The opinion of the court was delivered by: CONNER
This is an action under § 16(b) of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78p(b),
to recover short-swing profits made by defendant General Cinema Corporation ("General Cinema"). Plaintiff Heublein, Inc. ("Heublein") alleges that defendant earned approximately $74 million in profits from its trading in the stock of Heublein, Inc. ("Old Heublein"), of which $30 million is attributable to transactions in violation of § 16(b). The case presents the question whether a § 16(b) "sale" occurs when a corporation responds to the perceived threat posed by substantial acquisitions of its stock by a single shareholder by arranging a merger with a third party, and the shareholder then exchanges its stock for stock in the surviving company. This issue is currently of great moment because the facts underlying the instant action exemplify one of the most widely publicized, successful and presently popular strategies for achieving quick and substantial returns from a corporate stock investment.
The case is currently before the Court on defendant's motion to dismiss pursuant to Rule 12(b)(6), F.R.Civ.P., or, alternatively, for summary judgment pursuant to Rule 56, F.R.Civ.P. For the reasons stated below, General Cinema's motion for summary judgment dismissing the complaint is granted.
On November 18, 1981, General Cinema began purchasing the common stock of plaintiff's predecessor, Old Heublein. By January 22, 1982, defendant had acquired 1,070,000 shares, or just under 5% of the common shares then outstanding. General Cinema continued its purchases, and in a Schedule 13D statement filed with the Securities and Exchange Commission ("SEC") on February 3, 1982, defendant revealed that it was the beneficial owner of 2,101,000 shares, or approximately 9.7% of Old Heublein's outstanding common stock.
In response to the public disclosure of this rapid accumulation, Old Heublein, on February 19, 1982, filed suit in this Court against General Cinema alleging, inter alia, that the Schedule 13D statement was false, misleading and failed to disclose that General Cinema's true intent in purchasing Old Heublein stock was to acquire control of Old Heublein. See Complaint in Heublein, Inc. v. General Cinema Corp., 82 Civ. 1062 (MJL) (S.D.N.Y. 1982). General Cinema nevertheless continued to acquire Old Heublein common stock, and by March 15, 1982 it owned 2,266,500 shares, comprising approximately 10.4% of the total stock then outstanding.
Further purchases through the beginning of May 1982 boosted General Cinema's holdings to 3,530,200 shares, or roughly 16.2% of the shares outstanding.
On April 29, 1982, Hicks Waldron, President and Chief Executive Officer of both Old Heublein and Heublein, approached executives at General Cinema and asked whether they would consider the possibility of an asset swap as a means of resolving their "dispute" without further litigation. Waldron proposed an exchange of the Old Heublein stock owned by General Cinema for part of Old Heublein's wine business. During the course of discussions on this and other proposals, Old Heublein provided General Cinema with information not available to the general public concerning Old Heublein's wine business. The negotiations broke off on May 10, and on May 11 General Cinema again commenced purchasing Old Heublein stock. Old Heublein, however, continued to make further overtures to defendant in an effort to repurchase its stock, all of which approaches were rejected by General Cinema.
Additional purchases between May 11 and May 26 brought General Cinema's holdings in Old Heublein common stock to 4,092,900 shares, or approximately 18.9% of the total then outstanding. This total represented an investment by General Cinema of more than $157 million. On May 28, General Cinema filed an amendment to its Schedule 13D statement reflecting its 18.9% ownership and stating that it had no present intention to purchase any additional shares. Further efforts at this point by Old Heublein to negotiate either a standstill or a buyback agreement with General Cinema proved unsuccessful.
On July 9, 1982, Old Heublein commenced discussions with R.J. Reynolds Industries, Inc. ("Reynolds") concerning a possible merger of their two businesses. Following those talks, on July 29, the boards of directors of Reynolds, R.J. Reynolds Tobacco Company ("Reynolds Tobacco"), a wholly-owned subsidiary of Reynolds, and Old Heublein approved such a merger. The transaction authorized by the respective boards included a tender offer by Reynolds for 11,350,000 shares, or approximately 52%, of Old Heublein's outstanding common stock, at a price of $63 per share in cash, and a subsequent merger of Old Heublein and Reynolds Tobacco by the exchange of the remaining Old Heublein shares for Reynolds common and preferred stock.
The Reynolds tender offer became effective on July 30 and was successfully completed on August 20, 1982. At a special meeting of Old Heublein shareholders held on October 12, 1982, the merger of Old Heublein and Reynolds Tobacco was approved despite the fact that General Cinema voted its 4,092,900 shares against the merger. That same day, pursuant to the terms of the merger, the 4,092,900 shares of Old Heublein stock owned by General Cinema were exchanged for Reynolds stock at an average price of $56.83 per share of Old Heublein stock.
The legal contentions of the parties can be clearly and succinctly stated. Plaintiff alleges that the exchange by General Cinema of its Old Heublein shares for Reynolds shares on October 12 was a "sale" of an equity security within the meaning of § 16(b) of the Act. Because General Cinema was the beneficial owner of greater than 10% of Old Heublein's outstanding common stock at all times between March 15, 1982 and October 12, 1982, plaintiff asserts that all profits earned by General Cinema and attributable to shares purchased after April 12, 1982 constitute short-swing profits by an insider and thus are recoverable under § 16(b) by Heublein as successor in interest to Old Heublein.
Defendant does not dispute the foregoing facts
but merely argues that the exchange of stock on October 12, 1982 pursuant to the merger was not a "sale." Thus, General Cinema contends that its transactions do not come within the six-month limitation of § 16(b). The bounty riding on the resolution of this issue is substantial. If plaintiff is correct in its assessment of defendant's exchange of stock, it will be entitled to recover approximately $30 million of the nearly $74 million in profits realized by General Cinema on its $157 million investment in Old Heublein common stock. If not, then General Cinema will be permitted to carry away all the spoils of the expedition.
The starting point for the Court's analysis is the decision of the Supreme Court in Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582, 36 L. Ed. 2d 503, 93 S. Ct. 1736 (1973). In Kern County, the Court adopted a "pragmatic approach" to questions of § 16(b) liability in cases involving unorthodox transactions. See id. at 594-95; Lane Bryant, Inc. v. Hatleigh Corp., 517 F. Supp. 1196, 1200 (S.D.N.Y. 1981). Under this approach, a court determines whether a borderline transaction, i.e., a transaction not ordinarily thought of as a sale or purchase but arguably within the broad statutory definition, comes within the reach of § 16(b) by inquiring "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." 411 U.S. at 594 (footnote omitted). A court may undertake this flexible analysis, however, only in the limited instances where an ambiguous transaction is involved. See Lewis v. Varnes, 505 F.2d 785, 789 (2d Cir. 1975). In all other situations, § 16(b) imposes an objective standard of strict liability for all transactions occurring within the statutory time limits. See Reliance Electric Co. v. Emerson Electric Co., 404 U.S. 418, 422, 30 L. Ed. 2d 575, 92 S. Ct. 596 (1972).
Using a pragmatic analysis, the Court ruled in Kern County that when the target of a tender offer defends itself by merging into a third company and the tender offeror then exchanges his stock for stock of the surviving company, the exchange is not a § 16(b) "sale." Id. at 600; see also id. at 584. In that case, the defendant, Occidental, after unsuccessfully seeking to merge with Old Kern, the predecessor of the plaintiff, first made a tender offer for 500,000 shares, or more than 10% of the outstanding shares, of Old Kern, and then extended its offer to seek an additional 500,000 shares. Old Kern's management responded to the original offer by sending a letter to its shareholders urging them not to tender their shares. When Occidental extended its offer, the president of Old Kern sent a telegram to all shareholders, again advising against tender, and also undertook merger discussions with ...