The opinion of the court was delivered by: DAWSON
This is an action under § 16(b) of the Securities Exchange Act of 1934 (hereinafter called the 'Act'), 15 U.S.C.A. § 78p(b).
To eliminate 'insider profits', the Act enables any listed corporation to recover from its directors and officers all profits they realize from a purchase and sale or sale and purchase, within less than six months, of such corporation's stock. The individual defendants have each realized a profit from dealing in C.I.T. common stock. Their purchases were made pursuant to options granted under a Restricted Stock Option Plan. The sole defense raised by the defendants is that the Securities and Exchange Commission (hereinafter called the 'Commission') in Rule X-16B-3 has exempted stock acquired under a Restricted Stock Option Plan from § 16(b) of the Act.
The plaintiffs are the holders of record of 100 shares of common stock of C.I.T. Financial Corporation (hereinafter called 'C.I.T.') out of the approximately 9,150,000 shares outstanding. They bring this action on behalf of, and in the right of, C.I.T. and seek to recover for C.I.T. profits alleged to have been realized by the individual defendants in 'short swing' sales and purchases of stock of C.I.T. Each of the individual defendants is a director and all but one is an officer of C.I.T. The stock of this corporation is listed upon the New York Stock Exchange.
The portions of § 16(b) of the Act which are relevant to the issue are as follows:
'For the purpose of preventing the unfair use of information which may have been obtained by such * * * director, or officer (of a company having equity securities listed on a national securities exchange) 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 * * * within any period of less than six months, * * * shall inure to and be recoverable by the issuer * * *. 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 or transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of this subsection.' 15 U.S.C.A. § 78p(b).
All of the essential facts are set forth in a stipulation of facts, and all of the facts so set forth in that stipulation are found by the Court. The facts which are significant for the purpose of this opinion are as follows:
1. The C.I.T. Restricted Stock Option Plan was specifically approved by the stockholders of C.I.T. at a special meeting held on June 26, 1951, for which proxies were solicited in accordance with the Rules and Regulations under § 14(a) of the Act, 15 U.S.C.A. § 78n(a). The validity of the Plan and options granted thereunder and the compliance with the proxy rules of the Securities and Exchange Commission in connection with the approval of the Plan by stockholders have heretofore been decided in an action entitled Kaufman v. Shoenberg, 1952, 33 Del.Ch. 211, 91 A.2d 786.
2. The Plan provides that options for a limited amount of authorized but unissued common stock of C.I.T. may be granted from time to time prior to August 31, 1956; that each option is exercisable only within five years from the date of granting; that options may be granted only to regular salaried employees of C.I.T. or its subsidiaries; that the option price must be not less than 95% of the fair market value of the stock on the date of the granting of the option; that the shares must be paid for in full, in cash, upon the exercise of the option; that each optionee must agree to remain in the service of C.I.T. or one of its subsidiaries for a period of at least two years from the date of the granting of the option. The acquisition of the securities does not involve the payment of any cash except the funds payable pursuant to the option contract.
3. The Plan is administered by a committee of five directors, four of whom are, and at all times have been, ineligible to receive options under the Plan. The remaining number of the committee has been a regularly salaried employee of one of the subsidiaries of C.I.T., but prior to having been appointed to the committee, he advised the Board of Directors of C.I.T. in writing that he did not wish to receive then or later an option under the Restricted Stock Option Plan. Two members of the committee participate in the C.I.T. Retirement Plan, a group insurance plan, and a group surgical and medical plan, which plans are open to all employees of C.I.T. and its subsidiaries.
4. The committee has authorized the granting of options to 229 employees of C.I.T. and its subsidiaries, including the individual defendants. Each of the individual defendants received an option on July 2, 1951, the option price being $ 19.10 a share, which was more than 95% of the market value of C.I.T. common stock on that date.
5. The options, by their terms, were non-transferable except by will or the laws of descent and distribution.
6. The issue involved in this litigation resulted from the exercise by the individual defendants of certain of these options in 1953 and 1954, and arose by virtue of the fact that each individual defendant, within six months before, or within six months after, the date upon which he exercised his option, sold shares of common stock of C.I.T. at a price or prices higher than the option price.
7. The individual defendants did not purchase any shares of common stock of C.I.T., other than upon the exercise of options granted under the Plan, within less than six months before, or less than six months after, the date of such sales, except in one instance. In that instance, the defendant L. Walter Lundell sold shares of common stock on the New York Stock Exchange and within four months thereafter, purchased shares of common stock on that Exchange at a price higher than the price at which he sold, which transaction resulted in no profit to this defendant.
The plaintiffs urge that:
1. Rule X-16B-3 of the Commission did not exempt from the provisions of 16(b) of the Act acquisitions of shares of stock, by officers or directors of a listed corporation, pursuant to a Restricted Stock Option Plan.
2. That even if Rule X-16B-3 of the Commission exempted acquisitions of shares of stock by officers or directors of a listed corporation from the provisions of 16(b) of the Act, nevertheless, the Restricted Stock Option Plan of C.I.T. did not conform to the requirements of the Rule.
3. That Rule X-16B-3 of the Commission, if it exempted acquisitions of shares of stock pursuant to a restricted stock option, by officers or directors of a listed corporation, from the provisions of § 16(b) of the Act, was beyond the power of the Commission.
These issues will be discussed in the order in which they have been stated.
I. Did Rule X-16B-3, as in effect at the time of the acquisition of shares by the defendants, exempt acquisitions pursuant to a Restricted Stock Option Plan from the provisions of § 16(b) of the Act?
It is clear from the statute that it does not cover 'any transaction * * * which the Commission by rules and regulations may exempt as not comprehended ...