Landreth Timber Company v. Landreth, 83-1961
| Decision Date | 28 May 1985 |
| Docket Number | No. 83-1961,83-1961 |
| Citation | 471 U.S. 681,105 S.Ct. 2297,85 L.Ed.2d 692 |
| Parties | LANDRETH TIMBER COMPANY, Petitioner v. Ivan K. LANDRETH et al |
| Court | U.S. Supreme Court |
Respondents father and sons, who owned all of the common stock of a lumber business that they operated, offered their stock for sale through brokers. The company's sawmill was subsequently damaged by fire, but potential purchasers were told that the mill would be rebuilt and modernized. Thereafter, a stock purchase agreement for all of the stock was executed, and ultimately petitioner company was formed by the purchasers. Respondent father agreed to stay on as a consultant for some time to help with the daily operations of the mill. After the acquisition was completed, the mill did not live up to the purchasers' expectations. Eventually, petitioner sold the mill at a loss and went into receivership. Petitioner then filed suit in Federal District Court for rescission of the sale of stock and damages, alleging that respondents had violated the registration provisions of the Securities Act of 1933 (1933 Act) and the antifraud provisions of the Securities Exchange Act of 1934 (1934 Act). The court granted summary judgment for respondents, holding that under the "sale of business" doctrine, the stock could not be considered a "security" for purposes of the Acts because managerial control of the business had passed into the hands of the purchasers, who bought 100% of the stock. The court concluded that the transaction thus was a commercial venture rather than a typical investment. The Court of Appeals affirmed.
Held: The stock at issue here is a "security" within the definition of the Acts, United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621, distinguished, and the "sale of business" doctrine does not apply. Pp. 685-697.
(a) Section 2(1) of the 1933 Act and § 3(a)(10) of the 1934 Act define a "security" as including "stock" and other listed types of instruments. Although the fact that instruments bear the label "stock" is not of itself sufficient to invoke the Acts' coverage, when an instrument is both called "stock" and bears stock's usual characteristics as identified in Forman, supra, a purchaser justifiably may assume that the federal securities laws apply. The stock involved here possesses all of the characteristics traditionally associated with common stock. Moreover, reading the securities laws to apply to the sale of stock at issue here comports with Congress' remedial purpose in enacting the legislation to protect investors. Pp. 685-688.
(b) When an instrument is labeled "stock" and possesses all of the traditional characteristics of stock, a court is not required to look to the economic substance of the transaction to determine whether the stock is a "security" within the meaning of the Acts. A contrary rule is not supported by this Court's prior decisions involving unusual instruments not easily characterized as "securities." Nor were the Acts intended, as asserted by respondents, to cover only "passive investors" and not privately negotiated transactions involving the transfer of control to "entrepreneurs." Pp. 688-692.
(c) An instrument bearing both the name and all of the usual characteristics of stock presents the clearest case for coverage by the plain language of the definition. "Stock" is distinguishable from most if not all of the other listed categories, and may be viewed as being in a category by itself for purposes of interpreting the Acts' definition of "security." Pp. 693-694.
(d) Application of the "sale of business" doctrine depends on whether control has passed to the purchaser. Even though the transfer of 100% of a corporation's stock normally transfers control, the purchasers here had no intention of running the sawmill themselves. Moreover, if the doctrine were applied here, it would also have to be applied to cases in which less than 100% of a company's stock was sold, thus inevitably leading to difficult questions of line-drawing. As explained in Gould v. Ruefenacht, 471 U.S. 701, 105 S.Ct. 2308, 85 L.Ed.2d 708, coverage by the Acts would in most cases be unknown and unknowable to the parties at the time the stock was sold. Such uncertainties attending the applicability of the Acts would be intolerable. Pp. 694-697.
731 F.2d 1348 (CA9 1984) reversed.
James Linwood Quarles, III, Washington, D.C., for petitioner.
James A. Smith, Jr., Seattle, Wash., for respondents.
This case presents the question whether the sale of all of the stock of a company is a securities transaction subject to the antifraud provisions of the federal securities laws (the Acts).
Respondents Ivan K. Landreth and his sons owned all of the outstanding stock of a lumber business they operated in Tonasket, Washington. The Landreth family offered their stock for sale through both Washington and out-of-state brokers. Before a purchaser was found, the company's sawmill was heavily damaged by fire. Despite the fire, the brokers continued to offer the stock for sale. Potential purchasers were advised of the damage, but were told that the mill would be completely rebuilt and modernized.
Samuel Dennis, a Massachusetts tax attorney, received a letter offering the stock for sale. On the basis of the letter's representations concerning the rebuilding plans, the predicted productivity of the mill, existing contracts, and expected profits, Dennis became interested in acquiring the stock. He talked to John Bolten, a former client who had retired to Florida, about joining him in investigating the offer. After having an audit and an inspection of the mill conducted, a stock purchase agreement was negotiated, with Dennis the purchaser of all of the common stock in the lumber company. Ivan Landreth agreed to stay on as a consultant for some time to help with the daily operations of the mill. Pursuant to the terms of the stock purchase agreement, Dennis assigned the stock he purchased to B & D Co., a corporation formed for the sole purpose of acquiring the lumber company stock. B & D then merged with the lumber company, form- ing petitioner Landreth Timber Co. Dennis and Bolten then acquired all of petitioner's Class A stock, representing 85% of the equity, and six other investors together owned the Class B stock, representing the remaining 15% of the equity.
After the acquisition was completed, the mill did not live up to the purchasers' expectations. Rebuilding costs exceeded earlier estimates, and new components turned out to be incompatible with existing equipment. Eventually, petitioner sold the mill at a loss and went into receivership. Petitioner then filed this suit seeking rescission of the sale of stock and $2,500,000 in damages, alleging that respondents had widely offered and then sold their stock without registering it as required by the Securities Act of 1933, 15 U.S.C. § 77a et seq. (1933 Act). Petitioner also alleged that respondents had negligently or intentionally made misrepresentations and had failed to state material facts as to the worth and prospects of the lumber company, all in violation of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. (1934 Act).
Respondents moved for summary judgment on the ground that the transaction was not covered by the Acts because under the so-called "sale of business" doctrine, petitioner had not purchased a "security" within the meaning of those Acts. The District Court granted respondents' motion and dismissed the complaint for want of federal jurisdiction. It acknowledged that the federal statutes include "stock" as one of the instruments constituting a "security," and that the stock at issue possessed all of the characteristics of conventional stock. Nonetheless, it joined what it termed the "growing majority" of courts that had held that the federal securities laws do not apply to the sale of 100% of the stock of a closely held corporation. App. to Pet. for Cert. 13a. Relying on United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975), and SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), the District Court ruled that the stock could not be considered a "security" unless the purchaser had entered into the transaction with the anticipation of earning profits derived from the efforts of others. Finding that managerial control of the business had passed into the hands of the purchasers, and thus that the transaction was a commercial venture rather than a typical investment, the District Court dismissed the complaint.
The United States Court of Appeals for the Ninth Circuit affirmed the District Court's application of the sale of business doctrine. 731 F.2d 1348 (1984). It agreed that it was bound by United Housing Foundation, Inc. v. Forman, supra, and SEC v. W.J. Howey Co., supra, to determine in every case whether the economic realities of the transaction indicated that the Acts applied. Because the Courts of Appeals are divided over the applicability of the federal securities laws when a business is sold by the transfer of 100% of its stock, we granted certiorari. 469 U.S. 1016, 105 S.Ct. 427, 83 L.Ed.2d 354 (1984). We now reverse.
It is axiomatic that "[t]he starting point in every case involving construction of a statute is the language itself." Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 756, 95 S.Ct. 1917, 1935, 44 L.Ed.2d 539 (1975) (POWELL, J., concurring); accord, Teamsters v. Daniel, 439 U.S. 551, 558, 99 S.Ct. 790, 795, 58 L.Ed.2d 808 (1979). Section 2(1) of the 1933 Act, 48 Stat. 74, as amended and as set forth in 15 U.S.C. § 77b(1), defines a "security" as including
"any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable...
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