Western Auto Supply Company v. Gamble-Skogmo, Inc.

• Decision Date: 09 April 1964
• Docket Number: 4-61 Civ. 326.
• Citation: 231 F. Supp. 456
• Parties: WESTERN AUTO SUPPLY COMPANY, Plaintiff, and Beneficial Finance Co., Intervener, v. GAMBLE-SKOGMO, INC., Defendant.
• Court: U.S. District Court — District of Minnesota

231 F. Supp. 456

WESTERN AUTO SUPPLY COMPANY, Plaintiff, and Beneficial Finance Co., Intervener, v. GAMBLE-SKOGMO, INC., Defendant.

4-61 Civ. 326.

United States District Court D. Minnesota, Fourth Division.

April 9, 1964.

Armin M. Johnson, of Faegre & Benson, Minneapolis, Minn., appeared in behalf of plaintiff and intervener.

Edward J. Callahan, Jr., of Callahan & Callahan, Minneapolis, Minn. (Allen T. Rorem, Minneapolis, Minn., of counsel) appeared in behalf of defendant.

NORDBYE, District Judge.

This case arises under Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), and was presented to the Court on a stipulation of facts.

As of January 1, 1960, the defendant, Gamble-Skogmo, Inc., was the beneficial owner of 1,256,044 shares of common stock issued by Western Auto Supply Company, a former Missouri corporation hereafter called Western Missouri. From January 1, 1960, to July 11, 1960, these holdings represented more than ten per cent of Western Missouri's only outstanding class of common stock. Prior to January 15, 1960, there was due and owing from Gamble-Skogmo to its Employees Profit Sharing-Stock Bonus Trust Fund, hereafter called the Trust Fund, the sum of $839,251.78. On January 15, 1960, the Gamble-Skogmo Executive Committee approved the purchase of 32,000 shares of Western Missouri common stock for the purpose of contributing them, or as much thereof as would be necessary, to the Trust Fund in order to satisfy Gamble-Skogmo's 1959 obligation. On January 21, 1960, Gamble-Skogmo purchased 32,000 shares of Western Missouri common stock at $32.35 per share for $1,035,200 through Allen and Company, an investment securities dealer. On January 27, 1960, Allen and Company delivered to Gamble-Skogmo the required number of share certificates of Western Missouri bearing street names (not designated by Gamble-Skogmo) and endorsed in blank. Following the receipt of the stock, on January 28, 1960, Gamble-Skogmo caused 25,942 shares of this stock to be transferred to a nominee for the corporate trustee of the Trust Fund. In that the stock at the price purchased totaled $839,223.70, and the indebtedness to the Trust Fund was $839,251.78, a check for $28.08 was delivered to the Trust Fund trustee by Gamble-Skogmo so that the total amount due of $839,251.78 was obtained thereby. The remaining 6,058 shares of the 32,000 shares of Western Missouri thus purchased was then transferred to Gamble-Skogmo on the stock records of Western Missouri. It should be mentioned that Gamble-Skogmo was not required to make its contribution to the Trust Fund in Western Missouri stock or any other stock, but it merely chose this method to make this voluntary contribution for the year 1959. With the 6,058 shares added to the 1,256,044 shares, Gamble-Skogmo owned 1,262,102 shares of Western Missouri stock on January 31, 1960. All of these shares were sold to the Beneficial Finance Co. on July 11, 1960, for a price of $36 per share, totaling $45,435,672. In the interim from January 31, 1960, to July 11, 1960, Gamble-Skogmo had received dividends on its Western Missouri stock totaling 70 cents per share. The stipulation of facts states that on July 28, 1961, Beneficial and Western Missouri agreed to merge into the former company. The merger was completed on October 27, 1961. On the same date, Beneficial sold all its right, title and interest in Western Missouri assets to Western Auto Supply Company, a Delaware corporation, hereafter referred to as Western Delaware.

On December 13, 1961, the President of Western Delaware wrote a letter to Gamble-Skogmo demanding an accounting of the profits realized on the 32,000 shares which it had purchased on January 27, 1960, including the dividends paid thereon. On December 18, 1961, Gamble-Skogmo paid Western Supply $22,111.70, the difference between the price it received and the price it paid for 6,058 shares of Western Missouri, but refused to make any payment on the 25,942 shares which it had delivered to the Trust Fund. It contended, and it is admitted, that these shares were contributed to the Trust Fund at the exact cost of $32.35 per share, which with its check for $28.08 made the exact contribution which it was required to make to the Trust Fund in accordance with the formula in the Trust Agreement. No payment was made on the dividends received by Gamble-Skogmo on the 6,058 shares.

Plaintiff and the intervener, hereafter referred to as the plaintiffs, are proceeding under Section 16(b) of the Securities Exchange Act of 1934, which provides:

"For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) within any period of less than six months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months. Suit to recover such profit may be instituted at law or in equity in any court of competent jurisdiction by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute the same thereafter; but no such suit shall be brought more than two years after the date such profit was realized. This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of this subsection."

The defendant initially raises the question as to the right of these plaintiffs to institute this action. Plaintiffs' position is that the original Western Missouri cause of action under Section 16(b) against the defendant was a chose in action which passed first to Beneficial by virtue of its merger with Western Missouri, and then by assignment by Beneficial of all of Western Missouri's assets to Western Delaware. That this right in an issuer corporation and in its stockholders is a chose in action seems clear. The Securities Exchange Act contains no provision governing the assignability or transferability of the rights of action contained in Section 16(b). This statute merely states that "Suit to recover such profit may be instituted * * * by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer." The term "issuer" is defined in Section 3(a) (8), 15 U.S.C. § 78c (8), of the Act:

"The term `issuer' means any person who issues or proposes to issue any security; except that with respect to certificates of deposit for securities, voting-trust certificates, or collateral-trust certificates, or with respect to certificates of interest or shares in an unincorporated investment trust not having a board of directors or of the fixed, restricted management, or unit type, the term `issuer' means the person or persons performing the acts and assuming the duties of depositor or manager pursuant to the provisions of the trust or other agreement or instrument under which such securities are issued; and except that with respect to equipment-trust certificates or like securities, the term `issuer' means the person by whom the equipment or property is, or is to be, used."

Defendant contends that the statutory pronouncement as to who may sue is clear and excludes one in the position of plaintiffs.

That the merger statute of Missouri supports the plaintiffs' position that the right of action under Section 16(b) passed to Beneficial upon the merger of the two companies is evident from Missouri Revised Statutes of 1959, § 351.450, V.A.M.S., which in part provides:

"When such merger or consolidation has been effected

* * * * * *

"(4) Such surviving or new corporation shall thereupon and thereafter possess all rights, privileges, immunities, and franchises, as well of a public as of a private nature, of each of the merging or consolidating corporations; * * * and all and every other interest of or belonging to or due to each of the corporations so merged or consolidated, shall be taken and deemed to be transferred to and vested in such single corporation without further act or deed; and the title to any real estate, or any interest therein, under the laws of this state vested in any of such corporations shall not revert or be in any way impaired by reason of such merger or consolidation. * * *"

Section 16(b) must be considered as remedial in nature. Smolowe v. Delendo Corp., 136 F.2d 231, 148 A.L.R. 300 (2 Cir. 1943), cert. den. 320 U.S. 751, 64 S.Ct. 56, 88 L.Ed. 446. And in view of the fact that the statute was drafted not only to protect the issuing corporation, but the public as well, a broad and liberal construction should be given to the question of the assignability of this chose in action. Consequently, it seems entirely sound to conclude that the statutory rights of Western Missouri, as well as those of its stockholders, became vested in Beneficial. It was the sole owner of the outstanding securities of Western Missouri and the only entity which could proceed under Section 16(b) when it sold all of Western Missouri's assets to Western Delaware. The bill of sale, according to Exhibit D attached to the stipulation of facts, conveyed all assets of every kind and nature possessed by Western Missouri. Here, the issuer no longer exists because of its merger with...