Not what you're
looking for? Try an advanced search.
Buy This Entire Record For
ALLIS-CHALMERS MFG. v. GULF & WESTERN INDUS.
January 30, 1974
ALLIS-CHALMERS MANUFACTURING COMPANY, A DELAWARE CORPORATION, PLAINTIFF,
GULF & WESTERN INDUSTRIES, INC., A DELAWARE CORPORATION, DEFENDANT.
The opinion of the court was delivered by: Parsons, District Judge.
MEMORANDUM OPINION AND ORDER
This action was commenced on January 6, 1969 in the United
States District Court for the Eastern District of Wisconsin by
plaintiff, Allis-Chalmers Manufacturing Company, now
Allis-Chalmers Corporation (hereinafter referred to as "Allis").
Plaintiff seeks to recover alleged short-swing profits from Gulf
& Western Industries, Inc. (hereinafter referred to as "G&W")
under Section 16(b) of the Securities Exchange Act of 1934
(15 U.S.C. § 78p(b)) alleged by plaintiff to have been realized by
G&W as a result of two purchases in July and September of 1968
aggregating 3,248,000 shares of Allis common stock and the
subsequent sale of these shares on December 6, 1968.
Pursuant to a motion by G&W under 28 U.S.C. § 1406(a) that
venue was improper in the Eastern District of Wisconsin the case
was transferred to this District. Allis-Chalmers Mfg. Co. v. Gulf
& Western Industries, Inc., 309 F. Supp. 75 (E.D.Wis. 1970). At
the same time G&W commenced an action in this Court for
declaratory judgment. Gulf & Western Industries, Inc. v.
Allis-Chalmers Manufacturing Company (69 C 627). On March 23,
1970 the two actions were consolidated and this Court ordered the
consolidated action to proceed on the basis of Allis' Amended
Complaint which was originally filed on February 19, 1970 in the
Eastern District of Wisconsin.
Allis, a corporation organized under the laws of the State of
Delaware, having its principal office in West Allis, Wisconsin,
is a manufacturing company engaged in the manufacture of
agricultural, construction, industrial and electrical machinery
and related equipment.
G&W, a corporation organized under the laws of Delaware, having
its principal office in the City and State of New York, is a
diversified company engaged in a variety of businesses, including
manufacturing, distribution, leisure time operations and the
production of minerals, metals and certain agricultural and
During the period June 30, 1968 and December 31, 1968 there
were between 10,364,102 and 10,410,292 shares of Allis common
stock issued and outstanding. 3,000,000 of these shares were
purchased by G&W through an Exchange Offer made to all Allis
shareholders, and 248,000 shares of them were bought from the
Oppenheimer Fund, Inc.
On May 7, 1968 G&W publicly announced to all Allis shareholders
that it would make an Exchange Offer in accordance with a
registration statement and prospectus filed and published as
required by the Securities Act of 1933. G&W proposed to purchase
on a pro-rata basis up to 3,000,000 such shares. Under the
proposed offer Allis shareholders would receive for each share of
Allis common stock: (a) $11.50 in cash, (b) $12.50 principal
amount of a 6% subordinated 20-year nonconvertible debenture
("the G&W 6% Debenture"), and (c) 9/10 of a 10-year registered
warrant to purchase G&W common stock at $55 per share ("the G&W
There is a major dispute as to the date on which the purchase
of the 3,000,000 shares of Allis common stock occurred. G&W
contends that the date was July 29, 1968; Allis contends the date
was July 31, 1968. Both parties agree that G&W's purchase of the
additional 248,000 shares of Allis' common from the Oppenheimer
Fund took place later on September 30, 1968. In exchange for
these 248,000 shares G&W gave Oppenheimer 496,000 unregistered
On December 6, 1968 G&W sold its entire block of 3,248,000
shares of Allis' common stock to White Consolidated Industries,
Inc. (hereinafter referred to as "White") in exchange for: (a)
250,000 unregistered shares of White common stock, (b) White's
unsecured 8 1/2% promissory note in the face amount of
$93,680,000 payable in six months, and (c) $20,000,000 in cash.
Allis now seeks to recover what it alleges are short-swing
profits of $16,305,251 which it contends G&W realized from its
two purchases in July and September 1968 and its subsequent sale
in December of 1968 of the 3,248,000 shares of Allis common
stock. The total sales price is alleged to have been
$121,330,000. Allis' position is that the purchases and the sale
both occurred within less than six months. Allis claims that the
amount of the sale together with the dividends received by G&W
during this less than six month period, minus its stipulated cost
of acquiring and selling the 3,248,000 shares constitute the
amount of profit. Allis also seeks to recover interest at 6% on
G&W's profits from the date of sale, December 6, 1968, to the
date of entry of judgment.
G&W's Answer to the Amended Complaint denies all material
allegations of the Complaint, and specifically alleges, inter
alia, that G&W was not a beneficial owner of more than 10% of
Allis' stock at the time of its acquiring through the Exchange
Offer the 3,000,000 Allis shares, and that this is required by
Section 16(b). G&W contends that since its acquisition of the
3,000,000 Allis shares was pursuant to an Exchange Offer
regulated by the Securities Act of 1933 the transaction would be
excluded from the purpose of Section 16(b). G&W further charges
that the sale of its 3,248,000 Allis shares was induced by
"duress and hostility" to G&W, originating with Allis and
inflamed through Allis' encouragement of Federal Trade Commission
proceedings against G&W. G&W thus denies liability. But then,
going further, G&W claims that even if there is liability, it
realized no profit from the transactions and there would be no
money due to Allis as a result of this action.
The jurisdiction of this Court is asserted under Section 27 of
the Securities Exchange Act of 1934 (15 U.S.C. § 78aa).
Section 16(b) of the Act states as follows:
"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."
Section 16(b), thus, provides that liability attaches to 10%
beneficial owners who are such: ". . . both at the time of the
purchase and sale, or the sale and purchase, of the security
involved. . . ."
G&W contends in one of its affirmative defenses that as to the
3,000,000 shares of plaintiff's common stock acquired by G&W
pursuant to the Exchange Offer, G&W is not liable to Allis for
any profits that may have been realized upon the sale to White
since at that point in time when G&W acquired the 3,000,000
shares G&W was not a beneficial owner of more than 10% of Allis'
equity security within the terms of the statute. This would mean
that it then became the owner of more than 10%, and only a
subsequent acquisition would bring the statute into play.
Allis, however, contends that on an initial purchase of more
than 10% one becomes such a holder of more than 10% of the stock
of a company as to trigger the applicability of Section 16(b). To
bolster its contention that one becomes subject to Section 16(b)
at the time of the purchase which turns one into a 10% beneficial
owner irrespective of the percentage of his prior holdings, if
any, Allis quotes from the recent decision in Kern County Land
Co. v. Occidental Petroleum Corp., 411 U.S. 582, 584, 93 S.Ct.
1736, 1739, 36 L.Ed.2d 503 (1973):
"Unquestionably, one or more statutory purchases
occurs 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
In the Kern County case defendant, Occidental Petroleum
Corporation, made a tender offer for shares of the Kern County
Land Company (hereinafter referred to as "Old Kern"). That offer
became effective on May 8, 1967 and by May 10 more than 10% of
the shares had been tendered. The Court found that Occidental
became a beneficial owner within the terms of 16(b) when pursuant
to its tender offer it purchased more than 10% of the outstanding
shares of Old Kern.
G&W relies upon Kern County also. This is because in that case
a tender offer was involved, which like the exchange offer here,
raised the question of whether or not the nature of the purchase
was reached by the statutory definition.*fn1
A careful analysis of the case law including Kern County leads
me to the conclusion that G&W by its initial purchase, became a
beneficial owner of more than 10% of Allis' stock. In construing
the words "at the time" as used in the statute the Court in
Stella v. Graham-Paige Motors Corp., 104 F. Supp. 957, at 960
(S.D.N.Y. 1952), aff'd in part, remanded in part, 232 F.2d 299
(2d Cir.), cert. denied, 352 U.S. 831, 77 S.Ct. 46, 1 L.Ed.2d 52
(1956) said as follows:
". . . if the words `at the time' are construed to
mean `simultaneously with', a shareholder would
become subject to the provisions of § 16(b) as soon
as his ownership exceeded 10% of the outstanding
shares. This construction would be consistent with
the declared purpose of the statute to prevent the
unfair use of inside information by officers,
directors, or stockholders owning more than 10% of
the equity stock."
Through the years since the Stella decision the Courts have
followed its thinking in construing the words "at the time of the
purchase and sale" to apply to shareholders immediately upon
their acquisition of more than 10% of a corporation's securities.
In Bershad v. McDonough, 300 F. Supp. 1051 (N.D.Ill. 1969.) aff'd,
428 F.2d 693 (7th Cir. 1970), cert. denied, 400 U.S. 992, 91 S.
Ct. 458, 27 L.Ed.2d 440 (1971), as in Kern County, supra, the
Court was concerned with whether the granting of an option was a
sale (the back end of the transaction) within the confines of
Section 16(b). However, it is clear that the Courts would not
have concerned themselves with that issue had they first not
reasoned that Section 16(b) liability turned on an initial
acquisition exceeding 10% serving to set in motion the 6 month
period. In accord with these cases are the holdings in Emerson
Electric Co. v. Reliance Electric Co., 434 F.2d 918 (8th Cir.
1970), aff'd on other grounds, 404 U.S. 418, 92 S.Ct. 596, 30
L.Ed.2d 575 (1972); Blau v. Lamb, 363 F.2d 507 (1966), cert.
denied, 385 U.S. 1002, 87 S.Ct. 707, 17 L.Ed.2d 542 (2 Cir.
1967); and Newmark v. RKO General, Inc., 425 F.2d 348 (2 Cir.
1970), cert. denied, 400 U.S. 854, 91 S.Ct. 64, 27 L. Ed.2d 91
On the facts before me, I conclude that G&W became a beneficial
owner of more than 10% of Allis' common stock at the time of its
purchase, by tender offer, of the 3,000,000 shares of Allis'
stock. However, G&W argues that even if it became a 10% owner of
Allis' common stock at the time it acquired by tender offer
almost a third of Allis' equitable ownership and sold the whole
of it within six months, it is exempt from the operation of
Section 16(b) because the purchase was "unorthodox" and
"unorthodox" transactions do not involve the type of abuse
Section 16(b) was enacted to prevent.
G&W presents a strong argument for the proposition that its
initial acquisition of the Allis shares by an Exchange Offer was
not the traditional cash-for-stock purchase that Congress
considered in passing Section 16(b). Rather, G&W contends, it was
a hybrid type of transaction with unique characteristics closely
resembling a merger. G&W says that it would be erroneous to
consider the legal consequences of G&W's acquisition of the stock
apart from the disclosure process with which it alleges "it was
inextricably connected." The argument is that Exchange Offers (as
distinct from cash transactions) are surrounded by numerous legal
safeguards which are designed to guarantee full disclosure to
all shareholders and thus by their very nature are unsuited to
short-swing speculation based on inside information.
In effect, the argument is that since the acquisition was
conducted in accordance with the methods established by the
Securities and Exchange Commission and Congress, i.e., pursuant
to a registered Exchange Offer and by a Prospectus, G&W was not
automatically an insider nor was there any possibility of abuse
as a result of the nature of the transaction. Its offer, G&W
contends, was subject to the prohibition against the use of any
Prospectus (or Registration Statement) which contained "any
untrue statement of fact or omission of a material fact required
to be stated * * * or necessary to make the statements therein
not misleading." Such prohibition appears in a number of sections
of the Securities Act of 1933, 15 U.S.C. § 77k, 77l, 77q, 77x.
Accordingly, G&W maintains, it caused all material information
regarding Allis to be released to the public and placed in the
hands of each Allis shareholder and that these actions afforded
all parties to the proposed exchange an equal informational
footing, eliminating thereby any advantage to G&W.
In opposition to this contention Allis ignores certain words of
Kern County, "unorthodox sale — not a sale within the meaning of
16(b)", and argues that an unfettered reading of the language of
Section 16(b) makes it clear that the statute does not require
any showing that an insider had inside information in order for
liability to attach. The suggestion that full and truthful
disclosure of what is known is required by some other necessary
proceedings, according to Allis, creates no defense to the charge
that there was an actionable purchase.
It is true that the court in Kern County found that an
unsuccessful takeover bidder who converted shares of the target
company into the merged entity's shares was not liable for
short-swing profits when it was found that there had been no
opportunity for speculative abuse. The target corporation, Old
Kern, had vigorously opposed Occidental's takeover bid and to
thwart such a takeover had arranged a "defensive merger" with
Tenneco. Due to the merger of Old Kern and Tenneco, Occidental
was virtually forced to exchange the Old Kern shares that it had
acquired by its tender offer for those of Tenneco. The successor
corporation to Old Kern brought suit to recover the alleged
Section 16(b) profits realized by Occidental. The court concluded
that the transaction having been forced upon Occidental did not
constitute a "sale" within the purview of Section 16(b). The
court noted that the merger left Occidental with no appraisal
rights under California laws; but that any other sale of Old Kern
shares for cash before the merger closed "would have left
Occidental with a prima facie § 16(b) liability." Supra 411 U.S.
at 600, 93 S.Ct. at 1747, 36 L.Ed.2d 503.
I am convinced that with these words the Supreme Court
recognized that where, for example, a purchase carries sufficient
indicia of full disclosure of all information available to the
purchaser, and its sale is an economically or legally coerced
involuntary act the transaction is not intended by Congress to be
unlawful; but that when the sale is clearly voluntary a prima
facie Section 16(b) violation would exist. When we on the trial
bench try to facilitate our determination by limiting liability
to simple categories, such as "orthodox" and "unorthodox", we may
easily blind ourselves to the kinds of abuses to which Congress
directed 16(b). The 1934 Senate Report on Stock Exchange
Practices (Senate Comm. on Banking and Currency), Stock Exchange
Practices, S.Rep. No. 1455, 73rd Congress, 73 Cong. 2d Sess. 55