The opinion of the court was delivered by: BONSAL
Plaintiff, a shareholder of Frontier Airlines, Inc. (Frontier), a Nevada corporation, brought this action under Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), to recover on behalf of Frontier, "short-swing" profits allegedly realized by RKO General, Inc. (RKO), an "insider" of Frontier.
In an opinion reported at 294 F. Supp. 358 (S.D.N.Y. 1968), Judge Tyler held that, on the undisputed facts, plaintiff stated a claim under Section 16(b), that RKO was liable to plaintiff for the short-swing profits realized, and that the only issue for trial was the amount of the profit realized by RKO.
The issue of the amount of profit was tried before the court, without a jury.
The undisputed facts, upon which Judge Tyler found liability, are as follows:
On April 5, 1967, RKO owned 56% of the outstanding common stock of Frontier. On that date, Frontier and Central Airlines, Inc. (Central), a Nevada corporation, 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.
In early May 1967, RKO contracted with a small number of major Central shareholders to purchase 738,251 shares of Central common stock, representing 49% of Central's outstanding shares and $500,000 principal face amount of Central convertible debentures, which were convertible into an additional 149,994 shares of Central common (hereinafter, the Central securities). The purchase of the common stock was made at the rate of $8.50 per share of common stock; the purchase of the debentures was made at the rate of $8.50 per share of the common stock into which the debentures were convertible. As a part of the purchase agreement, Central shareholders owning approximately 66% of the Central common stock promised that they would vote their shares in favor of the merger. At the time of the execution of the purchase agreement, neither the public nor the other shareholders of the two corporations had been informed of the proposed merger.
Thereafter, on May 4, 1967, Central and Frontier executed a formal agreement of merger at the previously agreed upon exchange ratio, viz., 3 1/2 shares of Central for one share of Frontier. A press release on the merger agreement was issued that day, and the next day reports based on the release described the merger agreement and disclosed the existence of RKO's contract with the Central shareholders to purchase the Central securities.
On May 10, 1967, Frontier's Board of Directors declared a two-for-one split of Frontier common stock.
On July 27, 1967, the shareholders of Central and Frontier approved the merger and the Frontier shareholders ratified the 2-1 split of Frontier common stock, the terms of the exchange ratio being adjusted to compensate for the stock split by providing an exchange ratio of two shares of Frontier common stock for each 3 1/2 shares of Central common stock.
On September 1, 1967, subject to certain conditions to be accepted by Frontier, the Civil Aeronautics Board's (CAB) approval of the merger became effective. Thereafter, on September 18, 1967, RKO received the Central securities for which it had contracted with the Central shareholders and paid a total purchase price of $7,550,082.50. On the same day, the merger agreement was filed with the Secretary of State of the State of Nevada. On September 20, 1967, the CAB received notice of Frontier's acceptance of the conditions referred to above and Frontier's request that the CAB transfer Central's certificate of public convenience to Frontier, effective October 1, 1967.
On October 1, 1967, the exchange of securities between Central and Frontier took place. In exchange for its Central securities, RKO received 421,857 shares of the new Frontier common stock and new Frontier debentures convertible into 85,714 shares of the new Frontier common stock (hereinafter, the Frontier securities).
Judge Tyler found that RKO purchased the Central securities in early May 1967; that RKO sold its Central securities when it exchanged them for the new Frontier securities on September 18, 1967, or October 1, 1967; and that RKO realized a profit by its sale of the Central securities.
Since RKO purchased the Central securities for $7,550,082.50 ($8.50 per share times 738,251 shares of common stock, and $8.50 per share times debentures convertible into 149,994 shares of common stock),
the measure of its profit depends on the sales price, viz., the value of the Frontier securities received in exchange for the Central securities. Park & Tilford, Inc. v. Schulte, 160 F.2d 984 (2d Cir.), cert. denied, 332 U.S. 761, 92 L. Ed. 347, 68 S. ...