The opinion of the court was delivered by: PALMIERI
PALMIERI, District Judge.
These proceedings relate to the liability under Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), of Occidental Petroleum Company (Occidental) for short-swing profits from the purchase and sale of securities. Several motions for summary judgment are presently before the Court. They grow out of four suits initiated in this court against Occidental for its part in a series of transactions between May and December, 1967, relating to Occidental's attempt to take over a prosperous California corporation, the Kern County Land Company (Old Kern); and Old Kern's subsequent merger with a subsidiary of Tenneco Inc. (Tenneco). Three of the suits, 67 Civ. 2858, 67 Civ. 3291, and 67 Civ. 4977 (Actions Nos. 1, 2 and 4 respectively), were brought by stockholders of Old Kern; the remaining suit, 67 Civ. 4042 (Action No. 3), was brought by the subsidiary of Tenneco which succeeded to the business and assets of Old Kern. As the discussion, findings and conclusions which follow indicate, this Court rules in favor of the plaintiff in Action No. 3.
Old Kern, incorporated in California before 1900, had by 1967 developed a multi-million dollar diversified enterprise centered on real estate, oil and gas properties as well as agricultural and livestock interests, located primarily in California; its stock was listed for trading on the New York Stock Exchange and the Pacific Coast Stock Exchange, and between January 1, 1966, and May 5, 1967, had traded at prices between $56.00 per share and $76.25 per share. Occidental is also a California corporation. In 1967 its basic business activity involved the production and sale of petroleum, natural gas, coal, sulphur, and fertilizers. Tenneco, a Delaware corporation, at the time was the parent of a group of companies whose primary activities were the production of petroleum and natural gas in the Gulf Coast region and its distribution by means of an extensive pipeline network to the Northeastern and Midwestern areas of the country. Among Tenneco's subsidiaries was the Tenneco Corporation, which was the immediate parent within the Tenneco family of a new Delaware corporation (hereinafter New Kern) formed to succeed to the business of Old Kern.
As part of its expansion program, in the early part of 1967, Occidental approached the management of Old Kern to explore merger possibilities. When rebuffed by Old Kern, Occidental made a public tender offer in May, 1967, for the purpose of acquiring over 20 percent of the outstanding common stock of Old Kern at a price more than 30 percent higher than the then-current market price of the stock. The management of Old Kern opposed Occidental's takeover bid, and by way of defensive strategy agreed with Tenneco upon a sale of assets; the agreement was embodied in a document (the Plan) dated June 1, 1967, subject to the approval of the stockholders of both companies. Under the Plan, New Kern was to acquire all of the assets and business of Old Kern; in exchange, the shareholders of Old Kern would receive shares of a new class of Tenneco convertible preference stock on the basis of one Tenneco share for each share held of Old Kern stock. By the end of May, 1967, Occidental had become the holder of 883,381 shares, the largest single block of Old Kern stock and more than 20 percent of the total shares outstanding.
On June 2, 1967, Occidental entered into an agreement with the Tenneco Corporation under which, in substance, Tenneco Corporation acquired an option to purchase the shares of the new convertible preference stock of Tenneco which Occidental would receive as an Old Kern shareholder upon consummation of the sale of assets to Tenneco; Occidental was to be paid $105 per share for its holding in the new Tenneco stock. Occidental thereafter desisted from any further opposition, and in a letter, read at the Old Kern stockholders' meeting of July 17, 1967, at which the Plan was approved, Occidental offered its opinion that the Plan was a favorable arrangement for Old Kern shareowners.
When it became known that the Tenneco-Old Kern Plan was scheduled for a closing within six months of Occidental's purchases of Old Kern stock in May, 1967, Occidental sought a ruling from the Securities and Exchange Commission (SEC) exempting it from any liability under Section 16(b). It was unsuccessful. Numerous suits were brought in various courts in Texas, Nebraska and California, initiated by Old Kern stockholders, owners of miniscule numbers of shares, and which sought to delay or enjoin the closing. These suits notwithstanding, the closing of the Plan was held on August 30, 1967. Old Kern ceased to be a functioning company, and it was formally dissolved in October, 1967. Tenneco Corporation exercised its option to purchase Occidental's holdings of the Tenneco preference stock in December, 1967.
Of the instant suits, Actions Nos. 1 and 2 were filed prior to the closing of the Tenneco-Old Kern Plan, and contained, inter alia, causes of action under Section 16(b). New Kern brought Action No. 3 after the closing and asserted liability only under Section 16(b). Thereafter, another stockholder of Old Kern, Colonial Realty Corporation, initiated Action No. 4 against Occidental, in which it too sought to recover for Old Kern any Section 16(b) profits made by Occidental. In an order dated June 14, 1968, the late Judge Herlands of this Court consolidated Actions Nos. 1, 2 and 4, i.e., those brought by former stockholders of Old Kern, for pre-trial purposes and appointed general counsel to supervise pre-trial matters in those actions. Abrams v. Occidental Petroleum Corp., 44 F.R.D. 543 (S.D.N.Y. 1968). In these derivative shareholder actions, profits are sought to be recovered from Occidental by way of motions for summary judgment in favor of Old Kern (Actions 1 and 4) and by a similar motion as well as a prayer for declaratory judgment in favor of Old Kern or New Kern (Action No. 2).
Additionally, New Kern, plaintiff in Action No. 3, has moved for summary judgment on its four causes of action under Section 16(b). Basing its right to receive any recovery on the terms of the Tenneco-Old Kern Plan, and on a specific assignment on August 30, 1967, from Old Kern to New Kern of any Securities Exchange Act claims that might accrue, New Kern argues, and this Court agrees, that Occidental's liability should be predicated upon a matching of the total number of shares of Old Kern stock acquired in the May, 1967 tender offer with the disposition of these shares through Occidental's grant of the June 2 option to Tenneco Corporation and by way of the closing of the Tenneco-Old Kern Plan on August 30, 1967.
Also before the Court is a motion by the defendant Occidental for summary judgment seeking (1) dismissal of all Section 16(b) causes of action in Actions Nos. 1, 2 and 4, on the ground that the stockholder plaintiffs lack standing to sue, or (2) in the alternative, for an order pursuant to Rule 42(b), Fed. R. Civ. P., directing a separate trial on the issue of standing to sue in advance of any trial on the merits.
The findings of fact and conclusions of law which follow are intended to amplify and supplement what is set forth above. There is no genuine issue as to any material facts upon which they are based. Rule 56(c), Fed. R. Civ. P. Now Kern's motion for summary judgment is granted. The summary judgment motions of plaintiffs in Actions Nos. 1, 2 and 4, similarly based upon 16 (b) violations are denied solely because they are deemed moot by the decision in favor of New Kern. The motions of defendant Occidental are denied.
1. In the spring of 1967, Occidental determined to attempt an acquisition of Old Kern. On April 24 and April 28, 1967, Occidental purchased a total of 1900 shares of Old Kern stock on the open market. No Section 16(b) liability is asserted with respect to these shares, since Occidental was not at that time, nor did it become by virtue of those purchases, a beneficial owner of more than 10 percent of Old Kern's issued and outstanding stock.
2. In the belief that ownership of a large block of Old Kern stock would cause the management of Old Kern to be amenable to discussions of merger or consolidation, on Monday, May 8, 1967, Occidental announced a public tender offer with respect to the stock of Old Kern. The terms of the offer were published in more than 50 publications throughout the country beginning on May 9. The tender offer, to expire June 8, 1967, committed Occidental to "purchase all shares properly tendered by the expiration of the offer, up to 500,000 shares." Occidental reserved the right to purchase shares tendered in excess of 500,000. The purchase price was set at $83.50 per share, and Occidental undertook to pay an additional $1.50 commission per share on all shares tendered through a broker; for the purposes of the motions now before the Court, the parties accept the figure of $85.00 as Occidental's per share cost of acquisition.
3. The closing price of Old Kern's stock on the New York Stock Exchange on Friday, May 5, 1967, the last trading date prior to the announcement of the tender offer, was $63.625 per share.
As of May 10, 1967, Old Kern had exactly 4,328,140 shares of stock issued and outstanding.
4. Sometime after the tender offer and in May, 1967, the president and executive vice-president of Occidental appeared at the offices of Old Kern in San Francisco and announced to Old Kern's president that they were there to discuss the terms of a merger. Old Kern's president refused to discuss the matter.
5. By May 10, 1967, more than 500,000 shares of Old Kern stock had been tendered to Occidental, enough to make Occidental a beneficial owner of more than 10 percent of Old Kern's issued and outstanding stock. Occidental thereupon, on May 11, extended the tender offer to encompass an additional 500,000 shares; the other terms and conditions remained unchanged. On May 18, 1967, Occidental, as such beneficial owner, filed a Form 3, Initial Statement of Beneficial Ownership of Securities, with the Securities and Exchange Commission, indicating direct ownership of 507,055 shares of Old Kern stock; on June 9, 1967, Occidental filed a Form 4, Statement of Changes in Beneficial Ownership of Securities, for the month of May, indicating the purchase of an additional 376,326 shares of Old Kern stock, for a total ownership as of May 31, 1967, of 883,381 shares. An additional 4,168 shares were purchased by June 8, 1967, so that as of June 30, 1967, Occidental held 887,549 shares of Old Kern stock in direct ownership.
6. The management of Old Kern vigorously resisted Occidental's tender offer, writing a letter to stockholders on May 10, 1967, cautioning against tender and indicating that Occidental's offer might not have been the best available since the Old Kern management was then carrying on merger discussions with several other companies. When Occidental extended its tender offer, the president of Old Kern sent a telegram to all stockholders again requesting that shareowners refrain from tendering their stock.
7. Upon becoming the beneficial owner of more than 10 percent of Old Kern's stock, at least the following possibilities were available to Occidental, as Old Kern's largest stockholder:
1. Old Kern might have been induced to buy out Occidental's interest in the company, at a profit to Occidental;
2. Any company which merged with, or succeeded to the business of, Old Kern might have been induced to buy out Occidental's interest, at a profit to Occidental;
3. Occidental might have been able to take over the management of Old Kern;
4. Occidental might have been able to veto a takeover of Old Kern by any other company; or
5. Occidental might have retained its interest in Old Kern or in any new company formed by merger, wielding considerable influence in the policies and operations of the company in either event.
At least alternatives 1 and 2 would present the possibility for speculative abuse by Occidental of its position in Old Kern, as that term is understood within the purview and intendment of Section 16 (b). Apart from the abuse of inside information, which is presumed to exist under the statute, the possibilities of abuse in the factual context of this case can readily be envisaged. For example, Occidental could have used inside information to enable it to decide whether or not to fight the merger or sell its stock.
Indeed Occidental elected to enter into the option agreement.
8. On May 19, 1967, Old Kern's board of directors approved an offer made by Tenneco under which, in exchange for the transfer of all of Old Kern's assets and business, Old Kern's stockholders were to receive, for each share of Old Kern stock held, one share of a new $5.50 cumulative convertible preference stock to be issued by Tenneco. The annual dividend of $5.50 per share on the new Tenneco stock was more than double the current annual dividend rate of $2.60 per share on the Old Kern stock; each share of the new Tenneco preference stock was convertible into 3.6 shares of Tenneco common stock. Occidental, as an owner of 887,549 shares of Old Kern stock, would receive a like number of the new Tenneco shares. In a progress report to its shareholders on May 19, 1967, the president of Occidental estimated that the value of the Tenneco preference stock was equivalent to $105 per share.
The acceptance of the Tenneco offer by Old Kern's board was announced publicly the same day. In approving the transaction with Tenneco, the Old Kern board simultaneously rejected an oral offer which Occidental had made to it the same day.
9. As a result of the impending Tenneco-Old Kern reorganization, the president of Occidental stated in the said progress report of May 19, 1967, that based on the approximately 900,000 shares which Occidental had purchased, a profit of about 18 million dollars was indicated.
10. The details of the Tenneco-Old Kern transaction approved by the Old Kern board on May 19, 1967, were subsequently set out in a detailed Agreement and Plan of Reorganization, dated June 1, 1967. Under paragraph 7.1 of the Plan, Old Kern agreed to transfer, and New Kern agreed to accept
all of the assets and properties, business and goodwill of [Old] Kern of every kind and description * * * including without limitation all properties, tangible or intangible, real, personal or mixed, accounts receivable, bank ...