The opinion of the court was delivered by: CONNER
Plaintiff Piano Remittance Corporation ("PMC") brought this shareholder's derivative suit on behalf of Walt Disney Productions Corporation ("Disney") alleging that defendant Reliance Financial Services Corporation ("Reliance") is liable to Disney under § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b) (1982), for profits it made on short-swing trading in Disney stock. Section 16(b) provides that a corporation can require certain inside traders, statutorily defined as the corporation's directors and officers and beneficial owners of more than 10% of the corporation's outstanding stock, to disgorge the profits they realize on any purchase and sale of the corporation's securities within a six-month period. Plaintiff alleges that Reliance is liable to Disney for the profits it made when, as a beneficial owner of more than 10% of Disney's outstanding stock, it purchased 748,000 Disney shares and sold them less than six months later.
Section 16(b) provides that in order for a beneficial owner to be subject to the statute's proscriptions, he must have been a 10% shareholder "both at the time of the purchase and sale . . . of the security involved." Reliance has moved to dismiss plaintiff's complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure on the ground that it was not a 10% Disney shareholder at the time of the purchase of the stock at issue here. For the reasons stated below, Reliance's motion is denied.
For the purposes of this motion, the allegations of PMC's complaint must be taken as true. Cruz v. Beto, 405 U.S. 319, 322, 92 S. Ct. 1079, 1081, 31 L. Ed. 2d 263 (1972); Joyce v. Joyce Beverages, Inc., 571 F.2d 703, 706 (2d Cir.), cert. denied, 437 U.S. 905, 98 S. Ct. 3092, 57 L. Ed. 2d 1135 (1978). Accordingly, these are the relevant facts:
In April 1984, Reliance owned 3,198,233 Disney shares, or approximately 9.3% of Disney's outstanding stock. Complaint P5(b). Sometime thereafter, Reliance instructed its broker, Salomon Brothers, to purchase an additional 1,000,000 Disney shares for its account. Id. P5(c). Salomon Brothers purchased those shares for Reliance from several sources over several days, and transferred formal title to Reliance on May 1, 1984 when the 1,000,000 shares crossed the tape of the New York Stock Exchange at $65.50 per share. Id. With this purchase, Reliance owned approximately 12.2% of Disney's outstanding stock. Id. P6(a). On June 11, 1984, Reliance sold the 1,000,000 shares it had purchased to Disney itself for $70.83 per share, thereby making a profit of at least $5.20 per share. Id. P7.
Plaintiff alleges that Reliance reached the 10% shareholder threshold as soon as Salomon Brothers purchased 252,000 shares for its account, and therefore that Reliance is subject to § 16(b) liability for the 748,000 shares it purchased after that point. Id. PP5(d), 8(a), 9. Reliance argues, however, that its block purchase was a single transaction, and that it cannot be subject to § 16(b) liability since it was only a 9.3% shareholder at the time it bought the entire 1,000,000 shares.
Before turning to the merits of this motion, I take a moment to note that since this is a motion to dismiss, my task is a limited one. My role at this stage of the litigation is not to assess the strength or weakness of plaintiff's case, but only to determine whether plaintiff is entitled to offer evidence to support its claim. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S. Ct. 1683, 1686, 40 L. Ed. 2d 90 (1974). I may not dismiss the complaint unless it appears beyond doubt that plaintiff could prove no set of facts in support of its claim that would entitle it to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S. Ct. 99, 101-02, 2 L. Ed. 2d 80 (1957).
The parties agree that the resolution of this motion lies in an appropriate interpretation of the Supreme Court's decision in Foremost-McKesson, Inc. v. Provident Sec. Co., 423 U.S. 232, 96 S. Ct. 508, 46 L. Ed. 2d 464 (1976). Of course, they disagree as to what that interpretation should be.
Briefly stated, the facts of Foremost are as follows: Provident Securities Company ("Provident") was a holding company that decided to dissolve and liquidate its assets. After extensive negotiations, Foremost-McKesson, Inc. ("Foremost") agreed to buy Provident's assets in part with cash and in part with its own securities. At the closing of their deal, Foremost delivered to Provident the cash and a debenture which was immediately convertible into more than 10% of Foremost's outstanding common stock. Less than six months after the closing, Provident sold the debenture to a group of underwriters, distributed the proceeds to its shareholders, and dissolved. Realizing that Foremost might sue it to recover any profits realized on the sale of the debenture to the underwriters, Provident sued for a declaration that it was not liable to Foremost under § 16(b). The Court of Appeals for the Ninth Circuit held that Provident was not liable on the ground that it was not a beneficial owner of 10% of Foremost's outstanding stock "at the time of the purchase." Provident Sec. Co. v. Foremost-McKesson, Inc., 506 F.2d 601 (9th cir. 1974), aff'd, 423 U.S. 232, 96 S. Ct. 508, 46 L. Ed. 2d 464 (1976). The court rules that in a purchase-sale sequence the phrase "at the time of the purchase" "must be construed to mean prior to the time when the decision to purchase is made." Id. at 614. Since Provident was not a 10% owner at the time it decided to acquire the Foremost securities, the court concluded that it was not subject to § 16(b).
The Supreme Court affirmed the court of appeals, holding that "in a purchase-sale sequence, a beneficial owner must account for profits only if he was a beneficial owner 'before the purchase.'" 423 U.S. at 250, 96 S. Ct. at 519. In reaching this conclusion, the Court considered the purpose and legislative history of § 16(b). The Court explained that Congress was concerned that insiders sometimes have access to information that is not available to the rest of the investing public, and that by trading on this information, insiders can reap profits at the expense of less-knowledgeable investors. Id. at 243, 96 S. Ct. 515-16. Congress believed that the potential for insider abuse was particularly great in the area of short-term speculative trading, and in enacting § 16(b), it attempted to curb this evil by removing all profitmaking incentive. Id. As the Court explained, Congress did this by (1) creating a conclusive presumption that all officers, directors, and beneficial owners of more than 10% of a corporation's outstanding stock have access to inside information, and (2) enacting a "flat rule" that a corporation could recover the profits these insiders make on any purchase and sale of the corporation's stock within a six-month period. Id. at 243-44, 96 S. Ct. at 515-16.
After examining the general purposes of the statute, the Court turned to an analysis of the phrase "at the time of the purchase." It concluded, for two principal reasons, that this phrase should be construed to mean that a beneficial owner is subject to § 16(b) liability only if he was a 10% owner before the purchase in question. First, the Court noted that in previous drafts, the statute explicitly limited liability to beneficial owners who had achieved that status before the purchase at issue. Id. at 248, 96 S. Ct. at 518. Second, the Court explained that while congress believed that all corporate officers and directors could be presumed to have access to inside information, it believed that the only shareholders who could be so presumed were those who owned more than 10% of the corporation's stock. Since it was speculation on inside information that Congress sought to curb, and since Congress was unwilling to presume that a beneficial owner had inside information until he was a 10% owner, the Court concluded ...