Foremost-McKesson, Inc. v. Provident Sec. Co. - 423 U.S. 232, 96 S. Ct. 508

Rule:

Neither 16(d) of the Securities Exchange Act of 1934 (15 USCS 78p(d)), exempting certain transactions by a securities dealer from 16(b) of the Act (15 USCS 78p(b)), which authorizes a corporation to recover for itself the profits realized by an officer, director, or beneficial owner of more than ten per cent of its shares from a purchase and sale, or sale and purchase, of its stock within a six-month period, nor 16(e) of the Act (15 USCS 78p(e)), exempting from 16(b)'s provisions certain foreign or domestic arbitrage transactions, nor the Securities and Exchange Commission's Rule 16b-2 ( 17 CFR 240.16b-2), exempting from 16(b) of the Act specified transactions in connection with the distribution of a substantial block of securities, precludes a construction of the exemptive provision of 16(b) of the Act--which provides that subsection (b) is not to be construed to cover any transaction where the beneficial owner was not such both "at the time of the purchase and sale, or the sale and purchase," of the security involved--under which a beneficial owner, in a purchase-sale sequence, must account for profits only if he was a beneficial owner before the purchase.

Facts:

Provident Securities Co., a personal holding company contemplating liquidation, sold assets to Foremost-McKesson, Inc. Provident received from Foremost-McKesson as part of the purchase price convertible debentures which if converted into Foremost-McKesson’s common stock would make Provident a holder of more than 10% of Foremost-McKesson’s outstanding common stock. A few days later, pursuant to an underwriting agreement, one of the debentures was sold to a group of underwriters for cash in an amount exceeding its face value. After making debenture and cash distributions to its stockholders, Provident dissolved. Under § 16(b) of the Securities Exchange Act of 1934 (Act) a corporation may recover for itself the profits realized by an officer, director, or beneficial owner of more than 10% of its shares from a purchase and sale of its stock within a six-month period. An exemptive provision specifies, however, that § 16(b) shall not be construed to cover any transaction where the beneficial owner was not such both "at the time of" the purchase and sale of the securities involved. Since the amount of Foremost-McKesson’s debentures received by Provident was large enough to make Foremost-McKesson a beneficial owner of the former within the meaning of § 16, and its disposal of the securities within the six-month period exposed Provident to a suit by Foremost-McKesson to recover profits realized by respondent on the sale to the underwriters, Provident sought a declaratory judgment of its nonliability under § 16(b). The District Court granted summary judgment to Foremost-McKesson, and the Court of Appeals affirmed.

Issue:

Was Provident considered a beneficial owner at the time of purchase and sale of the involved securities?

Answer:

No.

Conclusion:

Congress itself recognized a distinction between short-term trading by mere stockholders and such trading by directors and officers. The legislative discourse revealed that Congress thought that all short-swing trading by directors and officers was vulnerable to abuse because of their intimate involvement in corporate affairs. But trading by mere stockholders was viewed as being subject to abuse only when the size of their holdings afforded the potential for access to corporate information. These different perceptions simply reflect the realities of corporate life. It would not be consistent with this perceived distinction to impose liability on the basis of a purchase made when the percentage of stock ownership requisite to insider status had not been acquired. To be sure, the possibility does exist that one who becomes a beneficial owner by a purchase will sell on the basis of information attained by virtue of his newly acquired holdings. But the purchase itself was not one posing dangers that Congress considered intolerable, since it was made when the purchaser owned no shares or less than the percentage deemed necessary to make one an insider. Such a stockholder is more analogous to the stockholder who never owns more than 10% and thereby is excluded entirely from the operation of § 16 (b), than to a director or officer whose every purchase and sale is covered by the statute. In sum,  in a purchase-sale sequence, a beneficial owner must account for profits only if he was a beneficial owner "before the purchase.” Thus, the fact that Provident was not a beneficial owner before the purchase removed the transaction from the operation of § 16(b).