The opinion of the court was delivered by: LASKER
OPINION (October 12, 1971)
In the spring of 1967 the fancy of Crane Co. ("Crane") lit upon Westinghouse Air Brake Co. ("Air Brake") as an attractive take-over candidate. As is often the case in corporate, as in amatory, affairs, the pursued was unwilling. Air Brake rejected its suitor and turned elsewhere for marriage and protection. American Standard, Inc. ("Standard") found Air Brake as appealing a partner as had Crane, competed for the favored hand and won. This litigation between the rejected and favored suitors -- not the first battle between them on the subject -- grows out of that courtship.
Standard sues under § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b) ("the Act") to recover short swing profits made by Crane in its dealings in the stock of Air Brake. The case presents the following questions:
1. Do the facts establish that an opportunity for speculative abuse by Crane existed?
2. If so, do Crane's dealings in Air Brake stock constitute sales (or purchases) within the meaning of the Act?
3. Did the Court of Appeals, in other litigation between the parties [Crane Company v. Westinghouse Air Brake Company, et al., and Crane Company v. American Standard, Inc. et al., 419 F.2d 787 (2d Cir. 1969)], determine that Standard's acts forced Crane to sell?
4. If so, does that finding prevent Standard from recovering from Crane on the theory of estoppel or otherwise?
On these cross-motions for summary judgment
as to liability, there are no genuine issues as to material facts, but the facts are complex and must be outlined in some detail for an intelligent understanding of the case.
In June 1967, Crane embarked on a program of buying Air Brake stock. In late 1967, Crane, not yet a 10% stockholder of Air Brake, proposed to Air Brake that it be merged into Crane. In December, Air Brake declined the proposal. Although Crane then briefly discontinued its purchases of Air Brake, it resumed them vigorously in January. By January 26, 1968, it held 463,000 shares, more than 10% of the 4,594,161 shares outstanding. On February 20, 1968, Crane filed 14-B statements with the Securities and Exchange Commission declaring its intention to solicit proxies to elect directors to Air Brake's board. This action sparked counter action by Air Brake in the form of discussions with Standard as to a merger of Air Brake into Standard. On March 4, 1968, the president of Standard advised Crane's chairman that agreement had been reached on a Standard-Air Brake merger, and the following day the announcement was made to the public.
Although Crane's chairman remarked at the time
that such a merger would cause Crane to become a stockholder of Standard, which "looked like an impossible situation," Crane decided to fight it out with Standard and continued its program of buying Air Brake stock. On April 6, 1968, Crane publicly announced its tender offer for all the outstanding stock of Air Brake.
Crane's tender offer to exchange a package of its stock and debentures totaling $50 in face amount for a share of Air Brake was mailed during the week of April 8. Through its tender offer Crane secured over 500,000 Air Brake shares in April and more than 250,000 within the following month, so that it finally owned 32% of the stock. By its terms the offer expired April 19 at 5:00 P.M. On April 10, Air Brake was selling at about $49.
On the day that the Crane tender was to expire, Standard purchased 170,000 shares of Air Brake on the New York Stock Exchange at an average price of $49.50, and on the same day sold 100,000 shares off the market and 20,000 shares on the market at a negotiated average price of $44.50 for a loss of over $500,000 on its transactions for the day. The Court of Appeals of this Circuit has described Standard's April 19th activities and their result as follows:
"The critical day in the take-over battle was April 19, the day Crane's tender offer for Air Brake stock was to expire. The holders of Air Brake stock could be expected to delay until the last moment in order to make a decision based on the latest market information, i.e., to compare the value of the tender offer, here not more than $50, with the market price on the day the offer was to expire. In fact, 85 percent of the shares tendered to Crane by the 19th were offered on that day. [citation] On April 19, Air Brake opened at 45 1/4 on the New York Stock Exchange, giving Crane's tender offer a good prospect of success. The surest way to defeat the Crane offer was to run the price up to $50. The tape did quickly reach $50 on April 19, and Crane's tender offer failed. Crane's claim that this was the result of extraordinary transactions by Standard is supported by the record.
". . . The net result of this buying was to represent to the public, whose primary source of information is the tape, that there was a great demand for Air Brake at an increased value. It is reasonable to conclude that many Air Brake stockholders who might otherwise have chosen to tender to Crane chose not to do so because their own holdings in Air Brake looked better as the price went up.
". . . Standard had 'painted the tape' in Air Brake stock. . . .
"Standard's extraordinary buying here, coupled wih its large secret sales off the market, inevitably distorted the market picture and deceived public investors, particularly the Air Brake shareholders." Crane Company v. Westinghouse Air Brake Company, et al., 419 F.2d 787, 792-793 (2d Cir. 1969).
On or about May 16, 1968, the Air Brake stockholders voted to approve the merger with Standard. On June 7 the merger became effective and the Standard preference stock was exchanged for Air Brake common. Between June 7 and June 13, Crane exchanged its then holdings of 1,480,623 Air Brake shares for 740,311 of Standard, and on June 13 sold 730,311 shares of Standard on the New York Stock Exchange for $76,134,921.75 at a profit estimated at over $10,000,000. Shortly thereafter Crane sold 9,000 of its remaining 10,000 shares.
In late May, prior to the consummation of the merger, Crane had brought two suits against Air Brake and Standard, the first to enjoin the merger, the second -- with which we are concerned in this case and to which reference has been made above -- charging Standard with manipulation in violation of the Securities Exchange Act of 1934. The first suit, as is evident from the fact that the merger was consummated, was dismissed on June 5 after trial. The second -- the case on the basis of which Crane moves here for summary judgment -- was also dismissed on June 5, but that dismissal was reversed by the Court of Appeals in the opinion quoted above. The Court there held:
"Standard's actions had the intended and inevitable effect of inducing Crane to become a seller within the meaning of section 9(a)(2), for if successful in defeating Crane's tender offer and consummating the Standard merger, antitrust considerations would require sale by Crane of the shares held by Crane or those received in exchange. This placed Crane in a situation comparative to that of the dissenting shareholders in Vine v. Beneficial Finance Co., 374 F.2d 627 (2d Cir. 1967), cert. denied 389 U.S. 970, 88 S. Ct. 463, 19 L. Ed. 2d 460 (1968) for here, as there, plaintiff was forced to become 'a seller under the Act.'" Crane Company v. Westinghouse Air Brake Company, supra, 419 F.2d at 794.
"Standard's failure to disclose its manipulation operated as a fraud or deceit on Crane in connection with the purchase and sale of securities, creating a right to relief in Crane quite apart from Crane's rights as a forced seller under section 9(a)(2)."
"The success of Standard's maneuver made Crane a forced seller of the newly issued Standard convertible preferred under threat of a divestiture action to be brought by Standard under the antitrust laws."
The Court remanded the case for a determination of the appropriate remedies, observing, at 803-804:
"The manipulation may be found to have deprived Crane of success in its tender offer in the free market to which it was entitled . . ."
In support of its motion for summary judgment, Crane argues (1) that the Court of Appeals has established that the transactions which form the basis of the instant suit were forced on Crane by Standard's illegal manipulation and deception, (2) that the Court of Appeals' decision collaterally estops Standard from recovery here, and (3) that an illegally forced transaction is not a "purchase" or "sale" within the meaning of § 16(b).
In opposition, Standard contends that § 16(b) applies on its face to Crane's transactions (there is no dispute that Crane was an "insider" under the section and that its transactions in Air Brake occurred within a period of six months), and that Crane's theory that "an illegally forced transaction" is not subject to § 16(b) is incorrect as a matter of law. At the least, Standard asserts, Crane is not entitled to summary judgment because, it claims, there are disputed questions of material fact as to the alleged "forced sale."
In the light of these contentions we proceed to treat the issues which they generate.
A. Were there opportunities for speculative abuse?
Section 16(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78p(b)) provides:
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, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months.
Its purposes and effects have been analyzed in a number of significant opinions, most recently in the succinct statement of Judge Kaufman writing for the Court of Appeals of this Circuit in Newmark v. RKO General, Inc. and Frontier Airlines, Inc., 425 F.2d 348, 350-351 (1970):
"Commonly termed a 'crude rule of thumb,' the statute seeks to prevent insiders from realizing profits on securities held for short periods of time. It is not aimed solely at the actuality of evil, or the veritable employment of inside information for purely speculative purposes, but also at potentiality for evil inherent in all insider shortswing trading." (emphasis added).
"To maximize its deterrent effect, the section is drafted in clear, straightforward terms. It provides that whenever a director, officer or owner of ten percent or more of any class of an issuer's securities purchases and sells equity securities of that issuer within a six-month period, he must return any profits he realizes to the issuer. There are no other prerequisites or postulates to liability."
The comprehensive reach of the § 16(b) tabu was earlier characterized by the Court of Appeals as follows:
"In order to insure discouragement of unfair insider short term trading all inside trading within a less-than-six-month period is discouraged. The arbitrary, some might say Draconian, nature of this statute reflects the view of experts who testified at the hearings leading to the passage of the 1934 Act that the use of information by corporate insiders could only be effectively curbed by a law that made it unprofitable for insiders to engage in any short term trading, whether fair or unfair. It might be said that Congress decided in order to throw out the bathwater that the baby had to go too." (emphasis in original). Blau v. Lamb, 363 F.2d 507, 515 (2d Cir. 1966).
In spite of the breadth of this construction of § 16(b) and a reiteration of earlier holdings that the section applied to conversions of securities as well as to cash transactions, the Court nevertheless raised the important question whether § 16(b) could be held to apply to a "transaction . . . which could not possibly serve as a vehicle for any of the abuses at which Section 16(b) was aimed." The answer was that it could not, and this construction necessarily required a preliminary inquiry as to whether the accused transaction could "possibly" fall within the guilty category. On this point the Blau court observed, at 519:
"Congress adopted the sweeping, arbitrary regulatory mechanism embodied in Section 16(b) in order to insure that even the possibility of insider abuse was deterred, but it would seem to follow that in order to avoid 'purposeless harshness' a court should first inquire whether a given transaction could possibly tend to accomplish the practices Section 16(b) was designed to prevent. . . . Frequently this initial inquiry will convince a court that the transaction in question held out at least the possibility of abuse; in such cases Section 16(b)'s regulatory mechanism requires that the section be applied without further inquiry. In some cases, however, this critical inquiry will convince a court that the conversion transaction in question could not possibly have lent itself to insider abuse. In such a case it is not inconsistent with Section 16(b)'s regulatory mechanism to hold that the section does not apply." (emphasis added).
The requirement of a threshold determination was reiterated in Newmark v. RKO General, Inc., ...