The opinion of the court was delivered by: TYLER
This action under Section 16(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78p(b)) raises some of the questions left unresolved by the Court of Appeals for the Second Circuit in Blau v. Lamb, 363 F.2d 507 (2d Cir. 1966), cert. denied 385 U.S. 1002, 17 L. Ed. 2d 542, 87 S. Ct. 707 (1967), that court's most recent in-depth excursion into the complicated world of short-swing insider profits.
Plaintiff's claim arises out of the events surrounding the 1967 merger of Central Airlines, Incorporated ("Central") into Frontier Airlines, Inc. ("Frontier"), the surviving corporation being Frontier. (For convenience, I will refer to the merged corporation as "Central-Frontier.") Plaintiff, a Frontier security holder,
claims that RKO General, Inc. ("RKO") realized short-swing insider profits in transactions in Central common stock and convertible debentures, and that the claim now belongs to Central-Frontier as a result of the merger. At all relevant times, Central common was traded over-the-counter.
With the material facts undisputed, defendant RKO has moved for summary judgment, and plaintiff has cross-moved for summary judgment on the issue of liability, reserving for future determination the calculation of the exact amount of profits claimed to have been realized by RKO.
During the period immediately preceding April 5, 1967, RKO held 56% of the outstanding common stock of Frontier and was in the process of negotiating a merger between Frontier and Central. On that date, the management of the two airlines agreed in principle to a merger of Central into Frontier with an exchange ratio of one share of Frontier common stock for each 3 1/2 shares of Central common stock.
On May 3 or 4, 1967, RKO contracted with a small number of major Central stockholders to purchase 738,251 shares of Central common, representing 49% of Central's outstanding shares, plus $500,000 principal face amount of Central convertible debentures, which were convertible into an additional 149,994 shares of Central common.
The purchase was to be at the effective rate of $8.50 per share of common stock. As a part of this agreement, RKO acquired the promises of Central shareholders owning approximately 66% of the Central common that they would vote the shares in favor of the merger. At the time of the execution of this purchase agreement, neither the public nor the stockholders of the two corporations had been informed of the proposed merger.
On May 4, 1967, the two airlines executed a formal agreement of merger at the previously agreed upon exchange rate. A press release on the merger agreement was issued the same day. The next day, May 5, 1967, reports in the financial press described the merger based on the press release, and disclosed to the public RKO's contract with the Central security holders.
The necessary approval of the merger by shareholder majorities of the two airlines was obtained on July 27, 1967. On the same date, the Frontier shareholders ratified a two-for-one split of Frontier common stock, which had been declared by Frontier's board of directors on May 10, 1967. To compensate for the stock split, the terms of the merger were adjusted to provide for an exchange rate of two shares of Frontier for each 3 1/2 shares of Central.
The requisite Civil Aeronautics Board ("CAB") approval of the merger became effective on September 1, 1967, subject to the written acceptance by Frontier of certain conditions. Thereafter, on September 18, 1967, RKO received the Central stock and convertible debentures for which it had previously contracted and paid a total purchase price of $8,550,082.50. On the same day, the merger aggrement was filed with the Secretary of State for the State of Nevada, where both Frontier and Central had been incorporated.
The CAB received notice of Frontier's acceptance of the regulatory board's conditions to the merger on September 20, 1967. At the same time, Frontier requested that the CAB transfer Central's certificate of public convenience effective October 1, 1967.
Apparently it was on October 1, 1967, that the exchange of securities between Central and Frontier was consummated. In exchange for its Central common stock and convertible debentures, RKO received 420,850 shares of Central-Frontier common and Central-Frontier debentures convertible into 85,831 shares of Central-Frontier common.
On the basis of these facts, plaintiff contends that RKO's acquisition of Central securities and subsequent disposition within six months in the course of the merger with Frontier falls squarely within the proscription of Section 16(b). RKO raises some eight separate rebuttals to this basic contention of plaintiff. The first three, which will be dealt with in Part II of this opinion, are arguments that plaintiff has failed to establish three elements of its Section 16(b) claim -- "purchase ", "sale ", and "profit realized ". The final five arguments are a variety of defenses based on administrative rules, federal statutes, and common law principles. This group of arguments will be discussed in Part III of the opinion.
"PURCHASE ", "SALE ", AND "PROFIT REALIZED"
Defendant aims at the jugular of this claim under Section 16(b), 15 U.S.C. § 78p(b),
by arguing that none of the primary elements of such a claim has been established by the facts in this case. Although there is a variety of factual and legal arguments made by RKO on these three points, a common thread can be discerned. Defendant consistently maintains that the transactions already described do not present a situation which lends itself to the type of insider abuse that Section 16(b) was designed to prevent.
The most hotly contested issue in this case is whether there was a "sale" of the Central securities, but it will be helpful to consider the "purchase" issue first since its outcome has some effect upon points raised in the main question. Defendant admits, as it must, that under any normal meaning of the word, it made a "purchase" of the Central securities for cash on September 18, 1967. (Def.'s Brief, p. 29.) But, it argues, "the substance of the transaction and the intent of the parties was that RKO was not purchasing shares of Central but shares of Central-Frontier." Even if I were to concede that such was the sole purpose of the parties to the transactions, Section 16(b) was designed to protect the investing public and shareholders other than the ones involved in the particular acquisitions and dispositions of shares. While RKO was probably primarily concerned with the merger and with maintaining its dominant position in Frontier, the method it used to effectuate its purpose was the acquisition of the common stock and convertible debentures of Central. In view of the ...