United States District Court, S.D. New York
June 22, 2004.
STEPHEN J. DILORENZO, derivatively, on behalf of SMITHFIELD FOODS, INC., Plaintiff,
WENDELL H. MURPHY, et al., Defendants.
The opinion of the court was delivered by: JED RAKOFF, District Judge
Pursuant to Section 16(b) of the Securities Exchange Act of
1934, 15 U.S.C. § 78p(b), plaintiff Stephen J. DiLorenzo brings
this derivative action on behalf of Smithfield Foods, Inc.
("Smithfield") seeking disgorgement of "short-swing" profits from
the defendants Wendell H. Murphy, Harry D. Murphy, Joyce Murphy
Minchew, Wendell H. Murphy, Jr., Wendy Murphy Crumpler, Stratton
K. Murphy, Marc D. Murphy, and Angela Norman Brown. The
defendants move, inter alia, for summary judgment in their
The facts pertinent to the summary judgment motion are
undisputed. On January 28, 2000, the defendants sold a number of
businesses (the "Acquisition Businesses") to Smithfield in
exchange for Smithfield common stock. See Affidavit of Brewer
Ezell sworn to January 29, 2004 ("Ezell Aff.") at ¶ 2. The
contract of sale (the "Acquisition Agreement") provided that the
number of Smithfield shares issued to the defendants as
consideration for the sale of the Acquisition Businesses would
bear a fixed relation to the financial performance of the
Acquisition Businesses, which would be determined, in turn, by an
accounting to be made in accordance with certain financial
criteria specified in the Acquisition Agreement. See Ezell Aff.
Ex. A ("Acquisition Agreement") at § 2.4. Thus, as a result of
the accounting, a final purchase price would be determined, which
would then be translated into a fixed quantity of Smithfield
common stock based on the closing price of that stock on January
28, 2000. Id.
In effectuation of this arrangement, it was further agreed that
on or about January 28, 2000, Smithfield would issue to the
defendants some 11,054,396 shares of Smithfield common stock, of
which 10,054,396 shares would be transferred immediately to the
defendants and the remaining 1,000,000 shares would be placed in
escrow. Ezzell Aff. ¶¶ 3-4. Depending on the results of the
accounting, the defendants would (a) receive some or all of the
escrow shares, (b) receive additional shares ("earn out" shares)
in addition to the escrow shares, or (c) be required to return
some of the 10,054,396, shares they had received. See
Acquisition Agreement at § 2.4.
As it happened, the accounting proceeded slowly. But on or
about July 16, 2001, finding that certain financial criteria had
been met, Smithfield not only relinquished its claim to the
1,000,000 shares placed in escrow (which were thereupon
transferred to the defendants), but also issued to the defendants
223,436 earn-out shares. Affidavit of James I. Rim, sworn to
January 30, 2004 ("Rim Aff.") at Ex. D (Schedule 13D dated August
30, 2001) at 12.*fn1 Thereafter, as a result of still
further steps in the accounting, another 129,100 earn-out shares
were issued to the defendants on July 22, 2003. See Rim Aff.
Ex. G (Amendment 2 to Schedule 13D dated October 23, 2003) at 19.
Meanwhile, however, the defendants also sold certain of their
Smithfield shares. Specifically, between September 25, 2001 and
November 7, 2001 i.e., fewer than six months after the July
2001 transfer of the escrow shares and issuance of the first
group of earn-out shares the defendants sold 1,960,150 shares
of Smithfield stock at a substantial profit. Thereafter, between
March 14, 2003 and June 6, 2003 i.e., fewer than six months
prior to receiving the July 2003 earn-out shares the defendants
sold 129,100 shares of Smithfield stock, again at a substantial
profit.*fn2 Plaintiff claims that the profits from the sales
of at least 1,352,536 of these 2,089,250 shares i.e., the
total corresponding to the shares transferred in July 2001, and
July 2003 respectively should be disgorged as violating section
16(b)'s prohibition on "short-swing" profits. Specifically,
section 16(b) requires "disgorgement to the company of any profit
derived from the matching of any purchase and any sale of an
`equity security' . . . within a six-month period by a statutory
insider,*fn3 irrespective of intent." See Gwozdzinsky v.
Zell/Chilmark Fund L.P., 156 F.3d 305, 308 (2d Cir. 1998).
However, if all the shares transferred to the defendants
pursuant to the Acquisition Agreement are deemed "purchased" as
of the date of that Agreement, i.e., January 28, 2000,
defendants are free of any liability under section 16(b), as no
sales occurred within six months of that date. To be sure, while
the escrow shares were issued to defendants on or about January
28, 2000, they were subject to escrow restrictions until July
2001; and the earn-out shares were not even issued until July
2001 and July 2003. Section 16(b), however, speaks not in terms
of issuance or transfer but rather in terms of the terms of
purchase. And there is no question that when defendants sold
their companies on January 28, 2000, they did so pursuant to an
agreement that said they would receive the purchase price in
Smithfield stock valued as of that date, the precise quantity of
which would be determined by a formalized accounting. It thus
seems plain that the actual purchase of the stock occurred on
January 28, 2000.
Such an interpretation is also consonant with the purpose of
Section 16(b), which is to discourage the speculative use of
inside information by corporate insiders.*fn4 See, e.g.,
Feder v. Frost, 220 F.3d 29, 32 (2d Cir. 2000); Magma Power
Co. v. Dow Chem. Co., 136 F.3d 316, 320 (2d Cir. 1998);
Provident Securities Co. v. Foremost-McKesson, Inc.,
506 F.2d 601, 604 (9th Cir. 1974). On January 28, 2000, the defendants
incurred an "irrevocable liability to take and pay for the
stock," see Blau v. Ogsbury, 210 F.2d 426, 427 (2d Cir.
1954), and no longer had "control over the transaction in any way
that could be turned to speculative advantage." Prager v.
Sylvestri, 449 F. Supp. 425, 432-33 (S.D.N.Y. 1978). While the
ultimate number of shares to be transferred was not then known,
that number was dictated by financial formulae and criteria set
forth in the Acquisition Agreement and, as plaintiff concedes,
could not be modified by the defendants.*fn5
Moreover, the Acquisition Agreement makes clear that the
parties viewed January 28, 2000 as the effective date for the
entire transaction, not solely for those shares actually then
transferred to the defendants: "all of the transactions
contemplated by [the Acquisition] Agreement shall be deemed for
all purposes, including (i) tax purposes and (ii) the transfer of
the benefits and burdens of ownership, including income and loss,
to have occurred on the Effective Date." Acquisition Agreement at
Accordingly, defendants' motion for summary judgment is hereby
granted and the complaint dismissed. Clerk to enter judgment.