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ELLERIN v. MASSACHUSETTS MUT. LIFE INS. CO.

August 1, 1958

Sol J. ELLERIN, a stockholder of The General Tire & Rubber Company, suing on behalf of himself and all other stockholders similarly situated, and on behalf and in the right of The General Tire & Rubber Company, Plaintiff,
v.
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, and The General Tire & Rubber Company, Defendants



The opinion of the court was delivered by: HERLANDS

On defendant Massachusetts Mutual Life Insurance Company's motion and plaintiff's cross-motion for summary judgment, the dispositive question of law is whether a particular issue of preferred stock constitutes a 'class' of stock as distinguished from a 'series' of stock. This question of the distinction between 'class' and 'weries' is a matter of novel impression under the 'insider's profit' provision of the Securities Exchange Act of 1934, section 16(b) (15 U.S.C.A. section 78p(b)).

The distinction is of critical importance because the operation of the statute depends in part upon the status of the alleged insider -- in this case defendant Massachusetts Mutual Life Insurance Company -- as 'the beneficial owner of more than 10 per centum of any class of any equity security.' (Emphasis supplied.)

 Plaintiff sues to recover, on behalf of defendant The General Tire & Rubber Company (called herein 'General Tire'), profits realized by defendant Massachusetts Mutual Life Insurance Company (called herein 'Massachusetts Mutual') from the purchase and sale of General Tire's common stock.

 The action is grounded on section 16(b) of the Securities Exchange Act of 1934 (15 U.S.C.A. section 78p(b)).

 Defendant Massachusetts Mutual acquired 7,142 856/1000 shares of common stock of General Tire on November 30, 1954 and December 14, 1954. This was effected through the conversion of certain shares of other stock of General Tire. The nature of this other stock is immaterial to the present inquiry.

 Between November 26, 1954 and February 4, 1955 defendant Massachusetts Mutual sold the 7,142 856/1000 shares of common stock, thereby realizing a profit.

 At all pertinent times, defendant Massachusetts Mutual was the owner of 2,500 shares of 3 3/4% Cumulative Preferred Stock of General Tire.

 General Tire was authorized (by its amended articles of incorporation) to issue 150,000 shares which 'shall be classified as Cumulative Preferred Stock.' Of this number of authorized shares of Cumulative Preferred Stock, General Tire initially issued 75,000 shares which were designated as 4 1/4% Cumulative Preferred Stock. Said 4 1/4% Cumulative Preferred Stock was registered under the Securities Exchange Act of 1934 on April 5, 1945 and was listed on the New York Stock Exchange on April 26, 1945.

 Subsequently, an additional 25,000 shares were issued pursuant to said authorization and were designated as 3 3/4% Cumulative Preferred Stock. Said 3 3/4% Cumulative Preferred Stock was registered under the Securities Exchange Act of 1934 on June 4, 1946 and listed on the New York Stock Exchange on July 3, 1946.

 The certificate of incorporation, which authorized the issuance of the Cumulative Preferred Stock, provided for the original issue of 75,000 shares as the initial series and also provided that subsequent Cumulative Preferred Stock may be issued from time to time in one or more series of Cumulative Preferred Stock. As to these subsequent issues of Cumulative Preferred Stock, the certificate of incorporation authorized the Board of Directors to fix certain characteristics, but all shares of Cumulative Preferred Stock 'shall be identical with each other in all (other) respects.'

 At the time Massachusetts Mutual bought and sold the 7,142 856/1000 shares of common stock, while the owner of 2,500 shares of 3 3/4% Cumulative Preferred Stock, there was outstanding approximately 52,488 shares of 4 1/4% Cumulative Preferred Stock and 18,605 shares of 3 3/4% Cumulative Preferred Stock.

 The statute (15 U.S.C.A. 78p(b)) provides:

 '(b) 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 recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer * * *'

 The 'such beneficial owner' referred to in clause '(b)' refers to the beneficial owners required to register under clause '(a)':

 '(a) Every person who is directly or indirectly the beneficial owner of more than 10 per centum of any class of any equity security (other than an exempted security) which is registered on a national securities exchange * * * shall file, at the time of the registration of such security or within ten days after he becomes such beneficial owner, * * * a statement with the exchange 'and a duplicate original thereof with the Commission) of the amount of all equity securities of such issuer of which he is the beneficial owner, and within ten days after the close of each calendar month thereafter, if there has been any change in such ownership during such month, shall file with the exchange a statement (and a duplicate original thereof with the Commission) indicating his ownership at the close of the calendar month and such changes in his ownership as have occurred during such calendar month.' (Emphasis supplied.)

 Defendant Massachusetts Mutual contends that it does not own 10 percent of 'any class of any equity security' because -- although its 2,500 shares of 3 3/4% Cumulative Preferred Stock are more than 10 percent of the outstanding 3 3/4% Cumulative Preferred Stock -- said shares are less than 10 percent of all outstanding Cumulative Preferred Stock. The essence of Massachusetts Mutual's argument is that all of the Cumulative Preferred Stock constitutes the class and that the 3 3/4% Cumulative Preferred Stock and the 4 1/4% Cumulative Preferred Stock constitute only series within that class.

 Plaintiff, on the other hand, asserts that -- notwithstanding the reference in the articles of incorporation to the Cumulative Preferred Stock as a 'class' and to the 3 3/4% and 4 1/4% Cumulative Preferred Stock as a 'series' within that class -- for purposes of the particular controlling statute the 3 3/4% Cumulative Preferred Stock and the 4 1/4% Preferred Stock constitute separate 'classes.'

 The evidentiary facts have been stipulated. Consequently, only the above-indicated question of law need be resolved by the Court. Two other issues of law raised by the parties need not be decided because the Court's decision of this specific issue is determinative of the case.

 The parties' arguments are largely derived from the literal wording of the statute. Defendant-Massachusetts Mutual asserts that the words used in the statute -- 'any class of any equity security' -- are to be sharply distinguished from the phrase 'any equity security'; that the statute is not aimed at a holder of 10 percent of any equity security but only at the holder of 10 percent of any class of any equity security; that the 3 3/4% Cumulative Preferred Stock is an equity security but it is not a 'class' of equity security; and that it is simply one of two series of a class of equity security, the class being the Cumulative Preferred Stock.

 On the other hand, plaintiff argues that the statute applies to 'any class of any equity security'; that the word 'any' modifying 'class' necessarily indicates an all-inclusive grouping that would include every class or series; that, if Congress had meant to limit the application of the statute to owners of a general class of equity security, it would not have used the phrase 'any class of any equity security'; and that the language used by Congress would include the 3 3/4% Cumulative Preferred Stock as a class.

 In interpreting this statute, the Court is called upon to ascertain the underlying Congressional policy and to give it the fullest possible scope consistent with the legislative language. Where the statutory policy is manifest but unclearly expressed, the Court's duty is to read the words of the statute in the context of that policy. Cox, Judge Learned Hand and the Interpretation of Statutes, 60 Harv.L.Rev. 370 (1946); Frankfurter, Some Reflections on the Reading of Statutes, 47 Colum.L.Rev. 528 (1947); Frank, Words and Music: Some Remarks on Statutory Interpretation, 47 Colum.L.Rev. 1259 ...


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