The opinion of the court was delivered by: KNAPP
Plaintiff, a stockholder of Arlen Realty and Development Corporation (Arlen), brings this derivative suit against four Arlen directors, Cohen, Levien, Rose and Weissman, to recover shortswing profits under § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p. Both sides move for summary judgment on the question of § 16(b) liability, having stipulated pursuant to F.R.Civ.P. 56 (c) to sever the issue of damages.
The following facts are undisputed:
Arlen, the corporation here involved, was formed to be the vehicle for the integration of two previously independent enterprises. The first of these was a partnership known as the "Arlen Group", which was engaged in real estate development. Defendants Cohen, Levien and Rose were members of this partnership. The second of these enterprises was Spartans Industries, Inc., whose business was the operation of retail stores and shopping centers. Defendant Weissman was an officer and director of this corporation.
The first step in the planned integration occurred in late 1970, when the members of the "Arlen Group" formed the Arlen Corporation, and defendants Cohen, Levien and Rose became directors of that corporation. The corporation did not then acquire the business of the "Arlen Group" or any assets whatever. On February 26, 1971, the Arlen Group partners transferred the assets of the partnership to the Arlen Corporation in return for shares of its capital stock. On the same day a merger between Spartans and Arlen was completed, and defendant Weissman became a director of Arlen. Thus, all four defendants were directors of Arlen on February 26, 1971.
On that same day, as a result of the foregoing transactions, the four defendants acquired shares of Arlen capital stock in the following amounts; Defendant Cohen, 4,968,220 shares; defendant Levien, 2,365,220 shares, defendant Rose, 355,971 shares; and defendant Weissman, 100,849 shares.
Three days later, on March 1st, defendants Cohen, Levien and Rose privately sold for cash and promissory notes to one Emanuel Klimpl, a former director of Arlen, 38,000, 19,000 and 3,000 shares, respectively, of Arlen common stock.
On the same day, defendant Cohen transferred 250,000 shares of Arlen common to his wife as trustee of five trusts established for their children. It is stipulated that this transfer was for value, and at oral argument it was stated that such "value" consisted of the trustee's promissory notes and that the trusts held no other assets.
On May 10, 1971, defendant Weissman sold 500 shares of Arlen common on the New York Stock Exchange.
Plaintiff claims that each of the above-mentioned transactions came within the purview of § 16(b), and that the Arlen corporation is therefore entitled to recover from each defendant any profit he may have made therefrom. Each defendant concedes he is an "insider" within the meaning of the section. However, defendants severally take the following positions:
(a) Defendants Levien and Rose concede that their acquisitions of the stock as a result of the February 26th integration, were ["purchases"] within the meaning of § 16(b), but contend that their subsequent sales to another "insider" should not be deemed "[sales]" within that section.
(b) Defendant Cohen, similarly conceding that his acquisition of Arlen stock was a "purchase", takes the identical position with respect to his sale to the insider Klimpl. In addition, he contends that his transfer of the stock to a trustee for the benefit of his children should not -- because of the nature of the transferee -- be deemed such a "sale".
(c) Defendant Weissman, conceding that his sale of Arlen stock was covered by the statute, contends that his acquisition of the stock was not a "purchase" within its coverage. In this connection plaintiff does not claim that defendant Weissman had a controlling voice in either Spartans or Arlen at the time of the merger, or that he could have prevented the merger. Other facts relevant to Weissman's acquisition of the stock will be subsequently stated.
For the reasons hereinafter stated, I accept defendant Weissman's contentions, but reject those ...