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

  • Oral Argument – November 11, 1971
  • 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?

    Thomas P. Mulligan:

    You are absolutely correct Mr. Justice, and what I meant to say was that negotiations did — you are forward but you are absolutely correct.

    They were initiated indeed by Reliance on behalf of Dodge and those negotiations did result in this sale.

    The negotiations however which took place were precisely of a nature which counsel for Emerson had anticipated because in his letter advising Emerson as to this defensive plan, he had contemplated the very things that did happen and suggested that it might be one of the ways of doing it and he issued some precautionary instructions with respect thereto.

    I suppose it is a natural thing to get rid of that stock after it lost the title for the Dodge, is it not?

    Thomas P. Mulligan:

    Well, I am sure it was a natural thing for them to want to get rid of it at a profit as soon as they could and that is precisely what they did.

    And it is our position that having undertaken the position of becoming a statutory fiduciary which is what this law does.

    That they were not free to dispose of that stock within the period of six months and keep the profit where they did it pursuant to a plan made at the time when they were an insider.

    And indeed —

    Warren E. Burger:

    Do you make a distinction between a decision and the plan where you juxtapose the two statements, the Eighth Circuit’s evaluation against the statement from the brief, I am not sure.

    I see these two necessarily in such a complete conflict as you do.

    Thomas P. Mulligan:

    It would appear to us Your Honor that what they did was to draw up a plan which they then decided as soon as it was obvious that they and not that — that they had lost and had not won the merger —

    Warren E. Burger:

    So they draw up plan, you mean they drew up something in writing?

    Thomas P. Mulligan:

    No Your Honor.

    I think this was totally within their own mind.

    This was —

    Warren E. Burger:

    Well, then it is not drawing up the plan, is it?

    Thomas P. Mulligan:

    It is drawing up in the sense that what they in fact did was precisely what the lawyer had suggested to them in what I would call the defensive plan as an alternative to a proxy contest.

    And so that when they sold they were in effect carrying out what had been planned as an alternative defensive way of avoiding the impact of Section 16(b) and thus keeping substantially all of the profit on the sale of the Dodge stock.

    And indeed in the trial in the District Court based upon the evidence that was before him, he made certain findings of fact which are in the record and which are of significance.

    He found first of all that while it was a beneficial owner, Emerson determined to dispose of its entire holdings so as to avoid Section 16(b) to the extent possible with respect to the profits that would be realized in such disposition.

    He held secondly and this is a very significant one that the first sale which Dodge — which Emerson made of 37,000 shares to Goldman, Sachs was motivated solely by Emerson’s desire to reduce its holdings under 10% immediately prior to disposing of the balance.

    And finally, he said that his finding was that these two sales were related parts of a single plan of disposition, the substance of which overlooking the form was to dispose of Emerson’s entire holdings and as a consequence he held that the second sale, the 115,282 shares also fell within the act and was not immune from the act by reason of the exemptive provision to which I made reference a moment ago.

    Warren E. Burger:

    So that Judge Reagan is finding then was directly opposed to advise of counsel both for Reliance and for Emerson or his conclusion.

    Thomas P. Mulligan:

    His ultimate legal conclusion.

    Yes Your Honor, the conclusion which he reached based on these findings which he made was contrary to the opinion of Emerson and it was contrary to a concurrence by Reliance with this exception Your Honor, that in every instance so far as I am aware in which Reliance had concurred in that opinion, it reserved the right to take whatever view was necessary if shareholders raised any question and if any further developments in the law or the facts should dictate otherwise.

    And in point of fact, we do have a very significant change in the facts which was not known to Reliance at the time it expressed the views to which you make reference.

    In that it had no knowledge of the letter of Emerson’s counsel and therefore no knowledge of the plan as I call it of disposition arrived that while Emerson was an insider.

    The Eighth Circuit on —

    Warren E. Burger:

    I do not think Judge Reagan used the term plan anywhere, did he or did he?

    I noticed the one, the coded material you — well, that is the Eighth Circuit.

    Warren E. Burger:

    It determined, it is the Eighth Circuit that you have used, determine rather than planned.

    Thomas P. Mulligan:

    Yes Your Honor, I am on page 164 of the record.

    Judge Reagan in his opinion said looking through form to discern substance, we hold that in truth and in fact, the two sale transactions were related parts of a single plan devised by Emerson to dispose of all of its Dodge Stock and so on.

    Now, when the case got to the Eighth Circuit, an interlocutory appeal by Emerson, the fact is that the Eighth Circuit accepted the findings of the fact by the District Court but held that notwithstanding that acceptance of those facts it was compelled a whole as a matter of law that Section 16(b) did not apply to the second sale because having reduced its holdings to 9.96 it was unfree to do what it wished.

    And in our view what the problem that the Appellate Court had was in feeling that it was obligated to restrict its view of the case to ordinary commercial concepts without a clear and full recognition of the prophylactic effect that this statute was intended to have and without a full appreciation of the liberality of interpretation which was necessary in order to effectuate the purposes of this statute.

    It was for that reason that we ask this Court by a way of a petition for certiorari to review the Eighth Circuit’s approval, of a technique which it seems to us permits an insider at a time when he is an insider under the statute to shape his transactions so as to insulate from recovery a substantial portion of the profit which he has realized on profits, on purchases and sales within the six months period.

    Warren E. Burger:

    I do not recall that that dates, Mr. Mulligan, how much longer would they have had to wait to get out from under your view of the statute?

    Thomas P. Mulligan:

    A little over three months Your Honor.

    They did, their transactions were accomplished in less than three months, statutory period of six months.

    Now, the interesting thing in analyzing the Eighth Circuit’s opinion is that it appears that the Eighth Circuit had no difficulty at all in holding that Emerson was liable with respect to its first sale and the clear thrust of the Eighth Circuit’s opinion is that if Emerson had sold the entire 13.2% of its holdings at one time, there could have — there would have been 16 (b) liability and Reliance would have had a right to recover all of the profits.

    Difficulty that the Eighth Circuit had was handling the problem of what you do where they divided up to accomplish exactly the same result but in two sales followed in rapid succession.

    Warren E. Burger:

    That often happens in the application of the taxing statutes, does it not?

    Thomas P. Mulligan:

    I understand –(Voice Overlap)

    Warren E. Burger:

    –of the ways doing the same thing will produce very, very different result.

    Thomas P. Mulligan:

    Yes Your Honor and in situations where it appears to the Court that the sole purpose of steps taken by a tax payer was simply tax avoidance having no real business purposes.

    It is my understanding and this is illustrated specially by this Court’s decision in Gregory versus Helvering that the Court will look through the forum and get to the substance of the transaction and if the substance does not have any real meaning other than tax avoidance then the Court will not permit the tax payer to accomplish what he set out to do.

    And similarly here —

    Suppose in a capital gain or loss situation, purpose for waiting beyond the six months period results in tax savings rather than somewhat two days before the purposes there.

    Thomas P. Mulligan:

    No question about it and in this case had Emerson waited six months the same purpose for waiting would have given them immunity.

    It is the problem as we see it here is that what Emerson did was to make a decision at a time when Congress by law said, you are a statutory fiduciary.

    You are presumed to have inside information.

    You are not permitted to show that you are innocent and did not have it and therefore when you, Emerson, made a decision at the time when there is a presumption of inside knowledge, it is fair to assume that that decision made by Emerson under those circumstances was one dictated by the accessibility of inside information to it.

    And therefore it, Emerson, was exploiting an opportunity not available to outsiders but available only to it by reason of its insider status.

    Incidentally is Dodge stock listed or not?

    Thomas P. Mulligan:

    Dodge has since been merged into Reliance and it is —

    Well, was it listed at the time (Voice Overlap)

    Thomas P. Mulligan:

    Oh! Yes, it was.

    It was, yes Your Honor.

    I suppose that Emerson was not in the position to take an indemnity from Dodge in case it got stock for this profit.

    Thomas P. Mulligan:

    I do not know whether it was or not Your Honor.

    Thomas P. Mulligan:

    I know that there was no such discussion between the parties.

    Now, the point I was making, Your Honors was that if Emerson had sold the entire amount in one sale it would have been caught for the profit.

    And this is because when you review the legislative history of this act it is obvious that what Congress was aiming at or abuses by directors, by officers and by shareholders who were profiting in the short swing speculative trading through inside information or through manipulative practices.

    And the Courts in construing Section 16(b) have recognized this Congressional purpose and the language of the Courts indicates that Section 16(b) is to be construed liberally in favor of the corporation, the issue where that is and strictly against the shareholder, Emerson in this case.

    The Courts have used such language as thorough going, that all profits shall be squeezed out of the transaction that the purpose of the law is to set up standards so high as to avoid any sort of conflict between the selfish interest of the insider and the faithful performance of his duties.

    Warren E. Burger:

    What could be your view Mr. Mulligan if the record showed that a sale of this 9.6, the bulk of these securities was made six months and one day rather than approximately three months and that this was pursuant to resolution of the Board Of Directors to sell it within 24 hours after the six months period had expired?

    Thomas P. Mulligan:

    I would not have the slightest difficulty in Mr. Chief Justice in holding that that they had met the statutory requirement of holding it for six months and they would be immune.

    Warren E. Burger:

    But is there really all that much difference between that kind of predetermined plan, decision on six months and one day and cutting the holdings down to something less than 10%, if each one of them in avoidance of the impact of the statute or at least the motivation.

    We do not know whether the result is. The motivation in each case is to avoid the impact of the statute, is it not?

    Thomas P. Mulligan:

    Well, yes it could be.

    In each case it could be except that in the case of the person who waits six months and one day.

    He is complying with what the statute has set up.

    He is permitted to do that.

    Warren E. Burger:

    Even though he has actual inside information?

    Thomas P. Mulligan:

    Yes, indeed.

    No matter what information he has, if he waits for that period of time that is the period of time Congress has set just as he can buy 9% of the stock and preclude himself from being an insider.

    But in the case of the person who, while he is an insider decides what he is going to do within the six months period in order to circumvent that requirement, that requirement being the requirement or the intention of Congress and the courts to avoid permitting insiders to speculate within the six months period.

    When he makes a decision during that period, it is fair for the Court to say, he has made that decision on the basis of inside information.

    He is therefore taking advantage of that position and he has an advantage over outsiders.

    The whole purpose of the —

    Warren E. Burger:

    Is that not equally true of the six months and one day sale?

    Thomas P. Mulligan:

    Only because Congress has said that that is what he can do.

    Warren E. Burger:

    But Congress has also said 10% not 9.6.

    Thomas P. Mulligan:

    Yes Your Honor.

    But the difficulty I have as I say is that he can buy up to 9.6 and prevent himself from becoming — coming under the statute.

    But that once he comes under the statute and if you assume as we must that he then has inside information and you do not hold him to the second sale you are thereby — it seems to us, as Emerson did here.

    You are creating a loop hole in the statute.

    You are creating or approving, it is the better word not creating.

    You are approving a method by which the insider within the period which Congress has said it does not wants short swing speculation.

    You are approving a devise by which he can so structure his transaction that he is able to maximize the profit and keep it.

    Thurgood Marshall:

    But when he gets below the 10%, he is no longer an insider.

    Thomas P. Mulligan:

    He is not, it is our view Your Honor that anybody as an insider who makes this determination, well he is an insider to dispose of his stock in two sales is presumed to have arrived at that position by reason of information which is available to him and not to others and when —

    Thurgood Marshall:

    He did all of his planning and all of his conspiring, and he did not say anything else.

    But when he acted he could not be violating the statute because he was not an insider —

    Thomas P. Mulligan:

    Oh! This turns out —

    Thurgood Marshall:

    Because of four-tenths of 1%.

    But he is still was not an insider at the time he did it.

    Thomas P. Mulligan:

    Mr. Justice, I would response to that by saying that I think this Court just as the District Court did is perfectly in a perfect position within the decisions that have been decided under the Securities Act to determine that the word sale under Section 16(b) includes all related transactions pursuant to a plan which was predetermined at a time when the man was an insider.

    And that you do not have to put on blinders and look at each segment of his disposition that you can fairly say even though he had divided these in two, I will hold as a matter of law that a sale.

    Thurgood Marshall:

    But are you not rewriting something?

    Thomas P. Mulligan:

    I do not believe so Your Honor.

    And in any event there are the additional words in the statute which say at the time of sale, he must be 10% owner at the time of sale.

    I mean yes the problem of what do the words at the time of mean and I think —

    Thurgood Marshall:

    When it is sold, to me it means when it is sold.

    Thomas P. Mulligan:

    Judge Reagan held that at the time of means, the time involved in the disposition pursuant to a plan which he concede —

    Thurgood Marshall:

    But when would he pay his income taxes on it?

    When he made up his mind to sell it or when he sold it?

    Thomas P. Mulligan:

    No, when he sold it.

    Thurgood Marshall:

    Well, that is what I have thought.

    Thomas P. Mulligan:

    Yes.

    What you need and what we are — have here is an intention to do something made while an insider and the actual carrying out or execution of that program while an insider and having —

    Mr. Mulligan, you used the term putting on blinders, are you not willing to put the blinders on though once the six month has expired?

    Thomas P. Mulligan:

    No, I do not, I would not call it putting blinders on Your Honor.

    I would say that somebody who has done that has complied with the spirit of the actual literal wording of the statute and the spirit of the statute.

    When a man does what has been done here, it seems to us that he may well arguably have complied with the literal wording of the statute, but he has not complied with the spirit of the statute because the spirit of the statute required that if he thorough going and squeezed out profits and yet this technique permits a man while he has insider information to determine on the basis of that information that it is wise for him to get out.

    But instead of getting out in one sale he divides it so that he insolates from recovery a substantial and this can be done in every case, in every case where you have a person owning over 10% if the ruling of the Eighth Circuit is affirmed it would mean that in every single case from now on, insiders can in our view circumvent the spirit —

    Once they get —

    Thomas P. Mulligan:

    Yes Your Honor they can.

    (Voice Overlap) 10% and they see the statute it has two provisions, one is a six month provision, and the other is the 10% provision.

    And as I get your argument, you are feeling yourself bound by the time provision but not by the 10% provision.

    Thomas P. Mulligan:

    There can be questions in fact with respect to the time provision too that is there may well be a question in a particular case as to when the time starts to run.

    That is when did the purchase occur or when did the sale occur.

    And if that sort of a question came up, I would assume that the Court would liberally construe it in favor of trying to bring the transaction within the ambit of the law.

    Similarly here or what seem to me that where the word sale — this Court has said that you do not have to construe words in the securities law, in the ordinary commercial sense but you may construe them in such a way as to effectuate the purposes of the act.

    We submit Your Honors that to effectuate the broad purposes of Section 16(b), it certainly requires that where that 16 (b) apply here.

    Warren E. Burger:

    Thank you Mr. Mulligan.

    Mr. North.

    Walter P. North:

    Mr. Chief Justice may it please the Court.

    The commission is appreciative of the opportunity to participate in today’s oral argument even though it is only in the case on the amicus basis.

    And that one reason why we feel that way, particularly in this case is because while we agree with the result for which the petitioner argues, we would put it on a little different ground than at least to one that most of the oral argument has been devoted too though I think petitioner also agrees with our somewhat broader view of it.

    Byron R. White:

    But how about the other way around it?

    Walter P. North:

    How is that?

    Byron R. White:

    How about the other way around?

    Do you accept his interpretation?

    Walter P. North:

    We agree that his interpretation is one method of disposing of this case in his favor.

    In other words, his client would get the same $600,000 or $700,000 no matter on which theory he has decided on.

    Byron R. White:

    But I gather the commission thinks that the better interpretation is either voluntary purchase that makes him so or if he disposes of it all within six months either event he is within 16 (b), does it not?

    Walter P. North:

    That is right and we do not —

    Byron R. White:

    That is broader than what the petitioner has been urging.

    Walter P. North:

    It is, but we do not —

    Byron R. White:

    Do you think that it should not go that far?

    Walter P. North:

    We do not think the case on it turn on the question of whether or not there is an advance scheme which ties these two separate sales all in the one or not.

    The claimant —

    Byron R. White:

    You mean, you may had opened up the whole business if subjective attention over here?

    Walter P. North:

    That plus the fact that from then on, you would never have another case that had this kind of fact, the general counsel would not write the company a letter and then propose that you hook up this kind of a scheme.

    Then that will never occur again if he decided on that ground.

    In other words, the commission feels that the case ought to be decided on the broader ground that a —

    Byron R. White:

    Which of the two do you prefer, you can?

    Walter P. North:

    How then?

    Byron R. White:

    Which of the two interpretations that you proffered the better, do you think?

    Walter P. North:

    We feel, just as the questions from the Chief Justice indicate that there are some weaknesses in putting it on the grounds or whether there was a scheme or a plan or not because that might fit in with some other arguments about whether the six months period was a —

    Byron R. White:

    No, but you proposed two different in debtors do you think in Mr. Justice Brennan’s question, which one of those do you think is the preferable?

    Walter P. North:

    We —

    Byron R. White:

    The voluntary purchase or the all sales within six months, which?

    Walter P. North:

    I am not quite sure that I understand the difference between that.

    Byron R. White:

    Well, maybe if you have not understand it, Do you not have two, you have one at page 29.

    Not intended to preclude liability for profits made on transactions within a six month period by a 10% beneficial owner who acquires such status by a voluntary purchase.

    Is that any different from your next one at page 34, is it?

    To the language and the exempt provision may properly be construed as not excluding any sales transactions effective within six months after purchase by which a person become to 10%, are they the same thing?

    Walter P. North:

    Those are both subheadings under our general proposition that neither the purpose nor the language of the section were not excluding transactions such as this from the operation of the statute.

    Now, those are part and parcel of our overall argument to the effect —

    Byron R. White:

    The Circuits were quite separate are they not really?

    Two separate reasons for saying that the exemption does not apply?

    Walter P. North:

    No, I would not think so Your Honor.

    In the first place we are pointing out that the exemption provision was not intended to preclude liability from profits made on transaction within the six months period by a 10% provision of beneficial owner who acquires such status by voluntary purchase.

    Then the others, it seems to me follows along as a part of the same argument namely that their language is not exemptive provision does not run contrary to that.

    Byron R. White:

    I know, but if you are right in that, the first part that it — the exemption provision applies only in cases where there has not been a voluntary purchase which brings him on the 10%.

    You do not need ever to go — you do not need to go any farther to get in any other argument at all.

    Walter P. North:

    Mr. Justice what —

    Byron R. White:

    And your second reason would apply however if were it so.

    Walter P. North:

    I think Mr. Justice White that the difference is this that we feel that the purpose of Congress in putting in this provision about the — at the time of both the purchase and the sale, then the purpose of putting that in there was to protect against liability and in involuntary situations.

    In other words, if a man already owns 8% and then he inherits or he made a present of another 3 or 4%, he has become a 10% owner by virtue of purchases.

    Byron R. White:

    I understand that and that is as far you need to go in the case.

    As soon as someone got to be a 10% owner by purchase that is the exemption provision is out the window.

    That is your position.

    Walter P. North:

    That is right.

    But then we sale — we say that the thing you should max that against is not just one stage of a two or three or four stage sales transaction.

    Byron R. White:

    You do not even need to say that.

    You do not even need to get to that.

    Walter P. North:

    Assuming that all of these acquisitions are by purchase, then you do have to get to that.

    Byron R. White:

    Alright.

    Walter P. North:

    The only time he do not get to that is when his acquisitions are by some means other than a purchase.

    Otherwise, you have got to analyze the sale end of the transaction to determine whether or not there is liability.

    Well, I will see if I get this.

    Is it the commission’s view that once he has acquired enough to make him a 10% holder by voluntary purchase then any of that which he sells within six months is subject to 16 (b)?

    Walter P. North:

    That is right.

    Well, then why do we have to go beyond that?

    As I understand your position, once we have decided that this was acquired by voluntary purchase that any part of it that he sells within six months brings him within 16 (b).

    Walter P. North:

    That is right.

    Then do we have to go beyond that that inquiry?

    Walter P. North:

    The only reason we mentioned, make any point about involuntary acquisition is to show what we think was the Congressional reason for putting that provision in there about the — at the time of both the purchase and the sale.

    In other words, we think that the so-called exemptive language or the provision that says it shall not apply except under the condition set forth.

    We think that that provision was put in there for purposes of protecting against involuntary situations and should not be construed so narrowly as to permit a two step or three step or four step sale.

    All of which steps occur within six months regardless of whether it was with respect to a predetermined plan or was not respect to a predetermined plan.

    And we do not believe that that does any violence to the language of the statute.

    Now, the respondents continuously insist on saying that that does not comport with the literal language of the statute.

    But as we all know in situations of this kind, the literal language of the statute is not necessary the controlling factor, in fact is generally not to controlling factor.

    The controlling factor is the Congress.

    I thought that the case is generally, most of them in the Second Circuit but the case is elsewhere, had stood pretty much for the opposite in construing this statute that literal language of the statute does control.

    That the statute is a bland instrument if you will that if the period of holding is five months and 29 days, it is applicable.

    If it is six months and one day, it is inapplicable.

    If the percent held is 9.9% it is inapplicable.

    If it is 10.1%, it is applicable.

    That the literal provisions of the statute or what are controlling in this case, that is what I understood the precedence is pretty much to stand for.

    I do not mean in this case, I mean in construing this Section, 16 (b).

    Walter P. North:

    It is certainly true.

    I was thinking about that.

    Walter P. North:

    It is certainly true that it has been said time and again that the whole 16 (b) concept is one that has arbitrary limitations and there is a mechanical or mechanistic application of a hard and fast rule.

    But in determining whether there has been a purchase or there has been a sale or the aspects of the thing that our subject to interpretation other as against the arbitrary limitations, the Court just said repeatedly, this is a remedial statute and should be broadly and liberately construed to accomplish the purposes that Congress had in mind namely to prevent the types of abuses that arise in connection with short swing sale by insiders.

    And —

    Now there sometimes been litigation over this — for something was a purchase, i.e. an exchange and so on.

    Walter P. North:

    That is right.

    And has that language, has been used perhaps in that connection or whether something was a sale.

    Walter P. North:

    That is right.

    But with respect to its basic provisions, have not the case has pretty well told us, pretty well understood the propositions, along the lines I have said that this is not a refined instrument and that we do not look at actual motivation, that is completely irrelevant.

    Walter P. North:

    That is right.

    That it is just a mechanical bland instrument if you will.

    Walter P. North:

    That is true.

    But as Your Honor said in writing the Furlow opinion, the Sixth Circuit, the standards that seem to emerge from decided cases are to this effect and I am quoting from that opinion.

    Every transaction which can reasonably be defined as a purchase will be so defined if the transaction is of a kind which can possibly amend itself to the speculation and accomplished by Section 16(b).

    And by the same token the Courts have arrived at a decision as to whether or not there was a purchase or a sale on that kind of a test.

    It will result — they sometimes call a particular transaction or purchase or a sale and then another case, the identical type of transaction is not called a purchase or a sale.

    Now, to me it is impossible to say that you are going by the literal language of the statute, then sometimes you reach one result and sometimes you reach another on exactly the same kind of transaction.

    The whole thing to me is in terms of, are you accomplishing the intent of Congress in adopting this broadly remedial statute unless you call it either a purchase or a sale or refuse to call it, the last thing —

    I gather, are you saying this, that the exemption provision does not apply at all where the acquisition is voluntary purchase and for that reason you do not have to worry about the language both at the time of the purchase and sale if you are right about that.

    Is that correct?

    Walter P. North:

    I think that is right.

    But as your second argument at page 34 on the premise that maybe you are wrong about that and that to the exemption does also apply to voluntary purchases to which present answer is that so long as he was a 10% beneficial owner anytime during the period in which the sale transactions occur then he is subject to 16 (b).

    Walter P. North:

    That is right.

    From —

    That is now alternative argument, is that it?

    Walter P. North:

    No, no.

    From page 34 on, we are arguing what is our construction of the exemptive language of the statute namely —

    If it reaches voluntary purchase.

    Walter P. North:

    That is right.

    (Voice Overlap) The first one is, it does not reach voluntary purchases, that is your first argument.

    Walter P. North:

    No.

    The exemptive provision was not intended to —

    No, no.

    Wait a minute.

    Let us get back with, the argument that you are making at page 29 is that the exemptive provision does not reach voluntary purchases, is it not?

    You need not even consider the exemption provision at all if there is been a voluntary purchase.

    Just forget about it.

    Walter P. North:

    No, that is not the position.

    We are saying it that assuming you have got a voluntary purchase and not an acquisition that is not by a way of purchase.

    On the one end, the purchase end then on the sale end or any sales within six months should be considered as a single sale transaction even though if done in step stages.

    But you still got to have sales within six months of that purchase or you are not going to have any 16 (b) liability in the first place.

    Warren E. Burger:

    And what as Justice Stewart suggested there are necessity, a lot of arbitrary things in the statute like this.

    The problems would arise where the reality exists, where a man acquires more than 10% by inheritance or gift, is that not the reality of it?

    Walter P. North:

    That is true.

    But I am — and we–

    Warren E. Burger:

    But Congress had to draw some lines so they drew a whole series of lines.

    They drew the 10% line, they drew the six months line.

    They did not even say 180 days.

    Suppose some fellow got mixed up in a leap year and miscalculated his time, if he miscalculated and that was not relied on the one measurement instead of the other, if it was less than six months of the statute, the acts would fall on it, would it not?

    Walter P. North:

    That is right.

    If there is many respects — just you say in which the statutes are arbitrary, but the Courts have never had much difficulty in reaching what they felt was the right result on a case to case basis.

    For instances, this Colby against Klune case that we mentioned here.

    You had a person there who was an employee of the company but he did not bear any corporate official or officer’s title, he was not the president or the vice president or anything of that sort.

    But the Court said, well he might still be an officer even though he did not bear an official title, a corporate title of any kind. The Courts overlooked the precise language of the statute where they feel that substance should prevail over form and there should be liability.

    If that man is actually working for the company then the capacity where he has that the same access to inside information as though he were the president of the company.

    The Court said, liability should attach.

    Was that case decided before or after Blau against the Lehman Corporation?

    Walter P. North:

    That was before.

    It was decided —

    And only it would have been decided the same way afterwards, would it?

    Walter P. North:

    Yes, I think it would.

    I think it would.

    Potter Stewart:

    Mr. North, before you sit down, I think it would be helpful for this end of the bench, if you in three sentences would tell us what your position is?

    Walter P. North:

    Alright, my time is already up, but if I can do it in three sentences No, I will not run overtime, put a little bit.

    Walter P. North:

    Our position is that if you have a voluntary purchase that exceeds 10% that then to determine whether a 16 (b) liability or not, you match, you add up all the sales that are made within six months of that purchase and the liability attaches to all such sales.

    I do not —

    Potter Stewart:

    So that on the selling side as Mr. Justice Brennan says, the exemption has no application.

    Walter P. North:

    Well, we have tried to state whether we have done it effectively or not and apparently or not, from page 34 on we have tried to state why we think that you can read the statute that way.

    Now, if the Court decides you cannot read it that way while you have — we just cannot prevail on that theory.

    That is what — that the argument in varying to me.

    Thank you very much.

    Warren E. Burger:

    Thank you Mr. North.

    Jenner you will have about 11 minutes for today.

    Albert E. Jenner, Jr.:

    Thank you Mr. Chief Justice and members of the Court.

    I am troubled by both arguments because neither argument presents my little case before this Court and all I am seeking is to have the Court decide my case and not decide other cases.

    By a parade of horribles or otherwise, by Mr. Mulligan, a distinguish lawyer from Cleveland seeking to retain for his client, who participated in the purchase of the sales, the profit reselling from their purchase of these — the stock from Reliance.

    And may I in the few minutes this afternoon, I would like to devote if I may to stating the facts of this case as Mr. Justice Stewart said, the case in 1958 when he wrote the opinion for the unanimous court, that if the trend has come to be as you, Mr. Chief Justice had indicated when you wrote the opinion as the Circuit Justice of the Second Circuit is to examine the facts in each case and decide each case.

    Now, before I state the facts in this case which were relayed directly Mr. Justice Blackmun to one of the inquires you made as to whether or not in fact Emerson had any inside information of any kind of character at all to which Mr. Mulligan did not give you a correct answer or according to the record in which there is a direct finding in the case in which Dodge brought suit against Emerson.

    In which District Judge Grant held in the case that I tried and represented Emerson that Emerson not only had no inside information but no possibility of obtaining inside information.

    Warren E. Burger:

    For the actual information really is not an issue.

    Is it in these cases?

    They are just statutory presumption of information resulting from the amount of stock that is held, is that not true?

    Albert E. Jenner, Jr.:

    You are absolutely correct Mr. Chief Justice, but counsel —

    Warren E. Burger:

    And out of his way, he is saying that he did not imbued any bad faith or bluffing or conspiracy to anybody.

    It was just — it was taking this in one sense very literal review of the statute and then in another sense perhaps not.

    Albert E. Jenner, Jr.:

    That is correct Mr. Chief Justice.

    But in those who seek to argue the meaning of this and I may say harsh statute.

    They turn at times to intend when an argument of an intent will favor them.

    And they turn to the artificiality of the statute that is a presumed fiduciary relationships because of a holding of a 10% or more.

    But when that does not suit the attempt to induce a court to interpret this narrow language then they adopt a different.

    Now, if Your Honors please, have this in mind overnight.

    Emerson Electric on the 22 of May 1967 made a tender offer for the purchase of the shares of Dodge Manufacturing Company of Mishawaka, Indiana near South Bend.

    Prior to the time that they made that tender offer, they had negotiated with the officers and directors of Dodge Manufacturing Company in the hope that they could arrange a merger with Dodge and Emerson.

    Those discussions came of not and when those discussions did end is when Emerson Electric made a tender offer from the shares of Dodge Manufacturing Company.

    Albert E. Jenner, Jr.:

    The original tender exercise date was June 2, 1967.

    As soon as it became known, we announced necessarily on a tender offer you cannot reach shareholders so you publish in newspapers and Wall Street Journals.

    When it became known to the Dodge Managers of that company that we had submitted a tender offer for the shares of Dodge at a very substantial increase over the then price, as a matter of fact $20 per share, the Dodge Management immediately contacted all its shareholders immediately and said to them, do not tender your share.

    Two days later, the Dodge Management then entered into a negotiations with Reliance for a defensive merger to defeat the tender offer.

    That is to have the shareholders of Dodge approve a merger of Dodge into Reliance and that would destroy the tender offer.

    And that was announced to its shareholders immediately and they were urged in favor to consider the defense of merger that was tendered.

    In addition to that, Dodge filed suit in a Northern District of Indiana before His Honor, Judge Grant, to enjoin Emerson from proceeding with its tender offer claiming that Emerson had obtained confidential information from Dodge during the course of the attempts of Emerson to interest Dodge Management in a merger of Dodge into Emerson.

    And it charged in that complaint under Section 10 (b) and Regulation 10 (b) (5) of the Securities and Exchange Act.

    That Emerson had obtained confidential information during the course of the discussions with Dodge Management on the subject matter for possible merger of Dodge into Emerson.

    It was in that case that I represented Emerson and tried the case.

    It was tried before Judge Grant.

    And after an extend of hearing with a lot of proof taken, Judge Grant held expressly that Emerson had acted in good faith throughout and had never obtained any confidential information of any kind or dirt that what it had obtained by way of information was in 14 case, 10 case, other matters public with the Securities and Exchange Commission once they could examine annual reports and matters of that character.

    And so Judge Grant vacated the temporary restraining order that he had entered against Emerson restraining up from proceeding with this tender offer.

    And we extended that tender offer to June 2, 1967 with the approval of Judge Grant.

    Now, we were faced to that particular time with the defensive merger suggested by Dodge to merge Dodge into Emerson and so at that point, we proposed as a accountable that we would submit to the shareholders of Dodge a proposal for merger of Dodge and Emerson in which we would exchange convertible preferred shares of Emerson for Dodge stock as Reliance has — was proposing to give to the Dodge shareholders convertible preferred shares for Dodge stock except that we claimed by publication otherwise that our merger offer was more advantageous of the shareholders of Dodge than the Reliance.

    And we made a demand on the Management of Dodge that they submit the Emerson proposed merger to the shareholders of Dodge which the man has run on Directors of Dodge refused to do.

    Also, we demand that a right to see — to have a shareholders list so we can communicate with the shareholders of Dodge.

    Management refused to give us that list.

    We filed suit in the Superior Court of whatever that county is in Northern Indiana and we — that is the only way we were able to get a shareholder’s list then we got.

    Then we filed suit when management refused to submit the Emerson merger proposal to the Dodge shareholders and we could not get it to them for a vote.

    We then decided we would go ahead with the proxy fight to see if we could defeat the merger of Dodge into Emerson.

    And Emerson turned or Dodge turned around and sued us to enjoin us as submitting our merger proposal of merger of Dodge into Emerson.

    I believe all these with you up to this point to show that it was impossible for anybody to get any confidential information of any kind or character and that Judge Grant held expressly that we had not obtained them.

    Now, the proposal for the merger of Dodge into Reliance —

    Warren E. Burger:

    I think this would be, perhaps a good place to stop.

    Albert E. Jenner, Jr.:

    I think it is.

    Thank you very much.

    Warren E. Burger:

    We will pick up there in the morning Mr. Jenner.