Kern County Land Company v. Occidental Petroleum Corporation 8212 1059

• Decision Date: 07 May 1973
• Docket Number: No. 71,71
• Citation: 36 L.Ed.2d 503,411 U.S. 582,93 S.Ct. 1736
• Parties: KERN COUNTY LAND COMPANY, Petitioner, v. OCCIDENTAL PETROLEUM CORPORATION. —1059
• Court: U.S. Supreme Court

411 U.S. 582

93 S.Ct. 1736

36 L.Ed.2d 503

KERN COUNTY LAND COMPANY, Petitioner,

v OCCIDENTAL PETROLEUM CORPORATION.

No. 71—1059

Argued Dec. 5 and 6, 1972.

Decided May 7, 1973.

Syllabus

During a tender-offer campaign, respondent bought more than 10% of the outstanding stock of petitioner's predecessor (Old Kern). Respondent was blocked in its takeover efforts by a defensive merger between Old Kern and Tenneco, in which Old Kern stockholders were to receive new Tenneco stock on a share-for-share basis. Less than a month after its initial tender offer, respondent thereupon negotiated a binding option to sell to Tenneco at a date over six months after the tender offer expired all the new Tenneco stock to which respondent would be entitled when the merger took place. Sale of the postmerger stock yielded respondent a profit of some $19 million, which petitioner sought to recover by a suit under § 16(b) of the Securities Exchange Act of 1934, prohibiting profitable short-swing speculation by statutory insiders. The District Court's summary judgment for petitioner was reversed by the Court of Appeals. Held: The transactions, which were not based on a statutory insider's information and were not susceptible of the speculative abuse that § 16(b) was designed to prevent, did not constitute 'sales' within the meaning of that provision. Pp. 591—604.

(a) There was nothing in connection with respondent's tender-offer acquisition of Old Kern stock or the exchange thereof for the Tenneco stock that gave respondent 'inside information,' and once the merger, which respondent did not engineer, was approved the Old Kern-Tenneco stock exchange was involuntary. Pp. 596—600.

(b) The option agreement was not of itself a 'sale'; the option was grounded on the mutual advantages to respondent as a minority stockholder that wanted to terminate an investment it had not chosen to make and Tenneco whose management did not want a potentially troublesome minority stockholder; and the option was not a source of potential speculative abuse, since respondent had no inside information about Tenneco or its new stock. Pp. 601—604.

450 F.2d 157, affirmed.

David R. Hyde, New York City, for petitioner.

Whitney North Seymour, New York City, for respondent.

Mr. Justice WHITE 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 provides that officers directors, and holders of more than 10% of the listed stock of any company shall be liable to the company for any profits realized from any purchase and sale or sale and purchase of such stock occurring within a period of six months. Unquestionably, one or more statutory purchases occur when one company, seeking to gain control of another, acquires more than 10% of the stock of the latter through a tender offer made to its shareholders. But is it a § 16(b) 'sale' when the target of the tender offer defends itself by merging into a third company and the tender offeror then exchanges his stock for the stock of the surviving company and also grants an option to purchase the latter stock that is not exercisable within the statutory six-month period? This is the question before us in this case.

I

On May 8, 1967, after unsuccessfully seeking to merge with Kern County Land Co. (Old Kern),² Occidental Petroleum Corp. (Occidental)³ announced an offer, to expire on June 8, 1967, to purchase on a first-come, first-served basis 500,000 shares of Old Kern common stock⁴ at a price of $83.50 per share plus a broker- age commission of $1.50 per share.⁵ By May 10, 1967, 500,000 shares, more than 10% of the outstanding shares of Old Kern,⁶ had been tendered. On May 11, Occidental extended its offer to encompass an additional 500,000 shares. At the close of the tender offer, on June 8, 1967, Occidental owned 887,549 shares of Old Kern.⁷

Immediately upon the announcement of Occidental's tender offer, the Old Kern management undertook to frustrate Occidental's takeover attempt. A management letter to all stockholders cautioned against tender and indicated that Occidental's offer might not be the best available, since the management was engaged in merger discussions with several companies. When Occidental extended its tender offer, the president of Old Kern sent a telegram to all stockholders again advising against tender. In addition, Old Kern undertook merger dis- cussions with Tenneco, Inc. (Tenneco),⁸ and, on May 19, 1967, the Board of Directors of Old Kern announced that it had approved a merger proposal advanced by Tenneco.⁹ Under the terms of the merger, Tenneco would acquire the assets, property, and goodwill of Old Kern, subject to its liabilities, through 'Kern County Land Co.' (New Kern),¹⁰ a new corporation to be formed by Tenneco to receive the assets and carry on the business of Old Kern. The shareholders of Old Kern would receive a share of Tenneco cumulative convertible preference stock in exchange for each share of Old Kern common stock which they owned. On the same day, May 19, Occidental, in a quarterly report to stockholders, appraised the value of the new Tenneco stock at $105 per share.¹¹ Occidental, seeing its tender offer and takeover attempt being blocked by the Old Kern-Tenneco 'defensive' merger, countered on May 25 and 31 with two mandamus actions in the California courts seeking to obtain extensive inspection of Old Kern books and records.¹² Realizing that, if the Old Kern-Tenneco merger were approved and successfully closed, Occidental would have to exchange its Old Kern shares for Tenneco stock and would be locked into a minority position in Tenneco, Occidental took other steps to protect itself. Between May 30 and June 2, it negotiated an arrangement with Tenneco whereby Occidental granted Tenneco Corp., a subsidiary of Tenneco, an option to purchase at $105 per share all of the Tenneco preference stock to which Occidental would be entitled in exchange for its Old Kern stock when and if the Old Kern-Tenneco merger was closed.¹³ The premium to secure the option at $10 per share, totaled $8,866,230 and was to be paid immediately upon the signing of the option agreement.¹⁴ If the option were exercised option were exercised, the premium was to be applied to the purchase price. By the terms of the option agreement, the option could not be exercised prior to Decem- ber 9, 1967, a date six months and one day after expiration of Occidental's tender offer. On June 2, 1967, within six months of the acquisition by Occidental of more than 10% ownership of Old Kern, Occidental and Tenneco Corp. executed the option.¹⁵ Soon thereafter, Occidental announced that it would not oppose the Old Kern-Tenneco merger and dismissed its state court suits against Old Kern.¹⁶

The Old Kern-Tenneco merger plan was presented to and approved by Old Kern shareholders at their meeting on July 17, 1967. Occidental refrained from voting its Old Kern shares, but in a letter read at the meeting Occidental stated that it had determined prior to June 2 not to oppose the merger and that it did not consider the plan unfair or inequitable.¹⁷ Indeed, Occidental indicated that, had it been voting, it would have voted in favor of the merger.

Meanwhile, the Securities and Exchange Commission had refused Occidental's request to exempt from possible § 16(b) liability Occidental's exchange of its Old Kern stock for the Tenneco preference shares that would take place when and if the merger transaction were closed. Various Old Kern stockholders, with Occidental's interests in mind, thereupon sought to delay consummation of the merger by instituting various lawsuits in the state and federal courts.¹⁸ These attempts were unsuccessful, however, and preparations for the merger neared completion with an Internal Revenue Service ruling that consummation of the plan would result in a tax-free exchange with no taxable gain or loss to Old Kern shareholders, and with the issuance of the necessary approval of the merger closing by the California Commissioner of Corporations.

The Old Kern-Tenneco merger transaction was closed on August 30. Old Kern shareholders thereupon became irrevocably entitled to receive Tenneco preference stock, share for share in exchange for their Old Kern stock. Old Kern was dissolved and all of its assets, including 'all claims, demands, rights and choses in action accrued or to accrue under and by virtue of the Securities Exchange Act of 1934 . . .,' were transferred to New Kern.

The option granted by Occidental on June 2, 1967, was exercised on December 11, 1967. Occidental, not having previously availed itself of its right, exchanged certificates representing 887,549 shares of Old Kern stock for a certificate representing a like number of shares of Tenneco preference stock. The certificate was then endorsed over to the optionee-purchaser, and in return $84,229,185 was credited to Occidental's accounts at various banks. Adding to this amount the $8,886,230 premium paid in June, Occidental received $93,905,415 for its Old Kern stock (including the 1,900 shares acquired prior to issuance of its tender offer). In addition, Occidental received dividends totaling $1,793,439.22. Occidental's total profit was $19,506,419.22 on the shares obtained through its tender offer.

On October 17, 1967, New Kern instituted a suit under § 16(b) against Occidental to recover the profits which Occidental had realized as a result of its dealings in Old Kern stock. The complaint alleged that the execution of the Occidental-Tenneco option on June 2, 1967, and the exchange of Old Kern shares for shares of Tenneco to which Occidental became entitled pursuant to the merger closed on August 30, 1967, were both 'sales' within the coverage of § 16(b). Since both acts took place within six months of the date on which Occidental became the owner of more than 10% of the stock of Old Kern, New Kern asserted that § 16(b) required surrender of the profits realized by...