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SHAW v. DREYFUS

July 7, 1948

SHAW
v.
DREYFUS et al.



The opinion of the court was delivered by: GODDARD

Motion by plaintiff pursuant to Rule 56 of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c, for summary judgment with respect to the First and Third causes of action, and cross motion for summary judgment with respect to each of the three causes of action set forth in the complaint. Plaintiff concedes that defendants are entitled to summary judgment in the Second cause of action.

The action is by a stockholder of the Celenese Corporation of America (hereinafter referred to as the Corporation) suing on her own behalf and all other stockholders similarly situated, and is brought pursuant to Section 16(b) of the Securities Exchange Act of 1934 15 U.S.C.A. § 78(b), to compel the defendant Dreyfus to account for and pay over to the defendant, the Corporation, profits alleged to have been made by him from 'purchases and sales and sales and purchases' of common stock and rights to purchase said stock within periods of less than six months.

 Pursuant to resolutions adopted by the Board of Directors the Corporation issued to its common stockholders of record rights to subscribe at $ 50 a share to additional shares of common stock on the basis of one share for each 10 shares held. The rights were mailed out on October 9, 1945 and were to be exercised on or before November 24, 1945. Dreyfus was the holder of record of 106,343 shares of common stock of the Corporation, and accordingly received 106,343 rights from the Corporation entitling him to subscribe for 10634 3/10 additional shares of the Corporation's common stock.

 Dreyfus was then and now is a director and chairman of the Corporation.

 During the month of October Dreyfus sold, through brokers, 76,340 rights, for which he received $ 5,915.41. On October 22nd Dreyfus exercised the 30,000 of his remaining rights and subscribed for and was issued on October 23rd 3,000 shares of the common stock of the Corporation. Of these 3,000 shares between November 12, 1945 and January 6, 1946 he gave away 1,460 shares. The donees were five of his relatives, three intimate friends, and ten members of their families, a personal employee, and two employees of the Corporation. No consideration for the stock was received from any of them.

 Dreyfus filed gift tax returns with the Internal Revenue Department for the years 1945 and 1946, in connection with these gifts, which had a greater value of $ 3,000. He also filed reports with the Securities Exchange Commission reflecting the transfers of the 1,460 shares of common stock as gifts.

 The plaintiff contends that the receipt of the 'rights' by Dreyfus is covered by the words 'otherwise acquire' contained in Section 3(a)(13) of the Act, 15 U.S.C.A. § 78c(a)(13), which reads-in part ' the terms 'buy' and 'purchase' each include any contract to buy, purchase, or otherwise acquire'.

 The defendants urge that the transactions complained of are not within the coverage of Section 16(b) of the Securities Exchange Act and argue that the receipt by Dreyfus of the 'rights' to subscribe was not a transaction within the terms of Section 3(a)(13) of the Act.

 In respect to the Third cause of action, the plaintiff argues that the 'gifts' made by Dreyfus fall within the terms "sale' and 'sell' each include any contract to sell or otherwise dispose of'.

 In the First cause of action the question for determination is whether the receipt by Dreyfus of 106,343 rights from the Corporation and his sale of 76,340 of them was a 'purchase and sale' within the meaning of Section 16(b) of the Securities Exchange Act *fn1" as those words are defined in Section 3(a)(13) of the Act.

 Dreyfus did not purchase or acquire the right to subscribe for the new stock when the certificates or script were issued to him. These were but formal evidence of the rights he acquired when he bought the stock originally. The rights which were distributed to all the stockholders, including Dreyfus, were rights inherent in the stock. Miles v. Safe Deposit Co., 259 U.S. 247, 42 S. Ct. 483, 66 L. Ed. 923.

 'The new stock issued by the defendant (the corporation) under the permission of the statute did not belong to it, but was held * * * in trust for the stockholders. * * * The new stock belonged to the stockholders as an inherent right by virtue of their being stockholders, to be shared in proportion upon paying its par value or the par value per share fixed by vote of a majority of the stockholders, * * * . He (the stockholder) had an inchoate right to one share of the new stock for each share owned by him of the old stock, provided he was ready to pay the price fixed by the stockholders. If so situated that he could not take it himself, he was entitled to sell the right to one who could, as is frequently done. * * *

 A share of stock is a share in the power to increase the stock, and belongs to the stockholders the same as the stock itself. When that power is exercised the new stock belongs to the old stockholders in proportion to their holdings of old stock, subject to compliance with the lawful terms upon which it is issued.' Stokes v. Continental Trust Co., 186 N.Y. 285, 297, 299, 78 N.E. 1090, 1094, 12 L.R.A.,N.S., 969, 9 Ann.Cas. 738.

 See also Hammer v. Werner, 239 App.Div. 38, 265 N.Y.S. 172; Albrecht Maguire & Co. v. General Plastics, Inc., 256 App.Div. 134, 9 N.Y.S.2d 415; People ex rel New York Trust Co. v. Graves, et al., 265 App.Div. 94, 37 ...


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