Champion Home Builders Co. v. Jeffress

• Decision Date: 11 January 1973
• Docket Number: Civ. A. No. 32106.
• Parties: CHAMPION HOME BUILDERS CO., a Michigan corporation, Plaintiff, Joseph L. Kramer and Beatrice F. Kramer, Intervenors-Plaintiffs, v. Etson B. JEFFRESS, Defendant.
• Court: U.S. District Court — Western District of Michigan

352 F. Supp. 1081

CHAMPION HOME BUILDERS CO., a Michigan corporation, Plaintiff, Joseph L. Kramer and Beatrice F. Kramer, Intervenors-Plaintiffs, v. Etson B. JEFFRESS, Defendant.

Civ. A. No. 32106.

United States District Court, E. D. Michigan, S. D.

January 11, 1973.

Freud, Markus, Slavin & Mountain, Scholl, Jenkins, Robinson & Stieg, Detroit, Mich., for plaintiff.

Robert Newman, Parr, Doherty, Polk & Sargent, Robert Block, Pomerantz, Levy, Haudek & Block, New York City, for defendant.

MEMORANDUM OPINION AND ORDER

JOINER, District Judge.

The case now before this court presents us with the acquisition of one corporation (Concord Mobile Homes) by another (Champion Home Builders). That acquisition was accomplished via a purchase of 100% of the Concord stock, owned by Etson B. Jeffress, in exchange for 13% of Champion's stock. Mr. Jeffress was made a director of Champion subsequent to the sale. The major shareholders, including defendant, later sold as a part of a public offering portions of their holdings, pursuant to a previous agreement, selling proportional amounts in order to maintain the status quo.

This suit is brought by Champion at the instigation of two shareholders, the Kramers, to recover the profits that defendant Jeffress is alleged to have made through these activities; the claim is made under § 16(b) of the Securities Exchange Act of 1934 (prohibiting "short-swing" profit-taking) 15 U.S.C. A. § 78p(b). The Kramers have been declared by the court to be intervenor-plaintiffs for the reason that the other directors of the corporation were involved in the challenged transactions.

Section 16(b) of the Act 15 U.S.C.A. § 78p(b) provides that for the purpose of preventing the unfair use of information which may have been obtained, a person such as the defendant (a director or one who is a beneficial owner of more than 10% of the securities) who sells any of the securities, the beneficial ownership of which he has acquired within a period of six months from the time of the sale, is liable to the issuer of the securities for the profits realized on the sale of such securities.

Intervenor-plaintiffs' motion for summary judgment asserts that defendant sold the stock he acquired in the exchange within six months of its acquisition, thereby violating the provisions of § 16(b), and asks that the defendant be held liable for these transactions. Defendant has filed a cross-motion for summary judgment. In open court the parties agreed that the matter of liability was before the court for decision on the depositions, affidavits and exhibits submitted to the court.

There is no question as to the date of sale of the stock by Jeffress. It was September 12, 1968. The problem in this case is determining when Jeffress acquired "beneficial ownership" of the shares sold. Was it or was it not within the six month period prescribed by the statute?

DATE OF "BENEFICIAL OWNERSHIP"

On February 17, 1968, a "handshake" agreement to exchange stock was entered into by Jeffress and Gerald Grenier and Henry George, Treasurer and President of Champion respectively, subject only to approval of the Champion Board of Directors. A resolution regarding the exchange was adopted by the Board on February 21, 1968. The formal agreement was drawn up pursuant to the Board's direction and was executed on April 17, 1968.

Plaintiffs contend that the date of acquiring "beneficial ownership" is April 17, the date a formal detailed contract drawn up by the lawyers was executed by both parties. Defendant on the other hand contends that he acquired "beneficial ownership" on February 21, the date on which both parties were bound to exchange stock—105,000 shares of Champion for all of the shares of Concord—and the date the transaction was fully approved by the Board of Directors of Champion, the minutes of which were signed by its president. The question before the court is on which of these dates did the defendant Jeffress acquire beneficial ownership of the shares?

It appears that Section 16(b), as a result of recent cases, is being enforced against owners and directors in a less strict and mechanistic way:

"The federal judiciary within the last few years has shifted from a strict and comparatively harsh objective interpretation of the section to a much more subjective approach, an analysis less concerned with the narrow letter of the law than with the particular facts at bar—in short, an approach less automatic and mechanistic and more fact-oriented and pragmatic." L. Lowenfels, Section 16(b): A New Trend in Regulating Insider Trading, 54 Cornell L.Rev. 45 (1968).

Ferraiolo v. Newman, 259 F.2d 342 (6th Cir. 1958); Blau v. Max Factor & Co., 342 F.2d 304 (9th Cir. 1965); Abrams v. Occidental Petroleum Corp., 450 F.2d 157 (2nd Cir. 1971); Provident Securities Co. v. Foremost-McKesson, Inc., 331 F.Supp. 787 (N.D.Cal.1971). However, even a technical and strict application of the statute leads to the conclusion that "beneficial ownership" was acquired by Jeffress on February 21, 1968.

The date of purchase or sale under which a person acquires "beneficial ownership" of stock under § 16(b) 15 U.S.C.A. § 78p(b) is not the date of transfer of the stock but the date on which the parties are irrevocably bound. Newmark v. RKO, 425 F.2d 348 (2nd Cir. 1970); Booth v. Varian Associates, 334 F.2d 1 (1st Cir. 1964); Stella v. Graham-Paige, 232 F.2d 299 (2nd Cir. 1956) and Blau v. Ogsbury, 210 F.2d 426 (2nd Cir. 1954).

Newmark holds that the date of acquisition of a "conditional right to purchase . . . at a fixed price" is the date at which the purchaser became a beneficial owner. Booth postpones the date of "beneficial ownership" to the date at which the purchase price was fixed, holding that price is an essential part of the contract. Stella states beneficial ownership attaches when he "incurred an irrevocable liability to take and pay for the stock." This did not arise until the closing, for prior to that time defendant was not irrevocably bound. Blau holds that the exercise of an option makes one a beneficial owner. Even though payment is postponed, the defendant became irrevocably liable.

The court finds that on February 21 the parties had reached a meeting of the minds on the essentials of their exchange agreement and that if matters had thereafter bogged down in the drafting of a formal contract, either party could have sued to enforce the contract or for its breach. Since this was merely a purchase of stock by Champion, all that was needed to bind the corporation to the deal was the approval of the Board of Directors. This approval was formally given at the February 21 meeting. Jeffress, as the seller of his own stock, was similarly bound by the acceptance of his offer of sale. Under the cases the parties were thus bound and defendant Jeffress then became the "beneficial owner" and an insider.

1. The parties had reached informal agreement earlier in February to exchange 105,000 shares of Champion for all of the stock of Concord.

2. Based on this informal agreement, the Board of Directors on February 21 formally approved acquisition of Jeffress' Concord stock in exchange for 105,000 shares of Champion stock. The Board minutes read as follows:

"RESOLVED, that the proposed acquisition by Champion Home Builders Co. of all the issued and outstanding shares of the common stock, no par value (`Concord Stock'), of Concord Mobile Homes, Inc., an Indiana Corporation, from Etson B. Jeffress in exchange for 105,000 shares of the common stock, par value $1, of Champion Home Builders Co., is approved . . ."

3. Jeffress sat in on the Board meeting after approval had been given and discussed...