Gould v. Ruefenacht

• Decision Date: 28 May 1985
• Docket Number: No. 84-165,84-165
• Citation: Gould v. Ruefenacht, 471 U.S. 701, 105 S.Ct. 2308, 85 L.Ed.2d 708 (1985)
• Parties: W. George GOULD, Petitioner v. Max A. RUEFENACHT et al
• Court: U.S. Supreme Court

471 U.S. 701

105 S.Ct. 2308

85 L.Ed.2d 708

W. George GOULD, Petitioner

v Max A. RUEFENACHT et al.

No. 84-165.

Argued March 26, 1985.

Decided May 28, 1985.

Syllabus

Respondent Ruefenacht (hereinafter respondent) purchased 50% of the stock of a company whose president previously had owned all of the stock.Respondent allegedly purchased the stock in reliance on financial documents and oral representations made by various individuals, including petitioner Gould, the company's corporate counsel.Part of the consideration for the deal was respondent's promise that he would participate in the company's management, which he did, but his actions were at all times subject to the president's veto.Respondent subsequently began to doubt the accuracy of some of the representations that had been made to him.He ultimately filed suit in Federal District Court, alleging violations of, inter alia, the Securities Act of 1933 and the Securities Exchange Act of 1934.The court granted summary judgment for the defendants, holding that the stock respondent purchased was not a "security" within the meaning of the Acts, and that the "sale of business" doctrine prevented application of the Acts.The Court of Appeals reversed.

Held: The stock purchased by respondent is a "security" within the meaning of the Acts, and the "sale of business" doctrine does not apply.Landreth Timber Co. v. Landreth,471 U.S. 681, 105 S.Ct. 2297, 85 L.Ed.2d 692. Pp. 704-706.

(a) Where an instrument bears the label "stock" and possesses all of the characteristics typically associated with stock, a court is not required to look beyond the character of the instrument to the economic substance of the transaction to determine whether the stock is a "security" within the meaning of the Acts.The instruments involved here were called "stock" and possessed all of the characteristics that are usually associated with traditional stock.P. 704.

(b) There are sound policy reasons for rejecting the "sale of business" doctrine as a rule of decision in cases involving the sale of traditional stock in a closely held corporation.The doctrine's application depends primarily on whether control has passed to the purchaser, which may not be determined simply by ascertaining what percentage of the company's stock has been purchased.Acquisition of more than 50% of a company's stock may or may not effect a transfer of operational control, while in some instances de facto operational control may be obtained by the acquisition of less than 50%.Such seemingly inconsistent results stem from the fact that actual control may also depend on other variables.Therefore, the Acts' applicability to a sale of stock such as that involved here would rarely be certain at the time of the transaction.Application of the doctrine also would lead to arbitrary distinctions between transactions covered by the Acts and those that are not.Pp. 704-706.

737 F.2d 320(CA31984), affirmed.

Robert C. Epstein, for petitioner.

Peter Steven Pearlman, for respondents.

Daniel L. Goelzer, Washington, D.C., for the S.E.C. as amicus curiae in support of the respondents by special leave of Court.

Justice POWELLdelivered the opinion of the Court.

This case presents the question whether the sale of 50% of the stock of a company is a securities transaction subject to the antifraud provisions of the federal securities laws (the Acts).

I

In 1980, respondent Ruefenacht (hereafter respondent) purchased 2,500 shares of the stock of Continental Import & Export, Inc., an importer of wine and spirits, from Joachim Birkle.Birkle was Continental's president and had owned 100% of the company's stock prior to the time of the sale.The 2,500 shares, for which respondent paid $250,000, represented 50% of Continental's outstanding stock.

According to respondent, he purchased the stock in reliance on financial documents and oral representations made by Birkle; Christopher O'Halloran, a certified public accountant; and petitioner Gould, Continental's corporate counsel.Part of the consideration for the deal was a promise by respondent that he would participate in the firm's management.The record reveals that he helped solicit contracts for the firm, participated in some hiring decisions, signed a banking resolution so that he could endorse corporate checks in Birkle's absence, and engaged in other more minor pursuits.All the while, however, respondent remained a full-time employee of another corporation, and his actions on behalf of Continental were at all times subject to Birkle's veto.

After respondent paid $120,000 of the stock's purchase price, he began to doubt the accuracy of some of the representations made to him by Birkle and others.Respondent subsequently filed this suit,¹ alleging violations of §§ 12(2)and17(a) of the Securities Act of 1933(1933 Act), 15 U.S.C. §§ 77l(2),77q.He also alleged violations of § 10(b) of the Securities Exchange Act of 1934(1934 Act), 15 U.S.C. § 78j(b), andRule 10b-5,17 CFR § 240.10b-5(1984).The District Court granted summary judgment for the defendants, concluding that the stock respondent purchased was not a "security" within the meaning of § 3(a)(10) of the 1934 Act, 15 U.S.C. § 78c(a)(10), and§ 2(1) of the 1933 Act, 15 U.S.C. § 77b(1).Finding that respondent intended to manage Continental jointly with Birkle, the court concluded that the sale of business doctrine prevented application of the Acts.

The United States Court of Appeals for the Third Circuit reversed.Ruefenacht v. O'Halloran, 737 F.2d 320(1984).It ruled that the plain language of the Acts' definitions of "security" included the stock at issue here, and it disagreed with the District Court's conclusion that the sale of business doctrine must be applied in every case to determine whether an instrument is a "security" within the meaning of the Acts.Because the Courts of Appeals are divided over the applicability of the sale of business doctrine to sales of stock arguably transferring control of a closely held business, we granted certiorari.469 U.S. 1016, 105 S.Ct. 428, 83 L.Ed.2d 355(1984).For the reasons stated in our decision announced today in Landreth Timber Co. v. Landreth,471 U.S. 681, 105 S.Ct. 2297, 85 L.Ed.2d 692, we now affirm.

II

In Landreth,we held that where an instrument bears the label "stock" and possesses all of the characteristics typically associated with stock, seeUnited Housing Foundation, Inc. v. Forman,421 U.S. 837, 851, 95 S.Ct. 2051, 2060, 44 L.Ed.2d 621(1975), a court will not be required to look beyond the character of the instrument to the economic substance of the transaction to determine whether the stock is a "security" within the meaning of the Acts.The instruments respondent purchased were called "stock," and the District Court ruled that they possessed all of the characteristics listed by Forman that are usually associated with traditional stock.App. 50a.As we noted in Landreth,471 U.S., at 687, 105 S.Ct., at 2302, the sale of stock in a corporation is typical of the kind of transaction to which the Acts by their terms apply.We conclude that the stock purchased by respondent is a "security" within the meaning of the Acts, and that the sale of business doctrine does not apply.

III

Aside from the language of the Acts and the characteristics of the instruments, there are sound policy reasons for rejecting the sale of business doctrine as a rule of decision in cases involving the sale of traditional stock in a closely held corporation.As petitioner acknowledges, see Brief for Petitioner 27, application of the doctrine depends primarily in each case on whether control has passed to the purchaser.See, e.g., Sutter v. Groen,687 F.2d 197, 203(CA71982);King v. Winkler,673 F.2d 342, 345(CA111982);Frederiksen v. Poloway,637 F.2d 1147, 1148(CA7), cert. denied, 451 U.S. 1017, 101 S.Ct. 3006, 69 L.Ed.2d 389(1981).Control, in turn, may not be determined simply by ascertaining what percentage of the company's stock has been purchased.To be sure, in many cases, acquisition of more than 50% of the voting stock of a corporation effects a transfer of operational control.In other cases, however, even the ownership of more than 50% may not result in effective control.In still other cases, de facto operational control may be obtained by the acquisition of less than 50%.These seemingly inconsistent results stem from the fact that actual control may also depend on such variables as voting rights, veto...