Continental Oil Company v. Perlitz

• Decision Date: 07 August 1959
• Docket Number: No. 12228.,12228.
• Citation: 176 F. Supp. 219
• Parties: CONTINENTAL OIL COMPANY, a corporation, Plaintiff, v. Charles A. PERLITZ, Jr., Defendant.
• Court: U.S. District Court — Southern District of Texas

176 F. Supp. 219

CONTINENTAL OIL COMPANY, a corporation, Plaintiff, v. Charles A. PERLITZ, Jr., Defendant.

No. 12228.

United States District Court S. D. Texas, Houston Division.

August 7, 1959.

Butler, Binion, Rice & Cook, Percy D. Williams, Houston, Tex., for plaintiff.

Baker, Botts, Andrews & Shepherd, Homer L. Bruce, Houston, Tex., for defendant.

INGRAHAM, District Judge.

In this cause both plaintiff and defendant have filed motions for summary judgment with supporting affidavits and counteraffidavits. The court finds the facts to be those admitted by the pleadings or by noncontroverted affidavits and as further found in this opinion.

At all times material to this cause plaintiff has been a corporation with its capital stock registered on the New York Stock Exchange, a national securities exchange, and defendant has been a director and officer of plaintiff. Plaintiff and defendant are therefore for the purposes of this cause subject to the applicable provisions of the Securities Exchange Act of 1934, as amended, 48 Stat. 896, 63 Stat. 107, 15 U.S.C.A. § 78a et seq., herein referred to as the Exchange Act. This is a suit by plaintiff under Section 16(b) of the Exchange Act (15 U.S.C.A. §§ 78p and 78aa) to recover the profits realized by defendant as a result of sales by defendant of certain shares of defendant's capital stock on May 16 and 17, 1957, and the purchase by him of shares of the same stock on August 28, 1957, within six months after the prior sales. The amount realized by defendant from the May, 1957, sales was greater than the price he paid for a corresponding number of shares in August, 1957.

Since 1952 plaintiff has had in effect a restricted stock option plan for officers and other key employees and in that year defendant as an officer of plaintiff was granted under that plan an option to purchase from plaintiff a given number of shares of plaintiff's stock at a fixed price. However, the option could not be exercised in whole or in part for at least two years after it was granted to defendant. Because of a later two for one split of plaintiff's stock, the number of shares still remaining under defendant's option was doubled and the price to be paid was halved. The stock purchased by defendant on August 28, 1957, was capital stock of plaintiff purchased by defendant under that option.

Section 16(b) of the Exchange Act is as follows:

"Sec. 16. (b) For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) within any period of less than six months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months. Suit to recover such profit may be instituted at law or in equity in any court of competent jurisdiction by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute the same thereafter; but no such suit shall be brought more than two years after the date such profit was realized. This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of this subsection." 15 U.S.C.A. § 78p(b). (Emphasis supplied.)

Plaintiff asserts that under this Section 16(b) plaintiff is entitled to recover the profit realized by defendant under his May, 1957, sales and August, 1957, purchases.

Defendant's first ground of defense is that the Securities and Exchange Commission (herein referred to as the Commission) by its Rule X-16B-3, adopted by it under the authority of Sections 16(b) and 23(a) of the Exchange Act, exempted defendant's said sales and purchases from the operation of Section 16 (b). It is admitted that plaintiff's restricted stock option plan and plaintiff's individual option met the requirements of Rule X-16B-3, but plaintiff urges that Rule X-16B-3 is invalid. It is further admitted that, if plaintiff is entitled to any recovery from the defendant, it will be limited to the amount determined under Rule X-16B-6 of the Commission.

Defendant's second ground of defense will be discussed later.

Rule X-16B-3 is as follows:

"Rule X-16B-3

"Any acquisition of non-transferrable options or of shares of stock including stock acquired pursuant to such options by a director or officer of the issuer of such stock shall be exempt from the operation of section 16(b) of the Act if the stock or option was acquired pursuant to a bonus, profit-sharing, retirement, stock option, thrift, savings or similar plan meeting all the following conditions:

"(a) The plan has been approved specifically, or through the approval of a charter amendment authorizing stock for issuance pursuant to the plan

"(1) by the holders of at least a majority of the securities of the issuer present or represented and entitled to vote at a meeting for which proxies were solicited substantially in accordance with such rules and regulations, if any, as were then in effect under section 14(a) of the Act, whether or not such rules and regulations were applicable to such solicitation, or by written consents of the holders of at least a majority of the securities of the issuer entitled to vote solicited substantially in accordance with such rules and regulations; or

"(2) by the security holders of a predecessor corporation in the manner provided in subparagraph (1) of this paragraph (a) if the plan, or obligations to participate hereunder, were assumed by the issuer in connection with the transaction of succession.

"(b) The plan effectively limits (subject to any provisions for adjustment of the plan or options outstanding thereunder to prevent dilution or enlargement of rights) the aggregate amount of funds or securities which may be allocated pursuant to the plan, either by limiting the maximum amount which may be allocated to each participant in the plan or by limiting the maximum amount which may be so allocated to all such participants. Such limitations may be established for each fiscal year, or for the duration of the plan, whether or not the plan has a fixed termination date, and may be determined either by fixed amounts of securities or funds, or by formulas based upon earnings of the issuer, dividends paid, compensation received by participants, outstanding securities or percentages thereof outstanding from time to time, or similar factors which will result in a determinable limitation.

"(c) Unless the context otherwise requires, all terms used in this rule shall have the same meanings as in the Act or elsewhere in the General Rules and Regulations thereunder. In addition the following definitions apply:

"(1) the term `plan' in this rule includes all plans whether or not set forth in any formal document;

"(2) the term `non-transferable option' includes an option which by its terms is not transferable by such optionee otherwise than by will or the laws of descent and distribution, and is exercisable, during his lifetime, only by him."

Plaintiff in asserting the invalidity of Rule X-16B-3 relies upon the majority opinion of the Court of Appeals for the Second Circuit in Greene v. Dietz, 1957, 247 F.2d 689, and Perlman v. Timberlake, decided by the United States District Court for the Southern District of New York in the Second Circuit on March 26, 1959, 172 F.Supp. 246. The only other decisions dealing with this question of which the court is aware are Gruber v. Chesapeake & Ohio Railway Company, 158 F.Supp. 593 (December 18, 1957), by the United States District Court for the Northern District of Ohio, which held Rule X-16B-3 valid, and Emerson Electric Manufacturing Co. v. O'Neill, 168 F.Supp. 804 (November 10, 1958), by the United States District Court for the Eastern District of Missouri, which held it was unnecessary to pass upon the validity of the rule as the defendants were relieved of liability under Section 16(b) because of their reliance upon Rule X-16B-3 and the last sentence of Section 23(a) of the Exchange Act, which Section 23(a) is as follows:

"Sec. 23. (a) The Commission and the Board of Governors of the Federal Reserve System shall each have power to make such rules and regulations as may be necessary for the execution of the functions vested in them by this title, and may for such purpose classify issuers, securities, exchanges, and other persons or matters within their respective jurisdictions. No provision of this title imposing any liability shall apply to any act done or omitted in good faith in conformity with any rule or regulation of the Commission or the Board of Governors of the Federal Reserve System, notwithstanding that such rule or regulation may, after such act or omission, be amended or rescinded or be determined by judicial or other authority to be invalid for any reason." 15 U.S.C.A. § 78w(a).

The District Court in Greene v. Dietz, 143 F.Supp. 464, 465, held that Rule X-16B-3 was valid and in addition the defendants were protected by reliance on that Rule.

In addition to the briefs of the parties to this cause the court has been furnished with and considered the memorandum of the Commission filed in Greene v. Dietz, supra, in the Court of Appeals and the memoranda filed by the...