The opinion of the court was delivered by: WARD
This is an action for a declaratory judgment pursuant to 28 U.S.C. § 2201. Plaintiffs, Tyco Laboratories, Inc. and its wholly-owned subsidiary, AMBG Corp., (collectively "Tyco") seek a declaration that they are not liable under section 16(b) of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78p(b), for "short swing" profits realized on a sale of defendant Cutler-Hammer, Inc's ("C-H") common stock. Defendant moves pursuant to Rule 12(c), Fed.R.Civ.P., for judgment on the pleadings dismissing Tyco's complaint and entering judgment on its section 16(b) counterclaim. Plaintiffs have cross-moved pursuant to Rules 15(a) and 15(d), Fed.R.Civ.P., to amend and supplement their complaint. For the reasons hereinafter stated, defendant's motion is granted and plaintiffs' cross-motion is denied.
There is no dispute as to the essential facts. Prior to April 7, 1978, the common stock of C-H was registered pursuant to section 12 of the Act and publicly traded on both the New York and Boston Stock Exchanges. During a four-month period beginning in late November 1977 and continuing through March 8, 1978, Tyco purchased 506,400 shares of C-H common stock, representing approximately 81/2% of the total number of C-H shares outstanding for cash in the aggregate amount of $ 17,302,490. On April 7, 1978, Tyco purchased an additional 225,400 shares of C-H common stock in open market brokerage transactions for cash in the amount of $ 8,720,827.50. The shares purchased on April 7, 1978 together with the shares previously purchased, brought Tyco's holdings to 731,800 shares, or approximately 12% of the total number of outstanding C-H shares.
During the four-day period April 10 through April 13, 1978, Koppers Company, Inc. ("Koppers") acquired approximately 21% of the voting stock of C-H. Koppers, a Delaware corporation, is a manufacturing, engineering and construction company many times larger and with substantially greater financial resources than plaintiffs. E. B. Fitzgerald, Chairman of the Board and chief executive officer of C-H, was a director of Koppers.
On April 10, 1978 C-H instituted suit against Tyco in federal court in Wisconsin alleging numerous violations of federal and state law in connection with Tyco's purchases of C-H stock. C-H requested: (1) that the court enjoin Tyco from purchasing any additional C-H shares and from voting or otherwise exercising rights of ownership in the C-H stock previously purchased, and (2) that the court order Tyco to dispose of its C-H shares. C-H obtained a temporary restraining order on April 12, 1978 barring Tyco from acquiring any additional C-H shares. On April 28, 1978 C-H's motion for a preliminary injunction was denied; on the next day, the temporary restraining order C-H had obtained expired.
Between April 10, 1978 and June 9, 1978, Tyco purchased an additional 1,374,100 shares of C-H common stock at a cost of $ 67,537,680. Tyco's purchases through June 9, 1978 aggregated 2,105,900 shares at a total cost of $ 92,560,997.50, inclusive of brokerage commissions. On June 12, 1978, Tyco sold its entire holdings of C-H common stock to Eaton Corporation for cash in the amount of $ 55.00 per share, less a brokerage commission of $ .10 per share, for a total of $ 115,613,910. In connection with this transaction, Eaton agreed that, if it acquired a majority of the outstanding common stock of C-H, it would, so far as possible, cause C-H to sell plaintiffs all of C-H's holdings of Leeds & Northrup Company. This portion of the agreement was never carried out, however, because C-H sold all its holdings of common stock of Leeds & Northrup Company before Eaton acquired a majority of the outstanding common stock of C-H.
On July 6, 1978 C-H's counsel asserted in a letter to plaintiffs that they had violated section 16(b) through their purchase and sale of C-H stock and demanded that they account for their profits in C-H stock during the six-month period from December 12, 1977 through June 12, 1978. Two weeks later, on July 20, 1978, plaintiffs filed the instant action requesting the Court to declare: (1) that they are not liable to C-H for profits realized on the purchase and sale of C-H stock during the six-month period ended June 12, 1978, and (2) that C-H is estopped, because of its prior acts and conduct, from recovering any such profits. Alternatively, Tyco requests the Court to declare: (1) that it is liable to C-H under section 16(b) only for profits realized on the sale of the 1,374,100 shares of C-H stock purchased after April 7, 1978 and (2) that this profit be determined as the excess of $ 75,438,090, the amount realized on the sale of such shares, over $ 67,537,680, the cost of such shares, after deducting all plaintiffs' expenses in purchasing and selling these shares. C-H has counterclaimed requesting that the court dismiss the complaint on the merits and award it the value of plaintiffs' alleged section 16(b) short swing profits and of the agreement with respect to the Leeds & Northrup stock, in an amount to be determined at trial.
The Court will first address plaintiffs' cross-motion to amend and supplement their complaint. Plaintiffs' proposed amended complaint is claimed to allege facts that occurred or were discovered after the original complaint was filed and "some amplification of evidentiary detail" based upon facts purportedly uncovered during discovery.
Although under the terms of Rule 15(a), Fed.R.Civ.P., leave to amend "shall be freely given when justice so requires", Foman v. Davis, 371 U.S. 178, 182, 83 S. Ct. 227, 230, 9 L. Ed. 2d 222 (1962), this does not mean that such amendment should be granted under all circumstances. Where there has been "undue delay, bad faith, or dilatory motive," Foman v. Davis, supra, amendment should be denied. The Court has determined after comparing the proposed amended complaint with the original complaint that plaintiffs could have moved to amend and supplement their complaint in the manner proposed long before now and that granting plaintiffs' motion at this time would not serve the interests of justice. In any event, inasmuch as the new matter in the proposed amended and supplemented complaint relates principally to the issue of estoppel, which will be discussed below, the Court is of the view that plaintiffs will suffer no prejudice through denial of their motion.
In evaluating defendant's Rule 12(c) motion this Court must take as admitted the "well-pleaded material facts alleged in the complaint," Gumer v. Shearson, Hammill & Co., Inc., 516 F.2d 283, 286 (2d Cir. 1974), and draw "all reasonable inferences and intendments from these facts" in favor of the plaintiff. Quality Mercury, Inc. v. Ford Motor Co., 542 F.2d 466, 468 (8th Cir. 1976), cert. denied, 433 U.S. 914, 97 S. Ct. 2986, 53 L. Ed. 2d 1100 (1977), citing National Metropolitan Bank v. United States, 323 U.S. 454, 457, 65 S. Ct. 354, 356, 89 L. Ed. 383 (1945). Moreover, although contested issues of fact should not be resolved upon a Rule 12(c) motion, George C. Frey Ready-Mixed Concrete, Inc. v. Pine Hill Concrete Mix Corp., 554 F.2d 551, 553-54 (2d Cir. 1977), a court need not accept as admitted mere legal conclusions or characterizations contained in the non-movant's pleadings. Diaz v. Ward, 437 F. Supp. 678, 681 (S.D.N.Y.1977); Shade v. Commonwealth of Pa., Dep't. of Transportation, 394 F. Supp. 1237, 1243 (M.D.Pa.1975); 5 C. Wright & A. Miller Federal Practice and Procedure § 1368, pp. 692-93; 2A J. Moore, Federal Practice P 12.15, at 2343; see also S & S Realty Corp. v. Kleer-Vu Industries, Inc., 575 F.2d 1040, 1044 (2d Cir. 1978). Applying these principles to the instant case the Court concludes that judgment on the pleadings in favor of defendant on the issue of liability contained in its counterclaim is warranted.
Section 16(b) of the Act
was originally intended to apply to insider trading within the statutory six-month period in an automatic, almost mechanistic fashion, which came to be known as the "objective approach." As the Supreme Court stated:
"In order to achieve its goals, Congress chose a relatively arbitrary rule capable of easy administration. The objective standard of Section 16(b) imposes strict liability upon substantially all transactions occurring within the statutory time period, regardless of the intent of the insider or the existence of actual speculation. This approach maximized the ability of the rule to eradicate speculative abuses by reducing difficulties in proof. Such arbitrary and sweeping coverage was deemed necessary to insure the optimum prophylactic effect."
Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 422, 92 S. Ct. 596, 599, 30 L. Ed. 2d 575 (1972), quoting Bershad v. McDonough, 428 F.2d 693, 696 (7th Cir. 1970).
However, in response to a series of cases requiring the application of the statute to transactions which were not classic purchases and sales for cash, such as stock conversions, mergers, and stock options, the Supreme Court approved a narrow exception to the generally broad and arbitrary reach of section 16(b). The court held that when a transaction is "unorthodox" and not clearly within the reach of the statute, the opportunity for speculative abuse should be assessed before section 16(b) liability is imposed:
In deciding whether borderline transactions are within the reach of the statute, the courts have come to inquire whether the transaction may serve as a vehicle for the evil which Congress sought to prevent the realization of short-swing profits based upon access to inside information thereby endeavoring to implement ...