Foremost-McKesson, Inc. v. Provident Securities Co., 423 U.S. 232 (1976)

Foremost-McKesson, Inc. v. Provident Securities Co.

No. 74-742

Argued October 7, 1975
Decided January 13, 1976
423 U.S. 232

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Syllabus

Respondent, a personal holding company contemplating liquidation, sold assets to petitioner corporation. Respondent received from petitioner as part of the purchase price convertible debentures which, if converted into petitioner’s common stock, would make respondent a holder of more than 10% of petitioner’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, respondent 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 petitioner’s debentures received by respondent was large enough to make respondent a beneficial owner of petitioner within the meaning of § 16, and its disposal of the securities within the six-month period exposed respondent to a suit by petitioner to recover profits realized by respondent on the sale to the underwriters, respondent sought a declaratory judgment of its nonliability under § 16(b). The District Court granted summary judgment to respondent, and the Court of Appeals affirmed, though for different reasons.

Held: By virtue of the exemptive provision, a beneficial owner is accountable under § 16(b) in a purchase-sale sequence such as was involved here only if he was such an owner "before the purchase." Thus, the fact that respondent was not a beneficial owner before the purchase removed the transaction from the operation of § 16(b). Pp. 239-259.

(a) The legislative history of the exemptive provision reveals a legislative intent to deter beneficial owners from making both a purchase and a sale on the basis of inside information, which is presumptively available only after the purchase. Pp. 243-250.

(b) Had it been Congress’ design when it enacted § 16(b) to impose liability in cases such as this, it should have done so expressly or by unmistakable inference. Pp. 251-252.

(c) Congress may have sought to distinguish between purchases by persons who have not yet acquired inside status through stock ownership of at least 10% and purchases by directors and officers because the latter are more intimately involved in corporate affairs. Pp. 253-254.

(d) Other sanctions remain available against fraudulent use of inside information in transactions not covered by § 16(b). Pp. 254-256.

(e) Other provisions exempting certain transactions from § 16(b) are not inconsistent with the "before the purchase" construction reached here. Pp. 256-259.

506 F.2d 601, affirmed.

POWELL, J., delivered the opinion of the Court, in which BURGER, C.J., and BRENNAN, STEWART, MARSHALL, BLACKMUN, and REHNQUIST, JJ., joined, and in all but Part IV-C of which WHITE, J., joined. STEVENS, J., took no part in the consideration or decision of the case.