Gold v. Sloan

• Decision Date: 19 October 1973
• Docket Number: No. 71-2180 to 71-2182.,71-2180 to 71-2182.
• Citation: 486 F.2d 340
• Parties: Betty L. GOLD, on behalf of the Susquehanna corporation, Appellee, v. Arthur W. SLOAN and Glenn L. Sloane, Appellants, Securities and Exchange Commission, Amicus Curiae. Betty L. GOLD, on behalf of the Susquehanna corporation, Appellant, v. Keith E. RUMBEL, Appellee, Securities and Exchange Commission, Amicus Curiae. Betty L. GOLD, on behalf of the Susquehanna corporation, Appellee, v. Arch C. SCURLOCK, Appellant, Securities and Exchange Commission, Amicus Curiae.
• Court: U.S. Court of Appeals — Fourth Circuit

486 F.2d 340 (1973)

Betty L. GOLD, on behalf of the Susquehanna corporation, Appellee, v. Arthur W. SLOAN and Glenn L. Sloane, Appellants, Securities and Exchange Commission, Amicus Curiae.

Betty L. GOLD, on behalf of the Susquehanna corporation, Appellant, v. Keith E. RUMBEL, Appellee, Securities and Exchange Commission, Amicus Curiae.

Betty L. GOLD, on behalf of the Susquehanna corporation, Appellee, v. Arch C. SCURLOCK, Appellant, Securities and Exchange Commission, Amicus Curiae.

Nos. 71-2180 to 71-2182.

United States Court of Appeals, Fourth Circuit.

Argued May 9, 1972.

Decided October 19, 1973.

For Opinion On Petition for Rehearing February 1, 1974.

Charles S. Rhyne, Washington, D. C. (Courts Oulahan, David M. Dixon, Robert H. Culp, and Rhyne & Rhyne, and Edmund D. Campbell, and Douglas, Obear, & Campbell, Washington, D. C., on brief), for appellants in No. 71-2180.

Joseph B. Gildenhorn, Washington, D. C. (Sidney B. Silverman, New York City, Ewell G. Moore, Jr., Fairfax, Va., on brief), for appellee in No. 71-2180, for appellant in No. 71-2181, and appellee in No. 71-2182.

C. Roger Nelson, Washington, D. C. (Franklin M. Schultz, Stephen L. Parker, and Purcell & Nelson, Washington, D. C. and William W. Koontz and Boothe, Pritchard, & Dudley, Alexandria, Va., on brief), for appellant in No. 71-2182.

Jack L. Lewis, Washington, D. C. (John M. Gray, Robert B. Hirsch, David M. Osnos, and Arent, Fox, Kintner, Plotkin & Kahn, and A. Francis Vitt, Jr., Washington, D. C., on brief), for appellee in No. 71-2181 G. Bradford Cook, Gen. Counsel, Walter P. North, Associate Gen. Counsel, Jacob H. Stillman, Asst. Gen. Counsel, Frederick L. White, Atty., S.E.C., on brief, for amicus curiae.

Before BOREMAN, Senior Circuit Judge, and WINTER and RUSSELL, Circuit Judges.

For Opinion On Petition for Rehearing En Banc February 1, 1974. See 491 F.2d 729.

DONALD RUSSELL, Circuit Judge:

Betty L. Gold as a stockholder of The Susquehanna Corporation (hereinafter referred to as Susquehanna) sues to recover under Section 16(b) of the Securities Exchange Act profits allegedly realized by certain "insiders" from sales on the open market of shares of Susquehanna preferred stock issued to them as stockholders in connection with the merger of Atlantic Research Corporation (hereinafter referred to as ARC) into Susquehanna.¹ All of the defendants had acquired their ARC stock prior to 1967. In fact, the two most directly concerned, Scurlock and Sloan, had not purchased any stock later than 1962 or 1963. Both the defendant Scurlock and the defendant Sloan were directors and owners of more than ten per cent of the equity stock of ARC. In addition, Sloan was the chairman of the board and chief executive officer of ARC during the merger negotiations involved in this proceeding. The other two defendants were not directors but were at the time vice-presidents either of ARC or one of its subsidiaries, and continued for a time in a like capacity with Susquehanna after the merger. Although all the defendants had acquired their stock in ARC more than six months before either there was an agreement to merge or the actual effective date of the merger, their sales which represent the basis for this action occurred less than six months after the effective date of the merger. The only issue in the cases is whether the exchange by the defendants of their ARC stock for Susquehanna stock pursuant to the merger constituted a "purchase" within the terms of the Act as of the effective date of the merger so as to establish a starting date for measuring the six-month period between purchase and sale of stock by the several defendants. The District Court found that it did, 324 F.Supp. 1211. We reverse in part and affirm in part.

I.

These actions are predicated on Section 16(b) of the Securities Exchange Act,² which provides that any profits realized by a statutorily defined corporate "insider" from "any purchase and sale" or "any sale and purchase" of any equity security of his corporation within a period of less than six months are recoverable by or on behalf of the corporation. A corporate "insider" is defined in the Act as any "person who is directly or indirectly the beneficial owner of more than 10 per centum of any class of an equity security" of his issuer "or who is a director or an officer of the issuer * * *."³ The purpose of the statute was to take "the profits out of a class of transactions in which the possibility of abuse was believed to be intolerably great" and to prevent the use by "insiders" of confidential information, accessible because of one's corporate position or status, in speculative trading in the securities of one's corporation for personal profit.⁴

No difficulty has been experienced in applying the statute and what has been described as its "crude rule of thumb"⁵ to the "traditional cash-for-stock transactions that result in a purchase and sale or a sale and purchase within the six-month, statutory period * * *."⁶ The right of recovery in such a situation is plain. The real problem for the courts in construing the statute, however, has arisen in connection with the "unorthodox" transaction,⁷ one in which the statutory concept of "purchase" and "sale" is blurred and where its identification within such concept is "borderline."⁸ Included among these "unorthodox" situations is an exchange of stock pursuant to a corporate merger, as in these cases. A judicial conflict developed over how to deal with such transactions under the statute. Kern County Land Co. v. Occidental Petroleum Corp., supra, however, resolved this conflict and adopted what had earlier been described as a "pragmatic rather than technical" test,⁹ under which "purposeless harshness"¹⁰ in the enforcement was to be avoided and the application of the statute was to be confined to situations where "its application would serve its goals" and where "the particular type of transaction involved is one that gives rise to speculative abuse" and "may serve as a vehicle for the evil which Congress sought to prevent * * *."¹¹ The focus of the court's attention in such situation, in other words, is limited to the negotiations leading up to and including the finalization of the unorthodox transaction itself, which is the one transaction in question. What the Court held in Kern County was not "that an exchange of stock pursuant to a merger may never result in § 16(b) liability."¹² It adopted no such automatic rule. What it did was to establish a sensible and flexible rule, which requires as a basis for statutory liability that the specific transaction itself, which constitutes the unorthodox transaction, present the possibility of, or potential for, exploitation of insider information.¹³ It held that if there is in the transaction itself, and the negotiations leading up to it, an absence of such possibility of abuse, then the deterrent force of the statute is unnecessary and liability is not in order.¹⁴ The issue is not whether there was "actual abuse of insider information" or "intent to profit on the basis of such information." These considerations are irrelevant.¹⁵ It is specifically whether the defendant "had or was likely to have access to inside information, * * * so as to afford it or him an opportunity to reap speculative, short-swing profits" from the unorthodox transaction.¹⁶

It follows, in summary, that, in cases involving exchanges of stock pursuant to a merger such as here, there is no automatic rule that an exchange is or is not a "purchase" but each transaction must be adjudged on its own particular facts¹⁷ and in the light of the evil which Congress sought by the statute to prevent.¹⁸ This is particularly true in a case like the present one, where there are a number of defendants and their situations are manifestly different.

It will accordingly be necessary to consider individually the situation of each defendant and determine whether the finding by the District Court that there was such a possibility of abuse of inside information on the part of the individual defendant in connection with the merger is supportable. Of course, the findings of the District Court on this issue are to be sustained unless clearly erroneous.

We shall accordingly proceed to examine the particular situation of each defendant as it relates to the merger in question, beginning with the defendant Scurlock.

SCURLOCK

II.

The defendant Scurlock, along with his co-defendant Arthur Sloan, founded ARC in 1949 and was its president and chief executive officer from that time until November, 1962. He was then removed as president and chief executive officer of the corporation and was given the title of chairman of the board. At the same time the board created the position of Chief Executive Officer, elected Sloan to the position, and declared the office of president vacant. By 1965 Scurlock and Sloan had apparently developed sharp differences, which had been growing since Scurlock's removal as chief executive officer in 1962. Scurlock, no doubt piqued by his removal, organized a proxy fight for the purpose of replacing Sloan as Chief Executive Officer at the annual stockholders' meeting in July, 1965. In the meantime, there had been some public distribution of the corporation's stock; and, while originally Sloan had owned sixty per cent of the corporate stock and Scurlock forty percent, Sloan's ownership had been reduced to about seventeen per cent and Scurlock's to something like twenty percent by 1965. At the stockholders' meeting in July, 1965 Sloan and his management slate received the vote of approximately two-thirds of the stock voting and thereupon took undisputed control of ARC from that time forward. Scurlock did retain membership on the board but only because cumulative voting enabled him to do so. From this point on he was simply a disaffected stockholder and powerless director, tolerated but not welcomed by the management. In each subsequent management proxy issued for the...