The opinion of the court was delivered by: Bua, District Judge.
The plaintiff, David Colan, a security holder of Eaton
Corporation (Eaton), brings this claim on behalf of Eaton and
Cutler-Hammer, Inc. (Cutler-Hammer) for recovery of short
swing profits realized by defendant Koppers Company, Inc.
(Koppers) allegedly in violation of section 16(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78p(b). Before the
court is the defendant Koppers' motion to dismiss for failure
to state a claim upon which relief may be granted pursuant to
Rule 12(b)(6), Fed.R.Civ.P. For the reasons hereinafter stated,
the defendant's motion to dismiss is denied.
The plaintiff alleges that on April 10, 1978, defendant
Koppers purchased 650,000 shares of Cutler-Hammer preferred
stock pursuant to a stock acquisition agreement between
defendant and Cutler-Hammer. These shares were convertible
into an equal number of shares of Cutler-Hammer common stock
and this purchase represented approximately 9.9% of
Cutler-Hammer's capital stock. During the four-day period,
April 10 through April 13, 1978, Koppers entered the open
market and continued to purchase shares of Cutler-Hammer
common stock. On May 31, 1978, Koppers converted its shares of
preferred stock into common. As a result of the aforementioned
transactions, Koppers became the owner of 21% of the
outstanding Cutler-Hammer common stock. The total price paid
by Koppers for its Cutler-Hammer stock was $62,101,513.
At all times relevant to the complaint, Mr. Edmund
Fitzgerald, the Chairman and Chief Executive Officer of
Cutler-Hammer, was also a member of the Board of Directors of
In addition, the plaintiff has alleged that on June 26,
1978, Eaton and Cutler-Hammer entered an agreement of merger
and plan of reorganization which provided for the merger of a
wholly owned subsidiary of Eaton with, and into,
Cutler-Hammer. Pursuant to this agreement, Cutler-Hammer
became a wholly owned subsidiary of Eaton on January 2, 1979.
Koppers sold its Cutler-Hammer stock in December, 1978 for
$80,765,000. Plaintiff has alleged, however, that for purposes
of section 16(b) of the Securities Exchange Act of 1934, 15
§ 78p(b), the effective date of this "sale" was August 23,
1978, or in the alternative, September 1, 1978, when Eaton and
Cutler-Hammer became irrevocably bound to the merger. The
plaintiff acknowledges that Koppers was unable to control the
course of events leading to the merger.
The defendant argues, relying principally upon Kern County
Land Co. v. Occidental Petroleum Corp., 411 U.S. 582, 93 S.Ct.
1736, 36 L.Ed.2d 503 (1972), that the plaintiff has failed to
allege a "sale" within the ambit of section 16(b) of the Act.
In support of this position, the defendant contends that the
actual transfer of ownership of the stock did not take place
within six months after its purchase, and further contends that
its inability to control the sequence of events related to the
merger, brings it outside of the sweep of section 16(b). The
plaintiff argues that the date of "sale" should be determined
with reference to the underlying policy of the provision, to
prevent the realization of short swing profits based upon
access to inside information, and that consistent with this
policy, the date of "sale" should be considered as the date
upon which Eaton and Cutler-Hammer became irrevocably bound to
Section 16(b) of the Securities Exchange Act of 1934,
15 U.S.C. § 78p(b) provides that officers, directors, and holders
of more than 10% of the publicly listed stock of a company
shall be liable to the company for any profits realized from
any purchase and sale or sale and purchase of such stock within
a six month period. In determining whether a particular
transaction falls within the ambit of section 16(b), the court
must inquire whether the transaction "may serve as a vehicle
for the evil which Congress sought to prevent — the
realization of short swing profits based upon access to inside
information . . ." Kern County Land Co. v. Occidental Petroleum
Corp., 411 U.S. 582, 594, 93 S.Ct. 1736, 1744, 36 L.Ed.2d 503
(1972). Therefore, "[i]n interpreting the terms `purchase' and
`sale' courts have properly asked whether the particular type
of transaction involved is one that gives rise to speculative
abuse." Reliance Electric Co. v. Emerson Electric Co.,
404 U.S. 418, 424, 92 S.Ct. 596, 600, 30 L.Ed.2d 575 (1972).
In Kern, the Court addressed the question of whether an
exchange of stock by a defeated tender offerer, Occidental
Petroleum Corp., made pursuant to a defensive merger agreement
entered by the target company, Kern County Land Co., with its
defensive ally, Tenneco Inc., subjected the defeated offerer to
section 16(b) liability. Kern, supra 411 U.S. at 596, 93 S.Ct.
at 1745. The Court concluded that the transaction must be
viewed as having occurred on the date that Occidental became
irrevocably entitled to exchange its shares of old Kern stock
for shares of Tenneco preferred. Kern, supra at 596, 93 S.Ct.
at 1745. The Court reasoned, however, that the transaction
should not be viewed as a "sale" for purposes of section 16(b)
liability where the tender offerer exercised no control over
the course of the merger, and there was no possibility of
speculative abuse of inside information. Kern, supra at 600, 93
S.Ct. at 1747.
The defendant's reliance upon Kern County Land Co. v.
Occidental Petroleum Corp., 411 U.S. 582, 93 S.Ct. 1736, 36
L.Ed.2d 503 (1972) is misplaced. In the present case, it is
undisputed that Koppers exercised no control over the course of
events leading to the merger between Eaton and Cutler-Hammer,
however, at this point the similarity to Kern ends. Unlike the
circumstances presented in Kern, defendant Koppers was not a
defeated tender offerer, but an ally in Cutler-Hammer's
campaign to retain control. See Tyco Laboratories v.
Cutler-Hammer, Inc., 490 F. Supp. 1 (S.D.N.Y. 1980). In
addition, the presence of Edmund Fitzgerald on the Board of
both Koppers and Cutler-Hammer leads the court to believe that
there exists a strong possibility for speculative abuse of
inside information. Under the circumstances presented, the
court is bound to determine the date of "sale" as that date
most consistent with the policy of section 16(b). For the
purpose of this motion to dismiss, the court finds that August
23, 1978, the date alleged by plaintiff to be the point at
which Eaton and Cutler-Hammer were irrevocably bound to the
merger, was the
date of sale. Kern County Land Co. v. Occidental Petroleum
Corp., 411 U.S. 582, 93 S.Ct. 1736, 36 L.Ed.2d 503 (1972); cf.
Bershad v. McDonough, 428 F.2d 693 (7th Cir. 1970).
For the reasons stated, the defendant's motion to dismiss is
© 1992-2003 VersusLaw ...