Reliance Electric Co. v. Emerson Electric Company case brief

Reliance Electric Co. v. Emerson Electric Co.
404 U.S. 418 (1972)

Synopsis: The petitioner corporation appealed a judgment from the United States Court of Appeals for the Eighth Circuit, holding that the petitioner could not recover profits derived from respondent's sale of its shares.

FACTS: Emerson Electric Co. (P), was unsuccessful in an attempt to take over Dodge Manufacturing Co.
-P acquired 13.2 percent of the Dodge's outstanding stock on June 16, 1967, at the price of $63 per share.
-Dodge later approved a merger with the Reliance Electric Company (D).
-In an attempt to immunize its shares from liability under § 16(b), Emerson (P) planned to reduce its Dodge holdings to less than ten percent of Dodge's outstanding shares.
-On August 28, 1967, Emerson (P) sold 37,000 Dodge shares to a brokerage house for $68 per share, reducing Emerson's (P) holdings to 9.96 percent.
-Emerson (P) then sold the remaining shares to Dodge for $69 per share on September 11, 1967. -Reliance (D) demanded the profits that were realized on both sales, and Emerson brought this suit seeking a declaratory judgment as to its liability under § 16(b).




Procedural History:
Declaratory judgment action by seller of corporate stock to determine its liability, if any, to issuer's successor for profits realized on sale of stock, in which defendant counterclaimed for amount of profit. The United States District Court for the Eastern District of Missouri rendered judgment against plaintiff, and plaintiff appealed. The Court of Appeals,, reversed and remanded, and certiorari was granted. The Supreme Court, held that where owner, which had acquired 13.2% of outstanding common stock in unsuccessful attempt to take over issuer, disposed of its entire holdings in two sales within six months of purchase, the first sale of which reduced owner's holdings to 9.96% and the second of which disposed of remainder, profits derived from second sale were not recoverable by issuer's successor under ‘insider trader’ provision of Securities Exchange Act of 1934, notwithstanding that purpose of first sale was to immunize disposal of remainder from liability under Act.

ISSUE:
Can a party purposefully avoid section 16(b) by splitting sales to get below the 10% target ownership requirement?

Holding:  Yes.  A company can split its sale of shares into more than one part to reduce their holdings under the statutory minimum percentage of shares (10%) to reduce their liability under Section:16(b).

Rules/Analysis:
-Liability cannot be imposed simply because the investor structured his transaction with the intent of avoiding liability under § 16 (b). The question is, rather, whether the method used to "avoid" liability is one permitted by the statute.
-Among the "objective standards" contained in § 16 (b) is the requirement that a 10% owner be such "both at the time of the purchase and sale . . . of the security involved." Read literally, this language clearly contemplates that a statutory insider might sell enough shares to bring his holdings below 10%, and later—but still within six months—sell additional shares free from liability under the statute. Indeed, commentators on the securities laws have recommended this exact procedure for a 10% owner who, like Emerson, wishes to dispose of his holdings within six months of their purchase.



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