Put and Call Options: Criteria for Applicability of Section 16(b) of the Securities Exchange Act of 1934

Notre Dame Law Review Volume 40 | Issue 3 Article 1 4-1-1965 Put and Call Options: Criteria for Applicability of Section 16(b) of the Securities Exchange Act of 1934 George P. Michaely Barbara A. Lee Follow this and additional works at: http://scholarship.law.nd.edu/ndlr Part of the Law Commons Recommended Citation George P. Michaely & Barbara A. Lee, Put and Call Options: Criteria for Applicability of Section 16(b) of the Securities Exchange Act of 1934, 40 Notre Dame L. Rev. 239 (1965). Available at: http://scholarship.law.nd.edu/ndlr/vol40/iss3/1 This Article is brought to you for free and open access by NDLScholarship. It has been accepted for inclusion in Notre Dame Law Review by an authorized administrator of NDLScholarship. For more information, please contact . NOTRE DAME VOL. XL ApRi , 1965 No. 3 PUT AND CALL OPTIONS: CRITERIA FOR APPLICABILITY OF SECTION 16(b) OF THE SECURITIES EXCHANGE ACT OF 1934.* George P. Michaely, Jr.** & BarbaraA. Lee*** The recent Second Circuit case of Miller v. General Outdoor Advertising Co.1 is a terse and pointed application of that Court's narrow definition of the scope of summary judgment: Because we believe that on the complicated factual pattern presented here it would have been more prudent to permit all the facts to be fully developed at a trial before attempting to determine the applicability of Section 16(b) to Gamble's extremely involved transactions in Alleghany's stock, we 2 are compelled to reverse the orders granting summary judgment. The "complicated factual pattern" was no juridical hyperbole. Miller, a stockholder of Alleghany Corporation, brought an action pursuant to section 16(b) of the Securities Exchange Act of 1934' to recover in Alleghany's behalf any * The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for private publications by its employees. The views expressed in this article are those of the authors and do not necessarily reflect the views of the Commission or of the authors' colleagues on the staff of the Commission. ** Chief Counsel, Division of Corporation Finance, Securities and Exchange Commission. Member, Indiana Bar. B.S. in Math., 1948, University of Notre Dame; LL.B., 1956, Notre Dame Law School. *** Attorney, New York Regional Office, Securities and Exchange Commission. Member, Connecticut Bar. A.B., 1959, Boston University; LL.B., 1962, Harvard Law School. 1 337 F.2d 944 (2d Cir. 1964), reversing 223 F. Supp. 790 (S.D.N.Y. 1963). 2 337 F.2d at 947-48. 3 48 Stat. 896 (1934), 15 U.S.C. § 78p(b) (1958): 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 NOTRE DAME LAWYER profits realized by Gamble-Skogmo, Inc., and its subsidiary General Outdoor Advertising Co. in a series of transactions, including an "Agreement of Put and Call" some incidental contractual features of which were both complicated and novel.' The legal relations created were "extremely involved" by virtue not only of the forms employed, but, as the Second Circuit recognized, because of the sweeping potential impact of the legal issues to which they gave rise: Since this is the first case to raise the difficult and far-reaching question whether the acquisition of a call may be a "purchase' of an "equity security" under Section 16(b), it falls within that twilight zone where full development of the facts is necessary to decide whether the transactions involved were susceptible to the type of speculation the section seeks to eliminate.5 Section 16(b) has given rise to cases applying the definitions6 of "purchase" and "sale" to many fact situations, and the resulting decisions have often been of limited application.' The Miller case, on the other hand, raises the broad question of the applicability of section 16(b) to a whole class of securities, that is, to puts and calls. The opinion is of interest as an instance of summary judgment held improvidently granted.' Its greater significance, however, may lie in the "difficult and far-reaching question" which, although not decided by the Court, is of continuing importance in light of the extraordinary susceptibility of puts and calls to the speculative activities which are section 16(b)'s raison d'9tre. A put is an option to sell and a call is an option to buy a security within a period of time at a stated price. They have been somewhat more formally defined by the staff of the Securities and Exchange Commission: A "put" is a contract which gives the holder the right for a stated period of time to sell a specified number of shares of a stock to the writer of the contract at a price per share which was fixed at the time when the option was bought. A "call" is a similar 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. 4 See text at note 35, infra. 5 Miller v. General Outdoor Advertising Co., 337 F.2d 944, 948 (2d Cir. 1964). 6 Securities Exchange Act §§ 3(a) (13), (14), 48 Stat. 884 (1934), 15 U.S.C. §§ 78c (a) (13), (14) (1958), quoted in text at note 28, infra. 7 See Booth v. Varian Associates, 334 F.2d 1, 3 (1st Cir. 1964), cert. denied, 379 U.S. 961 (1965), and cases cited. 8 The following language is of interest on this point: We do not, by our disposition of this case, weaken the force of our recent holdings that the summary judgment procedure should be used to pierce the allegations of pleadings and screen out sham issues of fact. See, e.g., Dressler v. Sandpiper, 331 F.2d 130 (2d Cir. 1964). Here we simply recognize that there are instances where summary judgment is too blunt a weapon with which to win (...truncated)