Blau v. Oppenheim

• Decision Date: 21 February 1966
• Citation: 250 F. Supp. 881
• Parties: Isadore BLAU, Plaintiff, v. Laurent OPPENHEIM, Jr., M & T Chemicals, Inc., Hanson-Van Winkle Munning Company and American Can Company, Defendants.
• Court: U.S. District Court — Southern District of New York

250 F. Supp. 881

Isadore BLAU, Plaintiff, v. Laurent OPPENHEIM, Jr., M & T Chemicals, Inc., Hanson-Van Winkle Munning Company and American Can Company, Defendants.

United States District Court S. D. New York.

February 21, 1966.

Morris J. Levy, New York City, for plaintiff.

Milbank, Tweed, Hadley & McCloy, New York City, for defendant Laurent Oppenheim, Jr., Edward J. Reilly, Jr., Adlai S. Hardin, Jr., New York City, of counsel.

Dewey, Ballantine, Bushby, Palmer & Wood, New York City, for defendants M & T Chemicals, Inc. and American Can Co., Edward N. Sherry, New York City, of counsel.

Philip A. Loomis, Jr., Gen. Counsel, Walter P. North, Associate Gen. Counsel, Ellwood L. Englander, Asst. Gen. Counsel, Daniel J. Goldberg, Washington, D. C., of counsel, for Securities and Exchange Commission, amicus curiae.

February 21, 1966. 65 Civil 2719.

WEINFELD, District Judge.

The defendant, Laurent Oppenheim, Jr., moves pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss the complaint for failure to state a claim. The action was commenced under section 16(b) of the Securities Exchange Act of 1934¹ to recover "shortswing profits" allegedly realized by the defendant in sales and purchases of common stock of Hanson-Van Winkle Munning Company (Van Winkle). The motion rests upon the failure of the plaintiff to allege that he was a shareholder of Van Winkle at the time of the transactions, as required by Rule 23(b) of the Federal Rules of Civil Procedure in the instance of derivative actions.²

The essential facts as alleged by plaintiff are that between July 9, 1963 and September 12, 1963 the defendant, then a director and officer of Van Winkle, sold 3,154 shares of its stock and purchased 6,000 shares, resulting in short-swing profits within the meaning of section 16(b). One year later, in September 1964, Van Winkle sold and transferred all its assets and choses in action to M & T Chemicals, Inc. (M & T), a wholly owned subsidiary of American Can Company (American), and M & T assumed all the liabilities of Van Winkle. The consideration for the transfer was the delivery by American of a specified number of its shares to Van Winkle, which then distributed the American shares to its stockholders, whereupon Van Winkle was merged into M & T and ceased to exist as a public holding company upon its dissolution.³

The plaintiff did not own any shares of Van Winkle during its existence. He first acquired his shares of American in the open market in 1965. In August 1965 he served a formal demand upon American that it or M & T, its wholly owned subsidiary, institute suit against Oppenheim to recover the short-swing profits realized by him in the Van Winkle transactions from July to September 1963, pointing out that the statute of limitations was about to expire. In the absence of a reply, he commenced this action⁴ on behalf of himself and other stockholders of American and in the right of American, M & T and Van Winkle. Jurisdiction is asserted under section 16(b),⁵ which authorizes suit to recover short-swing profits by the issuer or upon its failure or refusal, by "the owner of any security of the issuer," and section 27 of the 1934 Act,⁶ which confers upon the district courts exclusive jurisdiction of such suits.

The defendant readily acknowledges that the courts uniformly have held that in a section 16(b) suit brought on behalf of an issuer Rule 23(b) is inapplicable and the security holder need not allege that he was such at the time of the transactions which gave rise to the suit.⁷ However, he urges that those authorities are inapplicable since in each the plaintiff admittedly was a shareholder of the "issuer" whose stock was traded and yielded the short-swing profits, whereas here the plaintiff was never a stockholder of Van Winkle. He stresses the fact that no action has been brought either by Van Winkle ("if indeed it still exists"), by any owner of its securities, by M & T, the successor corporation, or by M & T's parent, American. Accordingly, the defendant contends that plaintiff's action is essentially derivative and, absent compliance with the contemporaneous ownership requirement of Rule 23 (b), must be dismissed. The plaintiff and the Securities and Exchange Commission, which has submitted an amicus curiae brief, take a contrary view and in substance urge that upon the facts here presented the word "issuer" is broad enough to include both M & T and, since it is without security holders, its parent, American.

Essentially, however stated, the question presented is whether upon a transfer by an issuer, as defined in the Act, of all its assets and choses in action to another corporation with which it is merged or, as in this instance, to a wholly owned subsidiary of another corporation, a security holder of the surviving corporation or of its parent may, upon the failure of either to do so, bring an action under section 16(b) to recover short-swing profits which had accrued to the issuer without compliance with the contemporaneous ownership provision of Rule 23 (b) of the Federal Rules of Civil Procedure. I hold that the action may be maintained.

It may be acknowledged at once that upon a strict or literal reading of section 16(b) plaintiff never was "the owner of any security of the issuer," Van Winkle; but this hardly resolves the problem, since the question still remains whether "issuer," defined in the Act as one "who issues or proposes to issue any security,"⁸ is broad enough to embrace an issuer's successor in interest or a surviving corporation to which has been transferred all its assets, properties and choses in action.

While the courts may not give content to an act beyond its language, they are required to construe it in consonance with its clearly defined and avowed objective, and to carry out the Congressionally declared purpose. The purpose of section 16(b), enacted upon the basis of overwhelming evidence of widespread abuses by corporate fiduciaries, is succinctly set forth in the law itself as "preventing the unfair use of information" by insiders and thereby protecting the public and outside stockholders.⁹ The statute has been held to be remedial and "hence subject to that interpretation most consistent with the legislative purpose * * *."¹⁰ Just as the Supreme Court has not hesitated to give strained meaning to a word "in the candid service of avoiding a serious constitutional doubt,"¹¹ so, too, the courts have not hesitated to define words broadly to assure the legislative purpose where otherwise a strict or literal definition would have defeated the purpose. The courts, particularly in our circuit, have consistently interpreted section 16(b) in "the broadest possible"¹² terms in order not to defeat its avowed objective, resolving all doubts and ambiguities against insiders.¹³ Thus, a voluntary conversion of convertible preferred stock into common has been held a "purchase";¹⁴ so, too, a "purchase" was held to have been effected when an insider received stock of a parent corporation in exchange for his stock in a subsidiary under a plan of corporate simplification which permitted the stockholder to receive cash instead of the stock;¹⁵ also, a receipt of warrants by an officer pursuant to his contract of employment has been described as a "purchase."¹⁶ Similarly, a transfer of shares from one corporate officer to another in payment of a pre-existent debt has been held a "sale";¹⁷ a person performing the functions of a corporate officer, although not officially one, has been held an "officer";¹⁸ and a purchaser of corporate stock who was not a director of the corporation at the time of his purchase but became one prior to reselling the stock has been held to the same liability as one who had at all times been a director.¹⁹ Against this background we consider the issue.

Preliminarily it should be emphasized that strictly speaking a section 16(b) suit to recover short-swing profits is not derivative, although some of the cases so describe it,²⁰ but one to enforce a primary right created by the Act in favor of the issuer as well as its security holders.²¹ The issuer, by reason of this right of action, is the "instrument, sometimes unwilling,"²² for enforcing the statutory policy. And when the issuer fails to assert the right, the security holder may enforce it. The section, designed, as the courts have held, "to squeeze all possible profits"²³ out of condemned transactions, is probably the most effective safeguard in protecting the public against those abuses and practices which gave birth to the legislation.²⁴ With its underlying policy and enforcement provisions so clearly articulated by the Congress, unless the section otherwise commands, its literal words, if in fact they produce an unreasonable result "plainly at variance with the policy of the legislation as a whole,"²⁵ must yield to the essential policy of the Act.

Perforce the defendant urges that the language of 16(b) authorizing suits for the recovery of profits "by the issuer, or by the owner of any security of the issuer" is so clear and unambiguous that, granting the acknowledged policy of liberal interpretation of the section and its enforcement means, nonetheless a construction thereof to include a survivor or successor of an issuer (or its security holder) is foreclosed. The defendant stresses that the Act does not compel, but only authorizes, suit by an issuer or its security owners to recover short-swing profits and that nowhere did Congress expressly confer such right of action upon successor corporations. Accordingly, he urges that to deny successor corporations and their security owners the right to maintain a section 16(b) suit would not devitalize that enforcement provision of the Act. He further contends that the legislative policy would not be frustrated, since a merger would merely limit the time within which a 16(b) suit could be brought.

A collateral contention is that all rights to...