Reliance Electric Company v. Emerson Electric Company

PETITIONER: Reliance Electric Company
RESPONDENT: Emerson Electric Company
LOCATION: Circuit Court of Cook County, Juvenile Division

DOCKET NO.: 70-79
DECIDED BY: Burger Court (1972-1975)
LOWER COURT: United States Court of Appeals for the Eighth Circuit

CITATION: 404 US 418 (1972)
ARGUED: Nov 10, 1971 / Nov 11, 1971
DECIDED: Jan 11, 1972

ADVOCATES:
Albert E. Jenner, Jr. - for respondent
Thomas P. Mulligan -
Thomas P. Mulliganm - for petitioner
Walter P. North - for Securities and Exchange Commission, as amicus curiae, by special leave of Court

Facts of the case

Question

Media for Reliance Electric Company v. Emerson Electric Company

Audio Transcription for Oral Argument - November 11, 1971 in Reliance Electric Company v. Emerson Electric Company

Audio Transcription for Oral Argument - November 10, 1971 in Reliance Electric Company v. Emerson Electric Company

Warren E. Burger:

We will hear arguments next in Number 79, Reliance Electric Company against Emerson Electric Company.

Mr. Mulligan you may proceed.

Thomas P. Mulligan:

Mr. Chief Justice and may it please the Court.

This case brings before the Court a question involving Section 16(b) of the Securities Act -- Securities Exchange Act of 1934 which relates to short swing sales transactions involving directors, officers and 10% holders.

We are concerned here with the position of Emerson Electric Company.

The respondent who was what, has been described as a beneficial owner under the statute in that, it was at the times that are relevant in our consideration of this question more than a 10% holder of the common stock of Dodge Manufacturing Company which was subsequently merged into Reliance Electric Company, the petitioner here in.

Section 16(b) of the Securities Exchange Act of 1934, is set out in page 2 of our brief and provides that for the purpose of preventing the unfair use of information which may have been obtained by a beneficial owner or director or officer by a reason of his relationship with the issuer that any profit realized by him from the purchasing sale or sale in purchase within a period of six months, shall be recoverable by the issuer.

There is in 16 (b) an exemption which provides, and it is of significance in this case that the subsection shall not be construed to cover any transaction where the beneficial owner or the officer or director was not such because at the time of the purchase, end of the sale or the sale in purchase of the security involved.

This action comes before the Court by a reason of a declaratory judgment which was initially filed by Emerson against Reliance asking for a declaration of its rights and obligations under Section 16(b) by reason of its, that is Emerson’s ownership of more than 10% of the stock of Dodge.

Briefly, the relevant facts disclosed that on June 16, 1967 pursuant to a tender offer, Emerson purchased 152,282 shares of Dodge stock at $63 a share pursuant to a tender offer.

And by that purchase became the owner of approximately 13.2% of Dodge’s outstanding stock and therefore in our view within the purview of the act.

Mr. Mulligan, is there any suggestion anywhere here that upon or after this acquisitions through tenders, Emerson in fact possessed any insider information?

Thomas P. Mulligan:

There is no information one way or the other in the record Your Honor as to whether they did or did not.

It is our view as I will touch on, more fully later that within the purview of the statute once they become an insider by reason of the accusation of more than 10% they are presumed and irrebuttably presumed to have inside information and to have the opportunity to exploit that inside information in whatever way they see fit.

Warren E. Burger:

That is the purport of the statute?

Thomas P. Mulligan:

Yes Your Honor.

Now at the time that Emerson made its purchase and prior there to, it knew two things.

It knew first of all that Dodge and Reliance had entered into a merger agreement.

It also knew that its own management had authorized the submission of a merger proposal to Dodge.

This letter in fact however was not known on June 16 when Emerson made its purchase by the shareholders of Dodge nor by the public generally.

And it was not known until after Dodge or after Emerson had purchased the Dodge stock and indicated that it was going to solicit proxies to oppose the merger between Reliance and Dodge which matter was to come before a shareholders meeting of Dodge on August 22, 1967.

Within a few days after Dodge or Emerson had acquired its 13.2% of Dodge, it received a letter from its counsel, dated June 26, 1967 in which he outlined alternatives to a proxy fight with Dodge.

And principally he told them how he thought they could go about avoiding profit on the disposition of their holdings in Dodge principally by a defensive plan which would involve selling just enough of the stock to be below 10% and then the disposition of the balance so as to avoid the impact of 16 (b) and preserve the profit on the second sale.

Now, in point of fact in the proxy fight that did ensue Emerson lost and Dodge was merged into Reliance.

Immediately upon the completion of the meeting at which the shareholders of Dodge approved the merger, August 22, immediately thereafter Emerson undertook the deliberate intentional disposition of its stock as rapidly as it could pursuant to the plan which had been outlined by its attorney a couple of months before.

On August 28, 1967 in a sale to Goldman, Sachs & Company, it disposed of 37,000 shares of Dodge stock which had the effect of reducing its holdings in Dodge to just below 10%, 9.96 to be exact.

And almost simultaneously with that disposition it entered into negotiations whereby it sold the remaining 9.96 shares to Dodge which sale was completed in early September of 1967.

Both of these transactions involved sales at an amount considerably an excess of what Emerson had paid for the stock so that the net result of what Emerson had done pursuant to a plan which had been in its mind while it was an insider was the disposition of its entire holdings in Dodge at within, as I said three months had a gross profit including dividends that were declared of an excess of $900,000.

Mr. Mulligan, you said that it entered into negotiations with Dodge, let me get the implications of that statement.

Am I mistaken in my impression that it was Dodge that approached Emerson?