Gollust v. Mendell

• Decision Date: 10 June 1991
• Docket Number: No. 90-659,90-659
• Citation: 111 S.Ct. 2173,115 L.Ed.2d 109,501 U.S. 115
• Parties: Keith R. GOLLUST, et al., Petitioners v. Ira L. MENDELL, etc., et al
• Court: U.S. Supreme Court

501 U.S. 115

111 S.Ct. 2173

115 L.Ed.2d 109

Keith R. GOLLUST, et al., Petitioners

v Ira L. MENDELL, etc., et al.

No. 90-659.

Argued April 15, 1991.

Decided June 10, 1991.

Syllabus

Section 16(b) of the Securities Exchange Act of 1934 imposes strict liability on "beneficial owner[s]" of more than 10% of a corporation's listed stock, and on the corporation's officers and directors, for any profits realized from any purchase and sale, or sale and purchase, of such stock occurring within a 6-month period. Such "insiders" are subject to suit "instituted . . . by the issuer, or by the owner of any security of the issuer" in the issuer's name and behalf. After respondent Mendell, an owner of common stock in Viacom International, Inc. (International), instituted a § 16(b) suit against petitioners, allegedly "beneficial owners" of International stock, International was acquired by a shell subsidiary of what is now called Viacom, Inc. (Viacom). International merged with the subsidiary, and became Viacom's wholly owned subsidiary and sole asset. Mendell received cash and stock in Viacom in exchange for his International stock. The District Court granted petitioners' motion for summary judgment on the ground that Mendell had lost standing to maintain the action because he no longer owned any International stock. The Court of Appeals reversed, holding that Mendell's continued prosecution of the action was not barred by the statute's language or existing case law and was fully consistent with the statutory objectives.

Held: Mendell has satisfied the statute's standing requirements. Pp. 121-128.

(a) Section 16(b) provides standing of signal breadth, expressly limited only by the conditions that the plaintiff be the "owner of [a] security" of the "issuer" at the time the suit is "instituted." Any "security"—including stock, notes, warrants, bonds, debentures, puts, and calls, 15 U.S.C. § 78c(a)(10)—will suffice to confer standing. There is no restriction in terms of the number or percentage of shares, or the value of any other security, that must be held. Nor is the security owner required to have had an interest in the issuer at the time of the short-swing trading. Although the security's "issuer" does not include parent or subsidiary corporations, 15 U.S.C. § 78c(a)(8), this requirement is determined at the time the § 16(b) action is "instituted." Congress intended to adopt the common understanding of the word "institute"—"inaugurate or commence; as to institute an action," Black's Law Dictionary 985-986 (3d ed. 1933)—which is confirmed by its use of the same word elsewhere to mean the commencement of an action, see, e.g.,8 U.S.C. § 1503(a). Pp. 121-124.

(b) A § 16(b) plaintiff must, however, throughout the period of his participation in the litigation, maintain some financial interest in the litigation's outcome, both for the sake of furthering the statute's remedial purposes by ensuring that enforcing parties maintain the incentive to litigate vigorously, and to avoid the serious constitutional question that would arise under Article III from a plaintiff's loss of all financial interest in the outcome of the litigation he had begun. But neither the statute nor its legislative history supports petitioners' argument that a plaintiff must continuously own a security of the issuer. Pp. 124-126.

(c) An adequate financial stake can be maintained when the plaintiff's interest in the issuer has been replaced by one in the issuer's new parent corporation. This is no less an interest than a bondholder's financial stake, which, although more attenuated, satisfies the initial standing requirement under the statute. Pp 126-127.

(d) Here, Mendell owned a security of the issuer at the time he instituted this § 16(b) action, and he continues to maintain a financial interest in the litigation's outcome by virtue of his Viacom stock. P. 127-128. 909 F.2d 724, (CA2 1990), affirmed.

SOUTER, J., delivered the opinion for a unanimous Court.

Edwin B. Mishkin, New York City, for petitioners.

Irving Malchman, New York City, for respondents.

James R. Doty, Houston, Tex., for the S.E.C., as amicus curiae, in support of respondents by special leave of Court.

Justice SOUTER delivered the opinion of the Court.

Section 16(b) of the Securities Exchange Act of 1934, 48 Stat. 896, 15 U.S.C. § 78p(b),¹ imposes a general rule of strict liability on owners of more than 10% of a corporation's listed stock for any profits realized from the purchase and sale, or sale and purchase, of such stock occurring within a 6-month period. These statutorily defined "insiders," as well as the corporation's officers and directors, are liable to the issuer of the stock for their short-swing profits, and are subject to suit "instituted . . . by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer. . . ." Ibid.

Our prior cases interpreting § 16(b) have resolved questions about the liability of an insider defendant under the statute.² This case, in contrast, requires us to address a plaintiff's standing under § 16(b) and, in particular, the requirements for continued standing after the institution of an action. We hold that a plaintiff, who properly "instituted [a § 16(b) action as] the owner of [a] security of the issuer," may continue to prosecute the action after his interest in the issuer is exchanged in a merger for stock in the issuer's new corporate parent.

I

In January 1987, respondent Ira L. Mendell filed a complaint under § 16(b) against petitioners in the United States District Court for the Southern District of New York, stating that he owned common stock in Viacom International, Inc. (International) and was suing on behalf of the corporation. He alleged that petitioners, a collection of limited partnerships, general partnerships, individual partners and corporations, "operated as a single unit" and were, for purposes of this litigation, a "single . . . beneficial owner of more than ten per centum of the common stock" of International. App. to Pet. for Cert. 40a-42a. Respondent claimed that petitioners were liable to International under § 16(b) for approximately $11 million in profits earned by them from trading in International's common stock between July and October 1986. Id., at 42a-43a. The complaint recited that respondent had made a demand upon International and its Board of Directors to bring a § 16(b) action against petitioners and that more than 60 days had passed without the institution of an action.

In June 1987, less than six months after respondent had filed his § 16(b) complaint, International was acquired by Arsenal Acquiring Corp., a shell corporation formed by Arsenal Holdings, Inc. (now named Viacom, Inc.) (Viacom) for the purpose of acquiring International. By the terms of the acquisition, Viacom's shell subsidiary was merged with Inter- national, which then became Viacom's wholly owned subsidiary and only asset. The stockholders of International received a combination of cash and stock in Viacom in exchange for their International stock.³ Id., at 40a; App. 14-26.

As a result of the acquisition, respondent, who was a stockholder in International when he instituted this action, acquired stock in International's new parent corporation and sole stockholder, Viacom. Respondent amended his complaint to reflect the restructuring by claiming to prosecute the § 16(b) action on behalf of Viacom as well as International. App. to Pet. for Cert. 44a.

Following the merger, petitioners moved for summary judgment, arguing that respondent had lost standing to maintain the action when the exchange of stock and cash occurred, after which respondent no longer owned any security of International, the "issuer." The District Court held that § 16(b) actions "may be prosecuted only by the issuer itself or the holders of its securities," and granted the motion because respondent no longer owned any International stock.⁴ App. to Pet. for Cert. 32a. The court concluded that only Viacom, as International's sole security holder, could continue to prosecute this action against petitioners. Id., at 33a.

A divided Court of Appeals reversed. 909 F.2d 724 (CA2 1990). The majority saw nothing in the text of § 16(b) to require dismissal of respondent's complaint. "[T]he language of the statute speaks of the 'owner' of securities; but such language is not modified by the word 'current' or any like limiting expression. The statute does not specifically bar the maintenance of § 16(b) suits by former shareholders and Congress . . . could readily have eliminated such individuals." Id., at 730. Since the provisions of the statute were open to "interpretation," the court relied on the statute's remedial purposes in determining "whether the policy behind the statute is best served by allowing the claim." Id., at 728-729. The majority concluded that the remedial policy favored recognizing respondent's continued standing after the merger. "Permitting [respondent] to maintain this § 16(b) suit is not barred by the language of the statute or by existing case law, and it is fully consistent with the statutory objectives." ⁵ Id., at 731. The summary judgment for petitioners was reversed.

The dissent took issue with this analysis, finding it to be in conflict with prior decisions of the Second Circuit and at least one other. See Portnoy v. Kawecki Berylco Industries, Inc., 607 F.2d 765, 767 (CA7 1979); Rothenberg v. United Brands Co., CCH Fed. Sec. L. Rep. ¶ 96,045, 1977 WL 1014 (SDNY), aff'd mem., 573 F.2d 1295 (CA2 1977).

We granted certiorari, 498 U.S. ----, 111 S.Ct. 669, 112 L.Ed.2d 662 (1991), to resolve this conflict and to determine whether a stockholder who has properly instituted a § 16(b) action to recover profits from a corporation's insiders may continue to prosecute that action after a merger involving the issuer results in exchanging the stockholder's interest in the issuer for stock in the issuer's new...