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January 30, 1974


The opinion of the court was delivered by: Parsons, District Judge.


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 consumer products.

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 Warrant").

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 G&W warrants.

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 (1970).

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 (1934) stated:

  "Among the most vicious practices unearthed at the
  hearings before this subcommittee was the flagrant
  betrayal of their fiduciary duties by directors and
  officers of corporations * * *. Closely allied to
  this type of abuse was the unscrupulous employment

  of inside information by large stockholders who,
  while not directors or officers, exercise sufficient
  control over the destines ...

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