .... This profit falls within the meaning and purview of Section 16 (b) . . . .” 323 E. Supp. 570, 579-580. Since the actual sale pursuant to the exercise of the option did not occur within the six-mo,nth period, the only reasonable interpretation of this conclusion of law is that the District Court found that the execution of the option was in fact and substance a sale. The majority does not contest that an option agreement may *615be in economic reality a sale. See Bershad v. McDonough, supra. It distinguishes but does not reject Bershad. Rather, the majority can “see no satisfactory basis or reason for disagreeing” with the Court of Appeals, which concluded that there is “no basis” for a finding that Occidental’s Old Kern stock was “sold” upon execution of the option.19 I cannot agree.
In Bershad, the defendants, who had purchased approximately 18% of the outstanding shares of Cudahy Co. at $6.75 per share, executed an option obligating themselves to sell the shares at $9 per share. The market price of the shares was then $9,125. The optionee paid $350,000 (14% of the purchase price) for the option, to be applied against the purchase price in the event of exercise and forfeited in the event of nonexercise. In addition, defendants gave the optionee an irrevocable proxy with respect to the optioned stock, and defendant McDonough and his colleagues resigned from the Cudahy board of directors. The Court of Appeals also found that “[t]he circumstances of the transactions clearly indicate that the stock was effectively transferred, for all practical purposes, long before the exercise of the option.” 428 F. 2d, at 698.
By comparison, the exercise price here was $105, and the premium to secure the option was $10 per share, or $8,866,230, also to be credited against the purchase price if the option were exercised and forfeited in the event of nonexercise if the merger was consummated. Thus, the effective exercise price was nearly 10%' below the estimated value of the Tenneco shares to be received in *616the consolidation.20 When the option was executed, Occidental’s attorney was authorized to vote Occidental’s Old Kern shares in favor of the Tenneco acquisition, and it was not until it was apparent that Occidental’s vote was not needed that Occidental’s attorney was relieved of his obligation. Occidental also abandoned its demand for two seats on Old Kern’s board, as well as its litigation for inspection of Old Kern’s books and records.
In concluding that this case was not controlled by Bershad, the Court of Appeals emphasized the undisputed testimony21 that the forfeitable down payment was a reasonable, noncoercive price. The basis for this was the deposition of one of Occidental’s vice presidents stating that a New York investment firm had advised him that $9 to $12 per share was a reasonable premium for an option on stock selling at $95. This deposition should not suffice to support summary judgment. First, it is not clear what assumptions the investment firm had made in giving this advice. Second, while it may be that $10 per share premium was a reasonable price for an option based upon factors available to the general investing public, it is by no means clear that an option *617executed by two parties privy to inside information should be judged on the same terms.22 It may be that under the circumstances present here the eventual exercise of the option was a “sure thing.” In short, Occidental may have known that it was “locked into” a $17 million profit.23 Finally, it has not been determined what effect, if any, the very size of the down payment — nearly $9 million — had on the eventual exercise. With these uncertainties and in view of the holding of the District Court that the option agreement constituted a sale, at the very least the case should have been remanded to the District Court for a hearing on whether the terms of the option “compelled” its exercise. See Mourning v. Family Publications Service, Inc., ante, p. 356, at 383 (Douglas, J., dissenting); White Motor Co. v. United States, 372 U. S. 253, 263; 6 J. Moore, Federal Practice ¶ 56.12, p. 2243 (2d ed. 1972).

 Section 16 (b) provides in full:
“For the purpose of preventing the unfair use of information, which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) within any period of less than six months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months. Suit to recover such profit may be instituted at law or in equity in any court of competent jurisdiction by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute the same thereafter; but no such suit shall be brought more than two years after the date such profit was realized. This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or *606the sale and purchase, of the security involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of this subsection.” 15 U. S. C. § 78p (b).

 The term “purchase” includes “any contract to buy, purchase, or otherwise acquire.” 15 U. S. C. § 78c (a) (13). A “beneficial owner” is one who owns “more than 10 per centum of any class of any equity security (other than an exempted security) which is registered pursuant to section 781 [§ 12] of this title.” 15 U. S. C. § 78p (a). The District Court held that “[t]he tender offer constituted a single act of Occidental, whereby the company became a beneficial *607owner of more than 10 percent of Old Kern’s capital stock.” 323 F. Supp. 570, 579. Thus, the District Court ruled that the profit made on all stock purchased in the tender offer, not only the profit on the purchases in excess of 10%, would have to be surrendered. The Court of Appeals did not reach this issue.

 This is not a case where the stock surrendered and the stock received in the exchange were economic equivalents. Cf., e. g., Blau v. Lamb, 363 F. 2d 507, 523-525 (CA2 1966); Blau v. Max Factor & Co., 342 F. 2d 304, 308-309 (CA9 1965).
An exchange of securities in different companies is a “purchase” or “sale” for purposes of § 10 (b). E. g., SEC v. National Securities, Inc., 393 U. S. 453; Dasho v. Susquehanna Corp., 380 F. 2d 262 (CA7 1967).

 Judge Clark, in Park & Tilford v. Schulte, adopted a straightforward approach to defining “acquisition”: “Defendants did not own the common stock in question before they exercised their option to *608convert; they did afterward. Therefore they acquired the stock, within the meaning of the Act.” 160 F. 2d 984, 987. The same analysis holds for “disposition.”

 Examples of this practice are chronicled elsewhere. See, e. g., Reliance Electric Co. v. Emerson Electric Co., 404 U. S. 418, 429-430 *609and nn. 3-6 (Douglas, J., dissenting) and sources cited therein. It would serve no purpose to recount them here.

 Hearings on Stock Exchange Practices before the Senate Committee on Banking and Currency, 73d Cong., 2d Sess., pt. 15, p. 6557 (1934).

 See Recent Cases, 84 Harv. L. Rev. 1012, 1018 (1971).

 Letter of Nov. 24, 1965.

 Hearings, supra, n. 6, at 6558.

 The objective approach may have to yield to a more flexible interpretation of the terms “purchase” and “sale” to include transactions which present the evil Congress sought to eliminate or transactions which are designed to evade § 16 (b). See discussion, infra, at 612-613.

 The preamble of the section, which expresses the purpose of the section, was intended to aid in establishing the constitutionality of the section and guiding the Commission’s rulemaking authority. See Smolowe v. Delendo Corp., 136 F. 2d 231, 236 (CA2 1943); 2 L. Loss, Securities Regulation 1041 (2d ed. 1961).

 In addition, there would have been no reason to exempt transactions wherein the “security was acquired in good faith in connection with a debt previously contracted . . . .”

 See, e. g., Roberts v. Eaton, 212 F. 2d 82 (CA2 1964); Ferraiolo v. Newman, 259 F. 2d 342 (CA6 1958); Blau v. Max Factor & Co., 342 F. 2d 304 (CA9 1965); Blau v. Lamb, 363 F. 2d 507 (CA2 1966) ; Petteys v. Butler, 367 F. 2d 528 (CA8 1966).

 5 L. Loss, Securities Regulation 3029 (Supp. to 2d ed. 1969).

 Securities Exchange Act Release 7826.

 5 L. Loss, Securities Regulation 3029 (Supp. to 2d ed. 1969).

 Occidental unsuccessfully sought to have the Securities and Exchange Commission adopt a rule which would have exempted this exchange. No inferences should be drawn from this refusal. But, I do believe that, given the structure and policies of § 16 (b), any "exempting” is best left to the Commission and Congress. See Heli-Coli Corp. v. Webster, 352 F. 2d 156, 165-166 (CA3 1965).

 See generally 6 J. Moore, Federal Practice ¶ 56.12 (2d ed. 1972).

 The Court of Appeals also concluded that the District Court had made no such finding. For the reasons indicated above, I do not agree. In any event, I presume that the Court of Appeals, had it confronted such a finding, would have determined that it was clearly erroneous.

 Respondent argues that, unlike Bershad, the effective exercise price was not below the current market value because the Old Kern shares never sold for more than $94.75. It contends that this trading price reflected the Kern board’s acceptance of the proposed consolidation. But, it is common for a stock which may be exchanged to sell at a discount from the stock to be received until the exchange becomes a certainty. This discount reflects the risk that the exchange may not be consummated. The option agreement provided that the premium would be returned if there were no exchange. Thus, we must appraise this transaction on the assumption that the consolidation would be approved and accomplished.

 Petitioner contends here that it did not believe that it was necessary to rebut this hearsay testimony in order to prevail on its motion for summary judgment; moreover, it was not faced with a cross-motion.

 Although Occidental may not have been Tenneco’s “ally,” as the majority indicates, it was in their mutual interest to arrange for a satisfactory option agreement.

 Shortly after the option was exercised, Armand Hammer, the President of Occidental, commented on the profit of $17 million that Occidental expected. In his mind, it was “not bad for two weeks’ work.”