Steel Partners II, L.P. v. Bell Industries, Inc.

• Citation: 315 F.3d 120
• Decision Date: 30 December 2002
• Docket Number: Docket No. 00-9341.
• Parties: STEEL PARTNERS II, L.P., Plaintiff-Counter-Defendant-Appellant, v. BELL INDUSTRIES, INC., Defendant-Counter-Claimant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

315 F.3d 120

STEEL PARTNERS II, L.P., Plaintiff-Counter-Defendant-Appellant, v. BELL INDUSTRIES, INC., Defendant-Counter-Claimant-Appellee.

Docket No. 00-9341.

United States Court of Appeals, Second Circuit.

Argued: May 22, 2001.

Decided: December 30, 2002.

Thomas J. Fleming, Olshan, Grundman, Frome, Rosenzweig & Wolosky LLP, New York, N.Y. (Kenneth J. Rubinstein and Kristi A. Doyle, of counsel), for Plaintiff-Counter-Defendant-Appellant.

Neal H. Klausner, Davis & Gilbert LLP, New York, N.Y. (Christopher G. Ferro, Davis & Gilbert LLP, New York, NY, and David A. Schwarz and Eric B. Carlson, Irell & Manella LLP, Los Angeles, CA, on the brief), for Defendant-Counter-Claimant-Appellee.

Before WALKER, Chief Judge, JACOBS, Circuit Judge, and LARIMER, Chief District Judge.^*

JOHN M. WALKER, JR., Chief Judge.

Plaintiff-counter-defendant-appellant Steel Partners II, L.P. ("Steel Partners") appeals from the September 27, 2000, judgment of the United States District Court for the Southern District of New York (Naomi Reice Buchwald, District Judge) granting summary judgment in favor of defendant-counter-claimant-appellee Bell Industries, Inc. ("Bell") and declaring that a $1.30 dividend paid on 200,000 Bell shares owned by Steel Partners for less than six months fell within the definition of "profit" as used in Section 16(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78p(b), and thus was required to be disgorged to Bell. We hold that under the circumstances of this case, the dividend was not subject to disgorgement. Accordingly we reverse the district court and remand for entry of summary judgment in favor of Steel Partners.

BACKGROUND

Bell stock is publicly traded on the New York Stock Exchange. Steel Partners, an investment fund, began acquiring Bell stock in October 1998. That same month, Bell entered into an agreement (subject to shareholder approval) for the cash sale of a large division, its Electronics Distribution Group ("the Division").

On December 23, 1998, Bell issued a proxy statement to its shareholders seeking approval of the sale. On December 31, 1998, Steel Partners' holdings in Bell reached ten percent, making it a statutory insider of Bell under Section 16(b). Steel Partners remained a statutory insider during the rest of the period relevant to this suit. Bell shareholders approved the sale of the Division in January 1999 and the sale closed with Bell receiving approximately $177 million in cash.

In February 1999, the company issued a press release announcing its intention to use the proceeds of the sale to make a cash distribution of approximately $7.00 per share to its shareholders within ninety days — its first cash dividend in six years. In May 1999, Bell declared "an initial cash distribution" of $5.70, payable in June 1999, representing "the first portion of the previously announced planned distribution," and publicly announced its "plans to distribute additional cash of approximately $1.30 per share following the sale of remaining real estate properties associated with the [Division]."

Steel Partners made a final purchase of Bell stock — the 200,000 shares at issue in this suit — on October 7, 1999, and paid $5.30 per share. On October 8, 1999, Bell issued a press release stating that its Board of Directors had rejected an offer from Steel Partners to purchase Bell Industries for $5.30 per share, but that it would consider a higher offer.

On October 20, 1999, Bell publicly announced its intention to make the second cash distribution of the Division proceeds "during the fourth quarter" of 1999. On December 3, 1999, as previously forecasted, Bell declared the distribution of $1.30 per share, payable on December 17, 1999, to shareholders of record on December 10, 1999. The dividend was distributed as announced on December 17 (the "December Dividend"). The next business day, Steel Partners sold 547,200 shares at an average price of $6.37 per share. It is undisputed that for purposes of Section 16(b), this sale necessarily included the 200,000 shares Steel Partners had purchased on October 7.

On January 21, 2000, in order to effectuate compliance with Section 16(b), Steel Partners paid Bell $214,960, the difference between the $6.37 sale price of the 200,000 shares and the $5.30 price for which they were purchased two months earlier. After receiving the $214,960 payment, Bell claimed that Steel Partners' "profit" under Section 16(b) also included the December Dividend, i.e., an additional $1.30 per share or $260,000.

Steel Partners commenced this action on January 24, 2000, seeking a declaration that it had disgorged all profits owed under Section 16(b). Bell counterclaimed for a declaration that the December Dividend represented part of Steel Partners' "profit" under Section 16(b). The parties thereafter cross-moved for summary judgment and submitted Joint Stipulated Facts.

For purposes of the summary judgment motion, Bell does not dispute that at all relevant times Steel Partners: (1) had no representative on Bell's Board of Directors; (2) was not consulted before Bell's decision to declare cash distributions; and (3) learned of Bell's intention to distribute dividends, including the December Dividend, at the same time as the public and all other Bell shareholders.

In granting summary judgment in favor of Bell, the district court reviewed prior case law that held that dividends are not generally included in the calculation of Section 16(b) profits if they are paid out in the ordinary course of business, see, e.g., Blau v. Lamb, 363 F.2d 507, 528 (2d Cir. 1966); Adler v. Klawans, 267 F.2d 840, 848-49 (2d Cir.1959), and concluded that because the December Dividend represented the balance of a cash distribution of the proceeds from the sale of 49% of Bell's assets, it was not a dividend paid out in the ordinary course of business and therefore had to be disgorged. See Steel Partners II, L.P. v. Bell Indus., Inc., No. 00 Civ. 0499, 2000 WL 1372831, at *3 (S.D.N.Y. Sept. 21, 2000).

DISCUSSION

We review a grant of summary judgment de novo. See Beckford v. Portuondo, 234 F.3d 128, 130 (2d Cir.2000). Summary judgment is appropriate only where, "[e]xamining the evidence in the light most favorable to the nonmoving party," Adjustrite Sys., Inc. v. Gab Bus. Servs., Inc., 145 F.3d 543, 547 (2d Cir. 1998), the record shows "that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law," Fed.R.Civ.P. 56(c).

Section 16(b) of the Securities and Exchange Act of 1934 provides in relevant part:

For the purpose of preventing the unfair use of information which may have been obtained by [an insider, including the beneficial owner of 10% or more of the issuer's stock,] by reason of his relationship to the issuer, any profit realized by him from any purchase and sale ... of any equity security of such issuer ... within any period of less than six months ... shall inure to and be recoverable by the issuer, irrespective of any intention on the part of [the insider] in entering into such transaction or holding the security ... purchased....

15 U.S.C. § 78p(b) (emphasis added).

The purpose of Section 16(b) is to deter "insiders," who are presumed to possess material non-public information about the issuer, from using such information to purchase or sell the issuer's equity securities at an advantage over persons with whom they trade. See Gwozdzinsky v. Zell/Chilmark Fund, 156 F.3d 305, 308, 310 (2d Cir.1998). The statute imposes "strict liability for all transactions that meet its mechanical requirements," id., and, by its plain language, requires that "any profit" derived from the matching of any purchase and any sale of a corporation's securities occurring within six months of each other must be disgorged, irrespective of the insider's actual knowledge or intent or whether overall trading during that six months (i.e., all sales and purchases combined) resulted in a loss. The issuing corporation or, derivatively, a shareholder is entitled to maintain an action seeking to have the profit disgorged to the corporation. See 15 U.S.C. § 78p(b); see also Tristar Corp. v. Freitas, 84 F.3d 550, 552 (2d Cir.1996).

At issue in this case is whether the December Dividend paid on the 200,000 shares purchased by Steel Partners on October 7, 1999 and sold on December 20, 1999 (three days after the December Dividend was paid), constituted a "profit realized by [Steel Partners] from [the] purchase and sale." Unfortunately, that determination cannot be made by resort to the plain language of the statute: Dividends, which are neither contingent upon nor influenced by the occurrence or timing of a subsequent sale of the shares, do not inevitably constitute "profit" from a purchase and sale, and can just as readily be categorized as an incident of ownership. Cf. Champion Home Builders Co. v. Jeffress, 385 F.Supp. 245, 250 (E.D.Mich.1974) (holding that dividends constituted distribution of earnings, not profit from purchase and sale). Several of the terms used in Section 16(b) are defined in the statute and regulations. See, e.g., 15 U.S.C. § 78c(13) (defining "purchase"); 15 U.S.C. § 78c(14) (defining "sale"); 17 C.F.R. § 240.16a-1 (defining most of the terms used in Section 16); 17 C.F.R. § 240.16a-2 (defining persons and transactions subject to Section 16); 17 C.F.R. § 240.16b-6 (defining types of derivative securities and transactions subject to Section 16). The term "profit" is not defined, however.

Where, as here, the transaction at issue does not plainly fall within the literal terms of the statute, "[t]he judicial tendency, especially in this circuit, has been to interpret Section 16(b) in ways that are most consistent with the legislative purpose." Feder v. Martin Marietta Corp., 406 F.2d 260, 263 (2d Cir.1969); see Gwozdzinsky, 156 F.3d at 308, 310 (noting that courts look to policy "to avoid the harsh results of this inflexible rule")...