Brief Fact Summary. A tender offer takeover of Kern (Plaintiff) was attempted by Occidental (Defendant) and while doing so procured over 10% of Kern’s stock. In response, a defensive merger was arranged by Kern with Tenneco, forcing a conversion of Occidental’s Kern stock to Tenneco stock in less than six months post Occidental’s becoming a 10% holder of Kern’s shares.
Synopsis of Rule of Law. In situations where the likelihood of the abuse to be stopped may not even exist, Section 16(b) is not to be applied.
Under the strict terms of § 16(b), the prevailing view is to apply the statute only when its application would serve its goals.
View Full Point of LawIssue. Is § 16(b) applicable to profits resulting from a situation where a 10% holder of a corporation’s stock is forced to sell the shares within six months of purchasing them due to a merger that the 10% holder has no control over?
Held. (White, J.) No. Stopping the utilization of insider information for their own benefit by short-term transactions in their own company’s shares was the congressional intent behind passing 16(b). The class of transactions the statue references was so blatantly subject to abuse the use of insider information that the rule was stated in absolute terms. The federal appellate court has established a practice to only apply the rule in circumstances where it would accomplish its goals. Here, the initial consideration is to decide whether within six months of Occidental’s becoming a 10% holder if a sale had occurred. Regardless of when the formal procedure occurred, the finalization of the merger on August 30 committed Occidental to participate in the share exchange permanently. Since Tenneco may not have exercised the granting of the option, it would not have been a sale, the real question is whether the sale that occurred within six months of procurement would cause Occidental to be subject to the requirements of § 16(b). Regarding the animosity between Kern and Occidental, it is unreasonable to assume that inside information was able to be obtained by Occidental seeing as Occidental had to resort to the courts in order to access Kern’s records; it seems that it was not possible for Occidental to access valuable insider information. Although Occidental did not participate in the vote authorizing the merger for the sale, its votes could not have defeated the proposal so Occidental was basically trapped. It has been contended that when Occidental made the tender offer it could have anticipated the defensive merger and the resulting profit from such a merger, however, even if this argument is recognized, seeing as Occidental could not know what profit would be gained or who the defensive merger partner would be, the profit would not come from insider information.
There are many potential outcomes of a tender offer, one being success. (White, J.) No. Stopping the utilization of insider information for their own benefit by short-term transactions in their own company’s shares was the congressional intent behind passing 16(b). The class of transactions the statue references was so blatantly subject to abuse the use of insider information that the rule was stated in absolute terms. The federal appellate court has established a practice to only apply the rule in circumstances where it would accomplish its goals. Here, the initial consideration is to decide whether within six months of Occidental’s becoming a 10% holder if a sale had occurred. Regardless of when the formal procedure occurred, the finalization of the merger on August 30 committed Occidental to participate in the share exchange permanently. Since Tenneco may not have exercised the granting of the option, it would not have been a sale, the real question is whether the sale that occurred within six months of procurement would cause Occidental to be subject to the requirements of § 16(b). Regarding the animosity between Kern and Occidental, it is unreasonable to assume that inside information was able to be obtained by Occidental seeing as Occidental had to resort to the courts in order to access Kern’s records; it seems that it was not possible for Occidental to access valuable insider information. Although Occidental did not participate in the vote authorizing the merger for the sale, its votes could not have defeated the proposal so Occidental was basically trapped. It has been contended that when Occidental made the tender offer it could have anticipated the defensive merger and the resulting profit from such a merger, however, even if this argument is recognized, seeing as Occidental could not know what profit would be gained or who the defensive merger partner would be, the profit would not come from insider information.
There are many potential outcomes of a tender offer, one being success.
The option itself was not reasonably prone to hypothetical abuse because when the
$105 call price was given the green light, the shares involved had no market yet established. Now had the actual cost dipped under $95 when exercised, Tenneco would just drop the option, if the reverse were true and the cost inflated above $105, Occidental would be selling at a deal price. An attempt to elude the § 16(b) liability was the motivation behind the option seeing as Occidental did not care to be a non-influential minority shareholder in Tenneco, and Tenneco did not want Occidental as a shareholder. We hold that because there was no actual potential of insider information abuse that § l6(b) should not be applied here. Affirmed.
Discussion. In respect to equality, the majority’s decision was justified, however, the statute’s language is absolute. The fact that no exceptions were permitted in the statute due to how troublesome it proves to demonstrate wrongful motive or intent was an effective point brought up by the dissent. Due to the approvedattempt to elude the application of § 16(b) by Occidental, this case is especially worrisome. Tenneco tried to help Occidental out of this situation, which is not an action that reeks of animosity although, Occidental only started the merger attempt because it intended on being successful. It appears unfair for Occidental to be liable merely because it tried to initiate a legal business transaction only to get stuck in a series of events in which it had no control. Occidental’s “sale†of the shares was completely involuntary on their behalf. The statute envisions a voluntary action when purchasing and selling shares. Even when statutes are written in absolute language, courts are quite reluctant to give absolute force to them. The courts exist to attempt to implement the statutes to the situations intended because no legislature can satisfactorily cover all potential permutations of a fact.Â