V. Section 16(B)

Washington and Lee Law Review Volume 34 | Issue 3 Article 9 Summer 6-1-1977 V. Section 16(B) Follow this and additional works at: https://scholarlycommons.law.wlu.edu/wlulr Part of the Securities Law Commons Recommended Citation V. Section 16(B), 34 Wash. & Lee L. Rev. 966 (1977), https://scholarlycommons.law.wlu.edu/wlulr/ vol34/iss3/9 This Article is brought to you for free and open access by the Washington and Lee Law Review at Washington & Lee University School of Law Scholarly Commons. It has been accepted for inclusion in Washington and Lee Law Review by an authorized editor of Washington & Lee University School of Law Scholarly Commons. For more information, please contact . 966 WASHINGTON AND LEE LAW REVIEW [Vol. XXXIV mon law tort of interference with a prospective economic advantage. The court of appeals concluded from the existence of this cause of action at state law that Congress would have announced explicitly an intention to grant a private remedy to offerors had it so intended.'20 The Supreme Court, however, used the existence of the state cause of action to infer that if Congress had intended to create a duplicate 12 federal remedy, it would have stated that intention clearly. ' Simi22 larly, in Santa Fe Industries, Inc. v. Green,' the Court stated that in the absence of a clear command from Congress, it would hesitate to override established state policies of corporate law.'2 This rationale is also the moving force behind the holding in Piper.The Court would not assume that Congress intended offerors to have a damage remedy unless that remedy was essential to accomplishment of the statutory purpose. In the future, those who seek expansion of federal securities laws will have to look to Congress, not to the Supreme Court.'24 Scorr HAMILTON V. SECTION 16(b) The primary objective of the Securities Exchange Act of 1934 ('34 Act) is to provide a free and open market for trading securities with all traders having access to the same relevant market information.' "1 480 F.2d at 360-61; see note 96 supra. 121Professor Loss, in a discussion of implied private rights of action under § 14(a), states that statutory silence neither supports nor detracts from the proposition that there should be a private remedy under the '34 Act. 2 L. Loss, SEcuarriEs REGULATION 942 (2d ed. 1961). 1- 97 S. Ct. 1292 (1977). '2 Id. at 1303-04. 121In Green, id. at 1304, the Court cites Cary, Federalism and CorporateLaw: Reflections Upon Delaware, 83 YALE L.J. 663, 700 (1974). Professor Cary takes the position that federal regulation of corporate fairness and fiduciary duties cannot be achieved through the vehicle of rule 10b-5. Rather, he advocates federal legislation as a "counterattack against the erosion of standards" brought about by the economic benefits available to states with lenient corporation laws. Id. 1 15 U.S.C. § 78a-78hh (1970) as amended 15 U.S.C. § 78b-78kk (Supp. V 1975) ('34 Act). See generally Yourd, Trading Securities by Directors, Officers and Stockholders: Section 16 of the Securities Exchange Act, 38 MICH. L. REv. 133 (1939). The Securities Act Amendments of 1975 reiterate the objective of a free and open market for trading securities. 15 U.S.C. § 78b (Supp. V 1975). The Amendments declare that 1977] SECURITIES LAW DEVELOPMENTS Congress, recognizing the easy access of corporate officers, directors and substantial stockholders to a corporation's confidential information, enacted section 16(b) of the '34 Act to insure that these corporate insiders would not take personal advantage of such inside information.2 This section provides for recovery by the corporation of all profits realized by insiders on purchases and sales of their corporation's securities made within a six month period, commonly referred 3 to as short swing trading. Originally, federal courts applied the statute mechanically, and held insiders strictly liable for all short swing profits regardless of any possibility for speculative abuse.' This strict liability' approach presecurities markets are a national asset and that it is in the national interest to protect investors through the maintenance of fair and orderly markets. 15 U.S.C. § 78k-1 (Supp. V 1975). 2 15 U.S.C. § 78p(b)(1970). See, e.g., Adler v. Klawans, 267 F.2d 840, 844 (2d Cir. 1959). See generally Note, ExtraterritorialApplication of Section 16(b) of the Securities Exchange Act of 1934, 32 WASH. & LEE L. REV. 699, 708-10 (1975). 15 U.S.C. § 78p(b) provides: 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 . . . shall inure to and be recovered by the issuer, irrespective of any intention on the part of such beneficial owner, director or officer ... A beneficial owner under the '34 Act is any person who directly or indirectly owns more than 10% any class of a corporation's equity securities. Id. § 78p(a). The term equity security is broadly defined in the '34 Act to include any stock or similar security and securities or warrants which carry with them the right to convert or purchase a stock or similar security. Id. § 78c(11). The Securities Exchange Commission is given discretion to promulgate rules and regulations concerning the securities which it deems an equity security. !d. See, e.g., Park & Tilford, Inc. v. Schulte, 160 F.2d 984 (2d Cir.), cert. denied, 332 U.S. 761 (1947). In Park & Tilford, three controlling owners of a company converted preferred shares to common shares because the corporation had ordered an automatic redemption of all preferred shares at an exchange value below that of voluntary conversion. The court mechanically held that this exchange constituted a purthase since before the conversion the insiders owned no common stock while after the conversion they did. When this common stock was sold within six months, the court held the three statutory insiders liable under § 16(b) without full inquiry into any mitigation of the possibility of insider abuse caused by this economically forced conversion. See also Smolowe v. Delendo Corp., 136 F.2d 231 (2d Cir.), cert. denied, 320 U.S. 751 (1943). See generally Wentz, Refining A Crude Rule: The PragmaticApproach of Section 16(b) of the Securities ExchangeAct of 1934, 70 Nw. U.L. REv. 221, 225 (1975) [hereinafter cited as Wentz]. 5 Hearings prior to the adoption of § 16(b) described the provision as a "crude rule 968 WASHINGTON AND LEE LAW REVIEW [Vol. XXXIV sumed that statutory insiders had access to confidential market information and that they had misused the information if they profited on short swing transactions. 7 The Supreme Court in Kern County Land Co. v. OccidentalPetroleum Corp.,' however, held that certain "unortho (...truncated)