The opinion of the court was delivered by: BRYAN
This case involves the construction and application of Section 16(b) of the Securities and Exchange Act of 1934, 15 U.S.C.A. § 78p(b), which provides that short-swing profits in the securities of a corporation made by 'insiders' are recoverable for the benefit of the corporation.
Here a stockholder of Air-Way Industries, Inc., a Delaware corporation, hereafter referred to as 'Air-Way', sues under Section 16(b) on behalf of that corporation to recover for its benefit from the individual and corporate defendants, alleged 'insiders', profits realized by them from alleged short-swing trading in securities of the corporation within periods of less than six months. Both sides have moved for summary judgment.
The common stock of Air-Way was listed and traded in on the American Stock Exchange, a National Securities Exchange. Plaintiff, as a stockholder of Air-Way, is entitled to maintain the action in its name and in its behalf. There seems to be no question that prior to the commencement of the action demand to institute suit against the defendants was made on Air-Way by plaintiff and was refused upon the ground 'that a suit as requested would be baseless'.
The individual defendants, Lamb and Oswald, who are both citizens and residents of Ohio, were officers and directors of Air-Way at the time of the transactions in question and were therefore 'insiders' within the purview of Section 16. The corporate defendant, Edward Lamb Enterprises, Inc., hereinafter referred to as 'Enterprises', is an Ohio corporation, with its principal office in Toledo, and was the beneficial owner of more than 10% of the common stock of Air-Way. It is therefore also an 'insider' under Section 16. Defendant, Edward Lamb Foundation Inc., hereinafter referred to as 'Foundation', is a non-profit charitable corporation organized under the laws of Ohio, with its principal offices in Toledo. While plaintiff claims that Foundation is directly or indirectly the beneficial owner of more than 10% of the common stock of Air-Way, Foundation denies this and there is thus an issue as to whether it comes within the purview of the statute.
Plaintiff's claims are twofold.
The most substantial questions are presented by the claim that defendants realized profits from short-swing purchases and sales of the preferred stock of Air-Way. These transactions involve the acquisition of Air-Way convertible preferred by the defendants in exchange for the stock of Lamb Industries, Inc., another Ohio corporation, which they controlled, and the subsequent conversion of the preferred into the common stock of Air-Way. It is alleged that Oswald realized profits from these transactions of $ 76,500, Enterprises of $ 1,368,417.37, Lamb of $ 202,717.50, and Foundation of $ 112,674.
Plaintiff also asserts that defendants Lamb, Enterprises and Foundation have realized certain recoverable profits by virtue of short-swing purchases and sales or sales and purchases of Air-Way common stock. These transactions are relatively minor. Lamb's short-swing profits from these transactions are alleged to have been $ 2,067.96, Enterprises' $ 6,071.10, and Foundation's $ 6,705.15.
The major preferred stock transactions raise substantial questions of fact and law and will be examined first. The facts concerning these transactions on which the respective parties rely, as they appear from the papers now before me, are as follows:
In June 1955 the individual and corporate defendants were large stockholders of Lamb Industries, 97% of the stock of which was owned by defendant Lamb, members of his family, and companies which they controlled. The same interests owned more than 43% of the outstanding common stock of Air-Way.
On June 9, 1955, Air-Way made an offer to the Lamb Industries stockholders and to the holders of outstanding options to purchase Lamb Industries stock, to exchange one share of Air-Way 5% voting cumulative convertible perferred for each five shares of no par value common stock of Lamb Industries outstanding or issuable upon exercise of options. It is stated that this offer was 'for investment purposes only and not for resale', though the nature and extent of such alleged restrictions do not appear. The action of the Board of Directors of Air-Way in making the offer is said to have been unanimously ratified and approved by the Air-Way shareholders at 'the next annual meeting' which occurred some ten months later in March 1956. The minutes of this meeting are not in the record.
On June 10, 1955, the shareholders of Lamb Industries voted in favor of the exchange which is alleged to have been a tax free exchange under the Internal Revenue Code.
During the summer of 1955 the defendants, in pursuance of the offer, exchanged the Lamb Industries common stock which they then held for Air-Way preferred at the five to one ratio provided in the offer. In addition to their common stock holdings defendants Lamb and Oswald, who were officers of Lamb Industries, held certain restricted employee incentive options to purchase Lamb Industries common at the price of $ 6 a share issued to them in August of 1954. Lamb and Oswald exercised their options by purchasing Lamb Industries common stock, to which they were entitled, at the option price and then exchanged the Lamb Industries stock thus acquired for the Air-Way convertible preferred under the terms of the offer.
As a result of all these transactions Oswald acquired 2,000 shares of Air-Way preferred, Lamb 5,260 shares, Enterprises 34,589 shares, and Foundation 2,848 shares.
The Air-Way 5% voting cumulative convertible preferred exchanged for Lamb Industries common had a $ 50 par value and could be called for redemption by the corporation at a price of $ 52,50 per share plus accrued and unpaid dividends. It was convertible into Air-Way common at the ratio of 3 1/2 shares of common for each share of preferred. I was a 'protected' convertible, being fully protected against dilution by the provision that if at any time the number of Air-Way common shares outstanding should be increased ...