SECTION
16(B)
AND
CORPORATE
GARY
TERRELL
596
ACQUISITIONS
Section 1 6 ( b ) and Corporate A c q u i s i t i o n s
Corporate acquisitions or attempted acquisitions m a y
often involve transfer of s u b s t a n t i a l n u m b e r s of stocks
between the parties i n v o l v e d .
These m a j o r h o l d i n g s , for
w h a t e v e r reason, m a y find their way back to the m a r k e t within
a very short p e r i o d .
If conditions are r i g h t , this subsequent
transaction m a y return a profit to the s e l l e r .
Practically
speaking, the seller h a s , w i t h i n a short swing of time and
e f f o r t , reaped a p r o f i t .
This p o s s i b i l i t y of "short-swing"
profits arising from the attempted or successful corporate
acquisition raises the issue of the a p p l i c a b i l i t y of Section
1 6 ( b ) of the 1934 Securities Exchange Actl to such transactions.
It is the purpose of this paper to discuss a major
problem of interpretation w i t h Section 1 6 ( b ) in relation to
tender o f f e r s , m e r g e r s , and sales of assets for stock.
The
problem concerns w h e t h e r such transactions are encompassed
w i t h i n the statutory language as a "purchase" and "sale", and
thereby imposing liability for the profits r e c e i v e d .
There are,
of c o u r s e , other elements of a 1 6 ( b ) cause of a c t i o n , ^ but
their importance in this context depends upon the determination of the problem mentioned a b o v e .
It is important that
each of the transactions, i . e . tender o f f e r s , m e r g e r s , and
sales of assets for stock, be viewed in an intimate m a n n e r so
597
that a later analysis of their relation to 1 6 ( b ) can be fully
appreciated.
The first form of corporate acquisition to be observed
will be the tender o f f e r , sometimes referred to as the take3
over b i d .
Simply s t a t e d , it is a technique of acquiring
control of a corporate entity by making a public offer of
purchase to h o l d e r s of another corporation's stocks at a
fixed p r i c e .
The amount is usually in cash and often is at
a level above the m a r k e t value to compensate for the voting
power or share of corporate control w h i c h the block of shares
carries w i t h it.
W h i l e the corporation's desire to acquire
holdings from other stockholders could be viewed as an investment o p p o r t u n i t y , the m o t i v a t i n g factor behind such acquisition
is to obtain a w o r k i n g control of the company.
There m a y be
any n u m b e r of reasons w h y a corporation would w a n t to acquire
another c o r p o r a t i o n . ^
Often a later m e r g e r is p l a n n e d , a n d ,
if n o t c o n t e s t e d , a tender offer presents a less expensive
method of carrying through w i t h this o b j e c t i v e .
In fact, one
team of commentators has observed that,
"Tender offers are u s u a l l y made only after the
company m a k i n g the offer feels confident that
the m a n a g e m e n t of the offeree company w i l l
endorse the tender offer or at least w i l l
n o t a c t i v e l y oppose it."5
L o o k i n g at the possibility of a tender offer from the
view of a purchasing c o r p o r a t i o n , there are advantages and
disadvantages.
As pointed out earlier, the tender offer m a y
be a less expensive alternative to a conventional form of
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acquisition.
Of c o u r s e , if a formal m e r g e r is planned after a
successful tender o f f e r , this savings m a y be r e d u c e d .
An
excellent advantage to the purchasing c o r p o r a t i o n is the fact
that questions as to the fairness of the price given for the
stock are less frequent since each s t o c k h o l d e r m a k e s an individual d e t e r m i n a t i o n of w h e t h e r to sell or n o t .
In addition,
the tender offer does n o t require s h a r e h o l d e r a p p r o v a l as do
conventional mergers or sales of a s s e t s .
These conventional
forms also raise issues of providing detailed information as
required by the Securities E x c h a n g e C o m m i s s i o n ^ and extensive
legal d o c u m e n t a t i o n .
F i n a l l y , the tender offer form may be
more palatable to the m a n a g e m e n t of the target company than a
m e r g e r or sale of a s s e t s .
In fact, the tender o f f e r can alway
be viewed as a w e a p o n against completely u n w i l l i n g target companies.
W h i l e the foregoing reasons are e n c o u r a g i n g , the
purchasing corporation should be alert to some v e r y real disadvantages of acquiring corporations by tender o f f e r .
of a l l , the purchasing company is limited to w h a t
it m a y seek about the offeree company.
First
information
This is a valid consid
eration as more m o n e y is paid out and opposing m a n a g e m e n t
learns more about it and r e a c t s .
S e c o n d l y , the tender offer
is subject to some regulation u n d e r the W i l l i a m s Act.^
7
Third,
the more formal acquisition forms provide the protection of
certain representations and warranties that formal agreements
can g i v e .
Tender offers give n o similar p r o t e c t i o n .
Fourth,
an e v e n t u a l problem w i t h the takeover bid is that the corporation w i l l end u p owning a company w i t h certain m i n o r i t y
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4
interests.
These c a n be a hindrance to some areas of corporate
development.
H o w e v e r , the major problem o r risk of the t e n d e r
offer is that it m a y be u n s u c c e s s f u l .
The corporation is then
put in a position of owning a substantial share of a corporation
it cannot c o n t r o l .
of the s h a r e s .
T h e alternatives are to retain or d i s p o s e
S i n c e the money tied u p in this u n s u c c e s s f u l
venture could p r o b a b l y be used to b e t t e r a d v a n t a g e elsewhere
in the c o r p o r a t i o n , sale of the stock is a p p e a l i n g .
It is
at this point that liability for profits realized from the
sale is raised u n d e r S e c t i o n 16(b).
The situation described above w a s presented in the Supreme
Court case of K e r n C o u n t y Land Company v . O c c i d e n t a l Petroleum.8
O c c i d e n t a l had sought a formal merger w i t h K e r n County Land Company (Old K e r n ) w h i c h proved u n f r u i t f u l .
O c c i d e n t a l then announc-
ed a tender offer c a m p a i g n to obtain 500,000 shares of Old K e r n
w h i c h w a s later extended to obtain an a d d i t i o n a l 500,000 s h a r e s .
A t the close of the t e n d e r offer, O c c i d e n t a l had ownership of
887,549 shares of Old K e r n .
This was m o r e than 10 % of the
outstanding shares of Old K e r n .
Old K e r n m a n a g e m e n t immediately
instituted n e g o t i a t i o n s w i t h Tenneco, I n c . ( T e n n e c o ) to frustrate the takeover bid by Occidental by w a y of a defensive merger.
Old K e r n did a n n o u n c e acceptance of a m e r g e r proposal
advanced by T e n n e c o .
O c c i d e n t a l then sought to protect itself
from being forced into a minority p o s i t i o n in T e n n e c o by ne:
gotiating a binding option to sell tQ a subsidiary of T e n n e c o
at a date over six m o n t h s after the t e n d e r offer expired a l l
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the new Tenneco stock to w h i c h O c c i d e n t a l would be entitled
w h e n the m e r g e r took p l a c e .
This option was executed w i t h i n
six months of the more than 10% acquisition by O c c i d e n t a l of
Old K e r n s t o c k .
The Old K e r n - T e n n e c o m e r g e r w a s also closed
w i t h i n the six-month period w h i c h irrevocably entitled Old K e r n
shareholders to receive T e n n e c o preference s t o c k .
The O c c i d e n t a l
option was exercised by w h i c h it received a profit of $19,506,419.22
on the shares obtained through its tender o f f e r .
New Kern,
now a subsidiary of T e n n e c o , instituted a suit u n d e r Section
16(b) to recover the profit realized by O c c i d e n t a l .
It alleged
that both the e x e c u t i o n of the o p t i o n and the closing of the
merger a g r e e m e n t constituted "sales" w i t h i n the meaning of
the s t a t u t e .
The D i s t r i c t C o u r t granted summary
in favor of the p e t i t i o n e r .
judgment
The Court of Appeals for the
Second Circuit reversed and ordered summary judgment entered in
favor of O c c i d e n t a l .
The Supreme Court affirmed the court of
appeals.
W h i l e the tender offer has become a more popular method
of corporate a c q u i s i t i o n , a n o t h e r form w h i c h is often used is the
merger.
The term Is used q u i t e casually to denote the combina-
tion of business e n t e r p r i s e s , w h i c h is essentially t r u e .
Indeed,
a l l forms of corporate a c q u i s i t i o n s could be grouped under
this t i t l e .
H o w e v e r , one w r i t e r has attempted to de-emphasize
the use of "merger" as a generic term describing all corporate
acquisitions.
It is his opinion t h a t ,
". . . the only types of business combinations
that should be designated as m e r g e r s are statutory
mergers or c o n s o l i d a t i o n s , i.e., w h e n one or more
companies are merged into a n o t h e r or into a new
corporation in conformity w i t h the statutes dealing
w i t h such transactions in the states of their inc o r p o r a t i o n . "9
601
6
This is the context in w h i c h mergers w i l l be discussed in this
paper.
In addition to clarifying w h a t the term m e r g e r actually
means, it should be noted that a m e r g e r m a y be developed in
a n u m b e r of d i r e c t i o n s . " ^
This paper deals p r i m a r l y w i t h
"horizontal" and "conglomerate" mergers a l t h o u g h the principles
may be applied in o t h e r situations.
The h o r i z o n t a l merger is
one w h i c h "combines u n i t s engaged in the same stage of production, and it f r e q u e n t l y involves extension of the geographic
scope of m a r k e t c o v e r a g e or perhaps d e v e l o p m e n t of a broader
line of similar products." ^
The conglomerate m e r g e r is viewed
as an ", . . a c q u i s i t i o n of firms whose products bear little
relation to those of the acquiring
firm."^
It is interesting to note that Professor Cary refers to the
1 -a
merger procedure as an "organic change" in the c o r p o r a t i o n .
Professor Conard includes it u n d e r a chapter entitled
morphoses of Corporations."''"^
These characterizations
J
"Metaobviously
emphasize the c o r p o r a t i o n as an entity in itself w h i c h gives
some insight into a corporation's
rationale for mergers or
as one Fortune a r t i c l e stated it--"The Urge to M e r g e . "
Some
of these m o t i v a t i o n s w e r e alluded to e a r l i e r , but some additional ones w i l l be mentioned here."^
The a c q u i r i n g corpora-
tion m a y be able to increase its utilization of existing resources- - p a r t i c u l a r l y in the area of physical facilities n o t
operating at capacity levels.
Better d i s t r i b u t i o n facilities
through an e n l a r g e m e n t of operations could reduce costs of
production and m a r k e t i n g as w e l l as t e c h n o l o g i c a l , m a n a g e r i a l ,
60S
and service f u n c t i o n s .
With these s a v i n g s , the corporation
w i l l be able to better meet w i t h competitive c h a l l e n g e s .
The
m e r g e r may be the result of the need to obtain more credit
in financial c i r c l e s .
F i n a l l y , in the buying
v i e w , m e r g e r m a y be the best w a y to f o r e c l o s e
corporation's
competition.
A l t h o u g h this requires a serious consideration of the antitrust laws, it cannot be overlooked as a motivating
V i e w i n g the m e r g e r from the selling corporation's
factor.
viewpoint,
some a d d i t i o n a l m o t i v a t i n g factors can also be found.
Although
there are those that would argue that big business discourages
the independent businessman, the m e r g e r often attracts smaller
businesses to e n t e r the market because of its offer of allowing one to "get out" quite p r o f i t a b l y .
m a y be a problem to the smaller firm.
Liquidity of assets
Perhaps n o t as dignified
as some of the o t h e r reasons, the e c o n o m i c reality of the
failing business m a y be just as i m p o r t a n t .
F i n a l l y , the corpor-
ation m a y be forced into the m e r g e r as a defensive technique to
a takeover b i d .
Once the d e c i s i o n to merge has been m a d e , the process is
a long one, but only because the considerations involved m u s t
be analyzed c a r e f u l l y due to the investment involved.
Such
considerations are n o t within the scope of this paper, but
a brief look at w h a t the corporations m u s t deal w i t h is instructive and w i l l add to the analysis of corporate acquisitions in light of Section 16(b).16
There are a n u m b e r of
criteria to be examined before the m e r g e r :
8
(1) size, (2) capital
8
productivity, (3) degree of c o m p e t i t i o n , (4) stability of
income, (5) m a r k e t d e p e n d e n c e , (6) o w n e r s h i p control, (7) "fit"
of the a c q u i s i t i o n , and (8) a "takeoff"
platform.Additionally,
the u s u a l corporate m e r g e r , to be in accordance w i t h the cor1O
poration statutes, involves s h a r e h o l d e r a p p r o v a l .
T h i s , in
t u r n , m a y involve proxy regulations as w e l l as other provisions of the Securities E x c h a n g e A c t of 1 9 3 4 . ^
There is
available in some states a "short-form" m e r g e r . ^ 0
It, h o w e v e r ,
primarily involves w h o l l y owned subsidiaries merging w i t h the
parent c o r p o r a t i o n .
There is n o shareholder approval r e q u i r e d .
Finally, the s u c c e s s f u l m e r g e r m u s t be documented in f u l l .
T h e s e are only broad areas w i t h w h i c h the corporations must
d e a l , but they can be very complicated and
detailed.Success-
ful mergers are primarily the product of well-organized and
well-planned
approaches.
The potential problem w i t h mergers in light of Section
?
y
1 6 ( b ) w a s presented in N e w m a r k v . RKO G e n e r a l , I n c . .
Man-
a g e m e n t of two r e g i o n a l airline companies had made a provisional agreement in A p r i l 1967 to merge by an exchange of
stock.
RKO w a s a controlling shareholder of one of the
regional airlines (Frontier) at that t i m e .
On M a y 3 or 4 ,
1 9 6 7 , RKO contracted w i t h several m a j o r shareholders of the
other airline ( C e n t r a l ) to purchase at a fixed price, 49% of
Central's outstanding shares and $500,000 of debentures
convertible into a d d i t i o n a l shares.
The formal m e r g e r agree-
m e n t provided an exchange rate of 3^ Central shares for e a c h
share of F r o n t i e r common and w a s executed on M a y 4 .
It w a s
disclosed to the public the following d a y .
The m e r g e r
received shareholder a p p r o v a l in both corporations o n July
27.
Central's approval w a s partly based u p o n the commitment
of those shareholders w h o had contracted w i t h RKO to support
the m e r g e r .
The Civil A e r o n a u t i c s Board later approved
the RKO purchase of shares and the m e r g e r agreement w h i c h
became final on September 1 .
O n S e p t e m b e r 18, RKO executed
the purchase a g r e e m e n t , p a y i n g a price of $8,550,082.50 and
receiving both the stock and d e b e n t u r e s .
Physical exchange
of the C e n t r a l certificates at an amended rate of 3\ Central
shares for each two shares of F r o n t i e r (to reflect a Frontier
stock s p l i t ) occurred on O c t o b e r 1 .
A Frontier security
h o l d e r w h o had owned d e b e n t u r e s and w a r r a n t s before the merg e r brought an action u n d e r Section 1 6 ( b ) , alleging that the
exchange pursuant to the m e r g e r was a "sale" under the s t a t u t e .
She sought as "profit realized" the d i f f e r e n c e between the
purchase price of the Central shares and debentures and the
m a r k e t price of their e q u i v a l e n t in F r o n t i e r shares on the
date of the m e r g e r .
The t r i a l court granted
plaintiff's
cross-motion for summary judgment on the issue of liability
and the Second Circuit a f f i r m e d .
A third form of corporate a c q u i s i t i o n w h i c h potentially
presents Section 1 6 ( b ) problems is the sale of assets for
stock.
This is simply a m e t h o d by w h i c h one corporation is
fused into another by selling its assets in exchange for stock
of the purchasing c o r p o r a t i o n .
The rationale for acquiring
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10
the corporation t h r o u g h this method often m a y depend u p o n
the tax
c o n s i d e r a t i o n s . ^ ^
H o w e v e r , another possible consid-
e r a t i o n for the sale of assets method is that for the purchasing corporation the purchase m a y be authorized by a
d i r e c t o r resolution w i t h o u t s h a r e h o l d e r approval a n d , gene r a l l y , dissenting shareholders have n o right of a p p r a i s a l .
H o w e v e r , most state corporation statutes provide for the sale
of assets and require shareholder a p p r o v a l of the selling
c o r p o r a t i o n . 2 5
The procedure to effect a sale of
a s s e t s 2 6
involves some
preliminary n e g o t i a t i o n s w h i c h m a y be followed by an agreement
of sale or letter of intent.
The assets are conveyed by deed
of sale, the consideration is p a i d , and the transaction is
complete.
In an a s s e t s - f o r - s t o c k t r a n s a c t i o n , the considera-
t i o n , of course, is the stock in the purchasing
corporation.
The holders of these shares m a y desire to retain the securities and participate in the purchasing c o r p o r a t i o n .
However,
liquidity may be the objective of these shareholders, a n d ,
therefore, an immediate sale of the securities may be effected .
It is in this context in w h i c h the question of the ap-
plication of S e c t i o n 16(b) a r i s e s .
This precise situation
w a s presented to the Supreme Court in F o r e m o s t - M c K e s s o n , I n c .
?7
v . Provident S e c u r i t i e s Co..
In F o r e m o s t - M c K e s s o n , Provident Securities C o . had decided to liquidate and d i s s o l v e .
It engaged Foremost-Mc-
K e s s o n , Inc. as a potential b u y e r for its a s s e t s .
The trans-
a c t i o n stalled over the type of consideration to be paid
GOs
11
for the a s s e t s - - P r o v i d e n t w a n t e d cash but F o r e m o s t wanted to
pay w i t h its own s e c u r i t i e s .
A g r e e m e n t was s u b s e q u e n t l y
reached b e t w e e n the two c o r p o r a t i o n s w h i c h provided that
Foremost w o u l d buy two-thirds of Provident's assets for
$4.25 m i l l i o n in cash and $49.75 m i l l i o n in F o r e m o s t convertible subordinated d e b e n t u r e s .
These holdings
constituted
more than 10% of its outstanding common stock.
Provident,
Foremost, and a g r o u p of u n d e r w r i t e r s executed an u n d e r w r i t i n g
agreement w h i c h provided for sale to the u n d e r w r i t e r s of a
$25 m i l l i o n d e b e n t u r e .
This w a s w i t h i n the six-month period
since P r o v i d e n t had obtained the convertible
securities.
The proceeds w e r e distributed to the shareholders of Provident along w i t h the remaining cash and debentures and then
the corporation was d i s s o l v e d .
R e a l i z i n g their potential
Section 1 6 ( b ) l i a b i l i t y , P r o v i d e n t sought a d e c l a r a t o r y judgment that it w a s n o t liable to F o r e m o s t .
granted summary judgment for P r o v i d e n t .
The D i s t r i c t Court
The Court of A p p e a l s
for the N i n t h C i r c u i t affirmed the lower court d e c i s i o n w h i c h
was in turn affirmed by the Supreme C o u r t .
A n analysis of the cases and situations discussed above
is d e p e n d e n t u p o n a reasonable familiarity with the statutory
language of S e c t i o n 16(b) as w e l l as the circumstances w h i c h
9
surround it.
The statutory language itself
and s t r a i g h t f o r w a r d .
Q
is rather simple
Howeve r, the decisions u n d e r the section
demonstrate the d a n g e r of m a k i n g such hasty c o n c l u s i o n s .
It
is important, t h e n , to consider the circumstances w h i c h prompted
the enactment of the statute, the various verbalizations of
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w h a t the c o n g r e s s i o n a l intent was in enacting the s t a t u t e , and
h o w the courts h a v e interpreted the s t a t u t e .
Of c o u r s e , the
primary concern of this paper is to relate these considerations to the concept of a "purchase and sale" in the situations
of tender o f f e r s , m e r g e r s , and sales of assets for stock.
The c o n g r e s s i o n a l investigations w h i c h preceded the enactm e n t of the S e c u r i t i e s Exchange A c t of 1934 revealed numerous
instances where o f f i c e r s , d i r e c t o r s , and m a j o r stockholders
of corporations w h i c h publicly traded its stock on n a t i o n a l
securities exchanges had abused their positions of t r u s t .
A
frequent type of impropriety was the use of c o n f i d e n t i a l corporate information to aid the individual's personal market
a c t i v i t i e s at the expense of public security
holders.j
n
f a c t , prior to 1 9 3 4 , quick m a r k e t killings were an accepted
30
m a j o r source of income for corporate personnel.
W i t h such
c o n f i d e n t i a l i n f o r m a t i o n , these "insiders" were able to cause
fluctuations in the m a r k e t of w h i c h only they knew the cause
and w h i c h allowed them to reap substantial profits w i t h o u t
incurring the risk to their investment.
This state of affairs,
in t u r n , made the potential of twisting corporate policy
to
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e f f e c t u a t e the "insider profit" extremely a t t r a c t i v e .
This
w a s accompanied by the delaying of disclosure of such corporate
information to the public and the manipulation of the payment
of dividends to indirectly affect m a r k e t activity in the stock.32
S u c h actions d i s c o u r a g e d valid investment since the insider
a c t i v i t y in the stock resulted in a m a r k e t in the security
SOS
13
w h i c h did n o t a c c u r a t e l y reflect its true
value.33
Section
1 6 ( b ) was enacted by the Congress to d e a l w i t h the evils
surrounding insider trading.34
xhe m a i n thrust of the pro-
v i s i o n w a s to deprive the insider of the profit w h i c h his
short-swing transactions had produced if guch sale and purchase or purchase and sale had been performed w i t h i n any period less than six m o n t h s .
The statute provides that the issuer
of the security traded can recover the profit resulting from
the transaction irregardless of the intention of such insider
in entering into the purchase or s a l e .
U n d e r the circumstances outlined a b o v e , the Congress
enacted Section 1 6 ( b ) of the 1934 A c t pursuant to the power
35
delegated to it by the Constitution u n d e r the commerce clause,
and it has withstood c o n s t i t u t i o n a l m u s t e r .
The n e x t logical
step in the d e v e l o p m e n t of the statute w a s to discern the
intent of Congress in enacting S e c t i o n 1 6 ( b ) .
This was under-
taken by a n u m b e r of courts w h e n appropriate cases presented
the q u e s t i o n .
Of c o u r s e , d i f f e r e n t courts verbalized differ-
e n t interpretations of the congressional intent.
One of the
e a r l i e s t attempts came from the Second C i r c u i t , s t a t i n g ,
" . . . the statute was intended to be thoroughg o i n g , to squeeze all possible profits out of
stock t r a n s a c t i o n s , and thus to establish a
standard so h i g h as to prevent any conflict between the selfish interest of a fiduciary off i c e r , d i r e c t o r , or stockholder and the faithful
performance of his d u t y . " 3 6
O t h e r circuits h a v e voiced their concept of congressional intent in other w a y s .
The Fifth Circuit declares,
"One intent of S e c t i o n 1 6 ( b ) is to cast the
60s
14
o f f i c e r - d i r e c t o r thereunder into a f i d u c i a r y capacity for the benefit of a l l the shareholders in
the c o r p o r a t i o n .
The Sixth C i r c u i t has viewed S e c t i o n 1 6 ( b ) a s ,
" . . . designed to discourage short-swing transactions by insiders by taking a w a y profit and
placing it in hands of c o r p o r a t i o n , liability
therefor a t t a c h i n g regardless of intention of
insider."38
The Third Circuit says,
". . . short-swing profits provisions of Section
1 6 ( b ) of A c t seek to d e t e r use of inside information, presumed to be held by statutory insiders, or to limit Insider's c o m p e t i t i v e advantage by proscribing paired purchases and
sales or sales and purchases by insiders w i t h i n
six m o n t h s of e a c h other."39
H o w e v e r , the S u p r e m e Court has recently stated w h a t it has devined the c o n g r e s s i o n a l intent to b e .
In the K e r n County Land
C o . case, the court w r o t e ,
"The purpose of Section 1 6 ( b ) of the Securities
E x c h a n g e A c t of 1934 is to prevent u n f a i r u s e
of information w h i c h may have been obtained
by insider by reason of his r e l a t i o n s h i p to the
corporation, thus protecting the public by preventing c o r p o r a t e insiders from speculating
in stock on basis of information n o t available
to others."^O
A t the present t i m e , anyone dealing w i t h Section 1 6 ( b ) w i l l h a v e
to accept this formulation as controlling on the subject of congressional intent as far as the courts are c o n c e r n e d .
Once the intent behind the statute w a s u n d e r s t o o d ,
the next stage was to develop an interpretation of the words
of the statute to square with its p u r p o s e .
This development fo-
cused on various parts of Section 1 6 ( b ) , h o w e v e r , for the object of this p a p e r , the interpretation of the terms
616
"purchase"
15
and "sale" are m o s t r e l e v a n t .
It was easy enough for the
courts to interpret the statute to encompass situations w h i c h
w e r e c l e a r l y w i t h i n the terms of the c o m m e r c i a l law of sales
and n o t i o n s of c o n t r a c t .
The problem developed however w h e n the
courts began to realize that some transactions were n e i t h e r
clearly included in, n o r excluded from the statutory definitions of purchase and sale.^1
The problem arose in situations
involving involuntary sales, stock o p t i o n s , stock w a r r a n t s ,
stock c o n v e r s i o n s , stock r e c l a s s i f i c a t i o n s , tender offers,
m e r g e r s , exchange of assets for stock, and other t r a n s a c t i o n s .
These t r a n s a c t i o n s soon became known as "unorthodox"
tions.
transac-
R e a l i z i n g their p r e d i c a m e n t , the courts fashioned
a test to d e a l w i t h such s i t u a t i o n s .
The courts ask w h e t h e r the
c i r c u m s t a n c e s of the particular case are such t h a t , assuming
the p o s s e s s i o n or u s e of inside information, the insider could
have obtained any advantage over the public w h i c h he did n o t
already p o s s e s s . ^
T h u s , the courts do n o t follow a rule that
any of the transactions mentioned above w i l l or w i l l not produce a "purchase" or "sale."
Each case m u s t be independently
examined and decided on its f a c t s .
This approach has received
the a p p r o v a l of the Supreme Court in the K e r n County Land C o .
case in w h i c h it echoed the w o r d s of its earlier decision in
R e l i a n c e E l e c t r i c C o . v . E m e r s o n Electric
C o m p a n y . T h i s
is
where the law of Section 1 6 ( b ) stands today in relation to the
"unorthodox" transactions of tender offers, m e r g e r s , and sales
of assets for stock.
It is at this point that we m a y engage in
616
16
an analysis of this problem of interpretation of Section 1 6 ( b )
in the area of corporate a c q u i s i t i o n s .
The three cases used e a r l i e r to d e m o n s t r a t e the corporate
acquisition in the forms of tender o f f e r , m e r g e r , and sale of
assets for stock provide an excellent starting point for analysis of the Section 1 6 ( b ) problem of "purchase" and "sale."
A close look at the rationale of those cases w i l l allow an
insight into h o w the courts approach this interpretation problem.
It w i l l also provide a contrast or point of reference
for the basic premise of this w r i t e r w h i c h is common to all
three s i t u a t i o n s .
S p e c i f i c a l l y , that premise is that corpor-
ate acquisitions of the type contemplated by this paper should
be exempted entirely from the concept of a "purchase" or "sale"
u n d e r Section 1 6 ( b ) .
The arguments in support of such a
theory w i l l follow a d i s c u s s i o n of the court's rationale in
each of the three c a s e s .
The court in the K e r n C o u n t y Land C o . case finally gave
approval to the "subjective" or "pragmatic" a p p r o a c h to Section
16(b) in situations involving "borderline" t r a n s a c t i o n s .
In
applying such a standard to the facts of the c a s e , the court
absolved O c c i d e n t a l Petroleum of any Section 1 6 ( b ) l i a b i l i t y .
The court focused, in relation to the tender o f f e r , upon the
nature of the information available to O c c i d e n t a l during the
tender offer stage.
The information referred to w a s the pos-
sibility of calculations by O c c i d e n t a l that if its takeover
efforts f a i l e d , it could sell the stock acquired by tender
offer to the company's m e r g e r partner at s u b s t a n t i a l p r o f i t .
GlZ
17
Such information the court characterized as n o t being based on
inside i n f o r m a t i o n . ^
This same r a t i o n a l e was applied to the
later extension by O c c i d e n t a l of the t e n d e r o f f e r .
The court
pointing out once a g a i n ,
" . . . the e x p e c t a t i o n of such benefits (success
of takeover o r occurence of d e f e n s i v e m e r g e r ) was
unrelated to the use of information u n a v a i l a b l e
to other stockholders or m e m b e r s of the public
w i t h sufficient funds and the intention to make
~
the purchases O c c i d e n t a l had offered to m a k e . . ."
The court continues then to a p p l y the "speculative abuse" test
to the subsequent m e r g e r .
It is c l e a r , h o w e v e r , that the
court in this situation did n o t view the information involved
w i t h the tender o f f e r as inside information w h i c h would taint
the later sale at a p r o f i t .
W h i l e this w r i t e r would c e r t a i n l y agree w i t h the conclusion of the court in relation to the t e n d e r o f f e r , there is
still the u n c o m f o r t a b i l i t y inherent in the pragmatic a p p r o a c h .
In other w o r d s , the tender o f f e r o r in this case may have escaped liability, b u t a change in judicial t e m p e r a m e n t could just
have easily found that such information had the potential
for speculative a b u s e .
The court centered u p o n the main con-
tention for removing the tender offer a c q u i s i t i o n and sale situ a t i o n from Section 16(b) stating that such information related
thereto is n o t of the "insider" v a r i e t y .
T h e m a j o r factor in-
volved w h e n a t e n d e r offer is followed by a sale of the acquired
stock is w h e n the tender offer has been d e f e a t e d .
Unless the
tender offeror is satisfied to be a m e m b e r of the victorious
c o r p o r a t i o n , m u c h of its cash assets are tied u p in stock.
The
18
most reasonable a l t e r n a t i v e is to regain those funds by selling
the s t o c k .
If y o u realize a profit on such a t r a n s a c t i o n , so
m u c h the b e t t e r .
The concept of realizing a p r o f i t m a y be a
bit over-emphasized a n y w a y .
an inexpensive one g e n e r a l l y .
The tender offer process is not
The method of a p p r i s i n g share-
holders of the o f f e r can generate a great deal of c o s t s .
In
addition, the information required to be filed u n d e r the Williams
A c t m u s t be c o n s i d e r e d .
The tender offeror realizes that his
takeover bid m a y n o t be successful w h e n he b e g i n s .
The manage-
m e n t of the target company m a y be agreeable to the t a k e o v e r .
W h e r e u p o n , the S e c t i o n 16(b) problem should n o t a r i s e .
How-
e v e r , m a n a g e m e n t m a y resist strenuously a n d , if s u c c e s s f u l ,
leave the offeror w i t h little c h o i c e .
risk of w h a t m a y u l t i m a t e l y h a p p e n .
The offeror runs the
To impart to the defeated
offeror the p o s s i b i l i t y of Section 1 6 ( b ) liability w h e n he seeks
to extricate h i m s e l f from the situation seems u n d u l y burdensome.
It would seem that any attempt to obtain profits de-
ceptively could be m o r e e f f i c i e n t l y thwarted through Section
10 (b) and the provisions of the Williams A c t , s p e c i f i c a l l y designed for the r e g u l a t i o n of tender o f f e r s .
V e r y often the tender offer may motivate a defensive merger,
w h i c h brings us to the q u e s t i o n of mergers generally and the
potential for l i a b i l i t y u n d e r Section 1 6 ( b ) .
The RKO G e n e r a l
case presents an e x c e l l e n t opportunity to see h o w the courts
react to the interpretation of "sale" in this a r e a .
The Second
Circuit found that the m e r g e r h e r e involved could be termed as
a sale and therefore subjected the purchaser of the stock,
616
19
RKO G e n e r a l , Inc., to S e c t i o n 1 6 ( b ) liability for profit realized.
A g a i n the court applied the pragmatic t e s t .
The court ap-
p a r e n t l y had little trouble in coming to the conclusion that
in the situation p r e s e n t e d , there w a s p o t e n t i a l for speculative abuse of inside i n f o r m a t i o n .
The court w a s h i g h l y con-
cerned w i t h RKO's position of control in F r o n t i e r .
The court
reasoned that this control enabled RKO to know and dictate
the m e r g e r terms before they became p u b l i c .
In a d d i t i o n , RKO
had constructed an escape valve for itself by n o t becoming
irrevocably committed to purchase the C e n t r a l shares if the
price fell below the contract p r i c e .
allow the merger to c o l l a p s e .
In other w o r d s , RKO could
The court termed this as an
investor's dream--"Heads I w i n , tails I do n o t
l
o
s
e
.
I
t
w a s this factor of control w h i c h m o t i v a t e d the court to term
the subsequent m e r g e r as a s a l e .
The court rejected RKO's ar-
g u m e n t that the stock e x c h a n g e did n o t f u n d a m e n t a l l y alter the
n a t u r e of its h o l d i n g s and therefore was n o t a s a l e .
The court
analogized it to the "economic equivalence" test stated in
Blau v . Lamb, but refused to a p p l y it u n d e r the facts of this
case.
It was to be restricted to e x c h a n g e s involving the se-
curities of a single issuer.
It should be n o t e d at the outset that the actions of RKO
G e n e r a l as depicted from the facts of the case certainly infer
a less than arm's length t r a n s a c t i o n .
The court w a s correct
in terming RKO's position as an investor's dream since the
e l e m e n t of risk w a s totally r e m o v e d .
H o w e v e r , w h i l e the court's
d e c i s i o n n e c e s s a r i l y gets rid of a scoundrel in the trading of
s e c u r i t i e s , it has also subjected a very significant form of
616
20
corporate acquisition to an u n n e c e s s a r y b u r d e n .
As discussed
e a r l i e r , the d e c i s i o n to m e r g e involves m a n y complex considerations.
It is n o t a m a t t e r to be taken lightly.
The process
involves shareholder a p p r o v a l w h i c h often brings into play
the proxy regulations of the 1934 A c t .
M e r g e r s have increas-
ingly become a s u b j e c t of antitrust l i t i g a t i o n .
It should be
r e m e m b e r e d , too, the varying business reasons w h i c h m o t i v a t e
a merger.
N o t least among these is e n c o u r a g e m e n t to the small
businessman to e n t e r the competitive m a r k e t .
The emerging
company w i l l more likely than n o t be more e f f i c i e n t w h i c h is
encouraged by sound economic p o l i c y .
be found in a l m o s t any m e r g e r p l a n .
These considerations can
Since Section 1 6 ( b ) pro-
hibits attempts to d e t e r m i n e motive behind the transaction,
these points are n e v e r brought o u t .
Y e t , they play a much more
significant role in the m e r g e r than the opportunities for specu l a t i v e abuse for w h i c h the courts m a y seek u n d e r the broad
reach of Section 1 6 ( b ) .
In addition, if the objectives of
the 1934 A c t are to protect the investing public, then it
w o u l d seem that a p p l i c a t i o n of Section 1 6 ( b ) to mergers is
misplaced since the only persons injured by abusive tactics
w o u l d be s h a r e h o l d e r s .
A n y injury to shareholders could be
remedied by state corporate law on a theory of a breach of
fiduciary d u t y .
The fact that a m e r g e r m a y subject a bus-
inessman to liability u n d e r Section 1 6 ( b ) because of the acts
of some u n s c r u p u l o u s shareholders is u n r e a s o n a b l e .
In fact,
the businessman w h o is concerned w i t h the m e c h a n i c s of the
616
21
merger going through m a y be caught c o m p l e t e l y u n a w a r e u n t i l it
is too late.
This is another area in w h i c h the antifraud
provisions of the 1934 A c t would serve the purpose of ridding
the securities m a r k e t of those involved in u n f a i r d e a l i n g w h i l e
allowing legitimate business operations to go f o r w a r d .
As
it is n o w , Section 1 6 ( b ) imposes one m o r e burden u p o n an
already complex b u s i n e s s d e c i s i o n .
The third form of corporate a c q u i s i t i o n , a sale of assets
for stock, m a y also apparently raise an issue of S e c t i o n 1 6 ( b )
liability.
The Foreroost-McKesson case presented the issue
to the Second C i r c u i t w h i c h termed the transaction an "orthodox" transaction and that the circumstances did n o t preclude
the possibility of speculative a b u s e .
T h e issue as
presented
for review to the S u p r e m e Court was m o r e concerned w i t h the
status of P r o v i d e n t as a beneficial o w n e r of m o r e than 1 0 % .
H o w e v e r , the o p i n i o n n e c e s s a r i l y assumes that there w a s a purchase by Provident and apparently does n o t reject the Second
Circuit's view that the acceptance of the convertible debentures was a p u r c h a s e .
W e are left then w i t h the Second Cir-
cuit's view of the t r a n s a c t i o n . ^
That court's analysis is
somewhat confusing in that it characterizes the t r a n s a c t i o n as
o r t h o d o x , yet applies the speculative abuse s t a n d a r d .
It seems
that the speculative abuse standard w a s to be applied only
in those "unorthodox" or "borderline" situations w h i c h could
n o t clearly be termed a purchase or s a l e .
N o n e t h e l e s s , the
court views the P r o v i d e n t - F o r e m o s t transaction as e s s e n t i a l l y
€17
22
a cash-for-stock t r a n s a c t i o n .
In this v e i n , it fits w e l l
w i t h i n the d e f i n i t i o n of a p u r c h a s e .
T h e only thing w h i c h
saved Provident from liability was the i n t e r p r e t a t i o n , affirmed by the Supreme C o u r t , that it w a s not an insider w h e n
the debentures w e r e
purchased.
The court of a p p e a l ' s c h a r a c t e r i z a t i o n of the transaction
as an orthodox c a s h - f o r - s t o c k proposition is d i s t u r b i n g .
Sev-
e r a l of the factors noted by the court point to the transaction as a sale of a s s e t s , not the "orthodox" securities purchase:
(1) P r o v i d e n t exchanged two-thirds of its assets for
c o n v e r t i b l e debentures of Foremost, (2) there w a s no delay between the agreement and the exchange, (3) the purchase price
did n o t depend u p o n a formula that was tied to m a r k e t price
of the s t o c k .
T h e s e facts are not u n u s u a l w h e n linked to the
fact that Provident w a n t e d cash, not s e c u r i t i e s , for its ass e t s , but was persuaded by Foremost to accept the securities
in o r d e r to consumate the sale.
get rid of the b u s i n e s s .
It w a s P r o v i d e n t ' s desire to
This is e v i d e n t by the subsequent
d i s s o l v i n g of the corporation upon d i s t r i b u t i o n to the shareholders.
A sale of assets for stock should c e r t a i n l y be con-
sidered an "unorthodox purchase" under present S e c t i o n 16(b)
considerations.
Beyond t h a t , h o w e v e r , it is again doubtful
that such a transaction should be subject to S e c t i o n 1 6 ( b ) at
all.
This form of corporate acquisition allows a great deal
of f l e x i b i l i t y for a l l parties concerned.
The u s e of stock
as the form of c o n s i d e r a t i o n certainly has e n o r m o u s benefits
in tax and it allows shareholders of the selling
corporation
to r e t a i n investment securities or liquidate t h e i r h o l d i n g s .
Sis
23
M u c h the same situation is presented h e r e for the businessman
who wants to get out as was discussed in the m e r g e r s i t u a t i o n .
His main concern is to close the sale and realize its p r o f i t s .
It is only w h e n h e attempts to convert those shares that he
realizes his p r e d i c a m e n t .
It is n o t t o t a l l y u n f o r s e e a b l e
that the sale of a s s e t s for stock could give rise to speculative a b u s e .
H o w e v e r , the 1934 A c t can again d e a l with the
problem m o r e e f f i c i e n t l y under its antifraud provisions than
stretching S e c t i o n 1 6 ( b ) to unreasonable l i m i t s .
The sale of
assets for stock is a n o t h e r choice for corporate acquisition
and should n o t be bothered with p o s s i b i l i t y of a Section
16(b) lawsuit.
S e c t i o n 1 6 ( b ) w a s enacted in r e a c t i o n to a general feeling
of disgust at the use of inside information by corporate officials for p e r s o n a l p r o f i t .
Y e t , the rampage to stamp out
the evil inherent in such practices has had its effect on
legitimate business operations, p a r t i c u l a r l y in the field of
corporate a c q u i s i t i o n s .
Indeed, there m a y be some question
as to w h e t h e r trading on inside information h a s been effectively hampered since transactions outside the six-month
period are u n t o u c h e d by Section 1 6 ( b ) .
A s s u m i n g , h o w e v e r , that
it does d i s c o u r a g e insider trading w i t h i n the six-month period, it is n o t r e a l l y necessary to a c c o m p l i s h that g o a l .
S e c t i o n 1 0 ( b ) and R u l e 10b-5 are adequate w e a p o n s against
insider trading at any time.
A l t h o u g h causes of action based
on these provisions do n o t enjoy the light burden of proof
provided by S e c t i o n 1 6 ( b ) , a plaintiff w h o is hard-pressed to
find e v i d e n c e of a c t u a l use of inside information is prevented
o
24
from a r b i t r a r i l y imposing l i a b i l i t y .
W h i l e designed to pro-
tect individuals from unfair d e a l i n g , Section 1 6 ( b ) can a l s o
be used as a form of corporate r e v e n g e .
F i n a l l y , Section 1 6 ( b )
and its d e v e l o p m e n t with the p r a g m a t i c approach has opened the
d o o r to e n d l e s s litigation as to w h e t h e r the particular t e n d e r
o f f e r , m e r g e r , or sale of assets for stock is a "purchase"
or "sale" u n d e r Section 1 6 ( b ) .
A n e x e m p t i o n of these transac-
tions from the operation of S e c t i o n 1 6 ( b ) would relieve this
problem of u n c e r t a i n t y w i t h o u t d e s t r o y i n g the policy of
e l i m i n a t i n g insider t r a d i n g .
FOOTNOTES
1 . 15 U . S . C . § 7 8 p ( b ) (1934).
2. The elements of a S e c t i o n 1 6 ( b ) action are: (1) a
beneficial owner, d i r e c t o r , or officer of the issuer, (2)
w h i c h is an issuer covered by S e c t i o n 12 of the 1934 A c t ,
(3) a sale and p u r c h a s e or purchase and sale of equity security
of the issuer, ( 4 ) w i t h i n six m o n t h s , and (5) a profit is
realized.
3 . The d i s c u s s i o n of tender offers relies h e a v i l y upon
the following a r t i c l e , for source m a t e r i a l . F l e i s c h e r and
M u n d h e i m , Corporate A c q u i s i t i o n by Tender O f f e r , 115 U . P a .
L . R e v . 317 (1967). (Hereinafter cited as F l e i s c h e r and M u n d h e i m . )
4. S e e , G . M c C a r t h y , A c q u i s i t i o n s and M e r g e r s at 12,
13 (1963).
(Hereinafter cited as M c C a r t h y . J
5. F l e i s c h e r and M u n d h e i m , supra note 3.
6. S . E . C . R e g . 1 4 A , 17 C . F . R . s 240.14
(1965).
7. W i l l i a m s A c t , 15 U . S . C . I 78m, n (1968).
8. K e r n County Land C o . v . O c c i d e n t i a l Petroleum Corp.,
411 U . S . 582 (1973).
9. M c C a r t h y , supra note 4 at 1 6 .
10. A l l a n , E x p a n s i o n by M e r g e r , in The C o r p o r a t e M e r g e r
101 (W. Alberts & J . Sega.ll e d s . 1966).
11 . IcL. at 101 .
12. IcL_ at 1 0 2 .
13. W . C a r y , Cases and M a t e r i a l s on Corporations at 1622
(4th e d . 1 9 6 9 ) .
14. A . C o n a r d , Corporations in Perspective at 176 (1976).
6ZJ
15. E . K i n t e r , P r i m e r on the Law of M e r g e r s at 18 (1973).
16. A l l a n , supra note 10.
1 7 . A l b e r t s , The Profitability of G r o w t h by M e r g e r , in
The Corporate M e r g e r 235 (W. A l b e r t s & J . S e g a l l e d s . 1966).
This is a very t e c h n i c a l , but complete set of general principles
for evaluating both specific m e r g e r s and growth by merger as a
corporate p o l i c y .
18. V . A . T . S . B u s . Corp. A c t , a r t . 5.03
(1955).
19. There w a s a time when a statutory m e r g e r was not
viewed by the SEC as a "sale." H o w e v e r , as of January 1 , 1973,
the SEC rescinded the "no-sale" rule and replaced it w i t h a new
rule--Rule 1 4 5 , 17 C . F . R . s 230.145 (1973).
For a d e t a i l e d analysis of the o p e r a t i o n of this R u l e ,
see Schneider and M a n k o , Rule 1 4 5 , The Review of Securities R e g u l a t i o n ,
V o l . 5 N o . 22 (Dec. 2 0 , 1972) and V o l . 6 N o . 1 (Jan. 10, 1 9 7 3 ) .
20. K i n t e r , supra note 15 at 3 0 .
21. F u l d , Some Practical A s p e c t s of a M e r g e r , 60 H a r v . L . R e v .
1092 (1946-47). A l t h o u g h somewhat o u t - o f - d a t e , this article
gives some insight into the m e r g e r p r o c e s s .
22. N e w m a r k v . RKO G e n e r a l , Inc., 425 F.2d 348 (2d C i r . 1 9 7 0 ) ,
c e r t , denied, 400 U . S . 854 (1970).
23. C o n a r d , supra note-14 at 2 1 6 .
2 4 . Cary, supra note 13 at 1700.
2 5 . V . A . T . S . B u s . C o r p . A c t , a r t . 5.10
(1955).
26. C a r y , supra note 13 at 1702-3.
27. F o r e m o s t - M c K e s s o n v . Provident S e c u r i t i e s Co., -- U . S .
96 S . C t . 508 ( 1 9 7 6 ) .
28. Section 1 6 ( b ) , 15 U . S . C . s 7 8 p ( b ) , reads in full:
"For the purpose of preventing the u n f a i r use
of information which m a y have been obtained by such
b e n e f i c i a l owner, d i r e c t o r , or o f f i c e r by reason of
his r e l a t i o n s h i p to the issuer, any profit realized
by him from any purchase and sale, or any sale and
p u r c h a s e , of any equity security os such issuer (other
than an exempted security) w i t h i n any period of less
G2Z
than six m o n t h s , unless such security was acquired
in good faith in connection w i t h a debt previously
contracted , shall inure to and be recoverable by
the issuer, irrespective of any intention on the
part of such beneficial o w n e r , d i r e c t o r , or officer
in entering into such t r a n s a c t i o n of h o l d i n g the
security purchased or of n o t repurchasing the security
sold for a period exceeding six m o n t h s . S u i t 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 n a m e and in behalf of the issuer if the issuer
shall fail or refuse to bring such suit w i t h i n sixty
days after request or shall fail diligently to
prosecute the same thereafter; but n o such suit shall
be brought more than two years after the date such
profit was r e a l i z e d . This subsection shall n o t be
construed to cover any t r a n s a c t i o n w h e r e such beneficial o w n e r was n o t such both at the time of the
purchase and sale, or the sale and purchase, of the
security involved, or any transaction or transactions
w h i c h the Commission by rules and regulations m a y
exempt as n o t comprehended w i t h i n the purpose of
of this subsection."
29. M e e k e r and C o o n e y . The Problem of D e f i n i t i o n in Determining;
Insider Liabilities U n d e r § 16(b), 45 V a . L . R e v . 949 (1959).
30. Rubin and F e l d m a n n , Statutory Inhibitions Upon U n f a i r
Use of Corporate Information by Insiders, 95 U . P a . L . R e v . 468
(1947).
3 1 . N o t e , 59 Y a l e L . J . 510 (1950).
32. Id.
3 3 . Y o u r d , Trading in Securities by D i r e c t o r s , Officers and
S t o c k h o l d e r s : Section 16 of the Securities E x c h a n g e A c t , 38
M i c h . L . R e v . 133 (1939).
34. I d .
3 5 . Smolowe v . D e l e n d o Corp., 136 F.2d 231 (2d C i r . 1943),
c e r t , d e n i e d , 320 U . S . 751 (1943).
3 6 . S m o l o w e , supra note 35; Park & T i l f o r d , Inc. v . S c h u l t e ,
160 F.2d 984 (2d C i r . 1947), cert, denied 332 U . S . 761 (1947);
Shaw v . D r e y f u s , 172 F.2d 140 (2d C i r . 1949), c e r t , denied 337
U . S . 907 (1949).
iii
37. M o u l d i n g s , Inc. v . P o t t e r , 465 F.2d 1101 (5th C i r . 1972),
cert, denied 410 U . S . 929 (1973).
38. Champion H o m e Builders C o . v . J e f f r e s s , 490 F.2d 611
(6th C i r . 1 9 7 4 ) , c e r t , denied 416 U . S . 986 (1974).
3 9 . Lewis v . M e l l o n B a n k , N . A . , 513 F.2d 921 (3d C i r . 1975).
4 0 . K e r n C o u n t y L a n d C o . v . O c c i d e n t i a l Pertoleum C o r p . ,
411 U . S . 582 at 5 9 1 , 592 ( 1 9 7 3 ) . (Citing the legislative r e p o r t s . )
4 1 . 15 U . S . C . I 78c(13):
"The terms "buy" and "purchase" each include
any contract to buy, p u r c h a s e , or otherwise
acquire."
15 U . S . C . I 78c(14):
"The terms "sale" and "sell" each include any
contract to sell or otherwise d i s p o s e of."
4 2 . M u n t e r , Section 1 6 ( b ) of the Securities E x c h a n g e A c t
of 1934: A n A l t e r n a t i v e to "Burning D o w n the Barn in O r d e r to
K i l l the R a t s . " , 52 C o r n e l l L . Q . 69 ( 1 9 4 2 ) .
43. 404 U . S . 418
(1972).
4 4 . 411 U . S . 582 at 597
(1973).
4 5 . I d . at 5 9 8 .
4 6 . 425 F.2d 348 at 354 (1970).
4 7 . P r o v i d e n t Securities C o . v . F o r e m o s t - M c K e s s o n , Inc.,
506 F.2d 601 at 604-5 (2d C i r . 1 9 7 4 ) .
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iv