# Petition for a Writ of Certiorari — Provident Securities Company, a California Corporation v. Foremost-McKesson, Inc., a Maryland Corporation > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385608_1753%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for a Writ of Certiorari - **Published:** January 1, 1976 - **Citation:** 423 U.S. 1077 ## Text ah ; y , 3 F bs ¢ IG AIO ps PELs PE, +o eee ae 12 Il. THE TRANSACTION INVOLVED NO POTENTIAL FOR ACTUAL SPECULATIVE ABUSE. As discussed above, the Ninth Cireuit determined that the transaction should not be exaimined for a potential for speculative abuse and that §16(b) was automatically applicable to it. Nonetheless, the court did examine the transaction and, in doing so, it considered two factors: (1) Could [Provident] reasonably be expected to have had access to inside information? And (2) did [Provident] initiate the transaction voluntarily ?”’ (Appendix B, p. xvii). The Court of Appeals erred in its discussion of the mat- ters pertinent to both these inquiries. First, the Ninth Circuit correctly noted that the pre- sumption of access to inside information could be rebutted (Appendix B, p. xviii). However, it erroneously held that Provident had not rebutted that presumption because it had ‘‘not demonstrated that the Foremost management was hostile’? (Appendix B, p. xviii). In Kern, this Court examined the facts to ascertain whether ** Occidental either had or was likely to have access to inside information, by reason of its ownership of more than 10% of the out- standing shares of Old Kern, so as to afford it an oppor- tunity to reap speculative, short-swing profits’? (411 U.S. 596). From the fact that Old Kern’s management was hostile, this Court inferred that the likelihood of posses- sion of inside information was remote (411 U.S. 598). Plainly, if the presumption of access to inside informa- tion ean be rebutted by such an inference, it can also be rebutted by other facts. Here, it is undisputed that the negotiations between the parties related solely to the ELLE GE SORA RRS Ge HS Sa PTE 13 evaluation of Provident’s assets which were to be trans- ferred to Foremost. During that time, it was Foremost that had complete access to Provident’s books and records (R., pp. 251-252) but there was no reason for Provident to have, and it did not have, any access to Foremost’s books and records. There has therefore never been any contention that Provident’s brief status as an ‘‘insider”’ gave it any access to inside information (Appendix A, p. ix). Second, the Ninth Cireuit’s emphasis on the *‘voluntary’’ nature of the transaction was misplaced. In Kern, in- voluntariness was again a fact involved in the stock conversion transaction. However, the voluntary nature of the transaction is not necessarily a controlling factor. This is made clear by the portion of this-Court’s opinion which discussed the subsequent stock option transaction— a wholly voluntary transaction—and concluded that there was no potential for speculative abuse in that transaction (411 U.S. 601-604). This view is consistent with that of the Second Cireuit which has previously pointed out that the voluntary nature of a transaction is not determinative (Blau v. Lamb (2 Cir. 1966) 363 F.2d 507, 520). As in Kern, Provident had no prior association with Foremost and owned no Foremost securities before its acquisition of the debentures. Therefore, Provident could not be found liable because of any hypothetical specula- tive calculations prior to the acquisition because any such calculations ‘‘could not have been based on inside informa- tion obtained from substantial stockholdings that did not yet exist’’ (411 U.S. 597). Also, as in Kern, there was no access to information after the acquisition. The court rin esa p hat 14 below therefore erred in its conclusion that there existed a potential for speculative abuse. Ill. THE SALE OF THE DEBENTURES OCCURRED WHEN PROVIDENT WAS NOT AN OWNER OF 10% OR MORE OF A CLASS OF FOREMOST’S SECURITIES. The underwriting agreement was signed on October 21, 1969 (R., pp. 400, 707-719) and it provided that October 28 was to be ‘‘the time of purchase’? when Provident would deliver the debentures and receive payment (R., pp. 707-708). On October 24, 1969, Provident distributed to its shareholders other Foremost debentures held by it so that, as Foremost conceded in the proceedings below, the remaining debentures to be sold constituted ‘‘less than 10% of the class of outstanding common stock’’ (Fore- most Opening Brief, p. 23). At the closing on October 28, the remaining debentures were transferred to the under- writers and Provident received its payment (R., p. 400). Because possession and the incidents of ownership were not transferred until October 2s, that date should be considered the date of sale (Cham pion Home Builders Co. v. Jeffress (6 Cir, 1974) 490 F.2d 4611, 616). On October 28, Provident was not an owner of 10% or more of a class of Foremost’s securities and § 16(b) liability there- fore could not attach (15 U.S.C. § 78p(b); Reliance Elec- tric Co. v. Emerson Electric Co. (1972) 404 U.S. 418, 423- 425). The Court of Appeals, however, erroneously held that October 21 was the date of sale because on that date, in its view, Provident was ‘‘irrevocably bound’? to sell (Appen- PFET AE ENO EEE Se EE CON IMM GO ATES a $e < eT AREER ROS NCPR NACI ARTY PS I NS AR ES EE PN NE es RE BARE Pye MR oe oe Nie ee ee “s ED ae baad - 15 dix B, p. xxi). Because of its mistaken belief that Provident had insulated itself against all market risks (Appendix B, p. xxi), the court ignored the rule that a firm commit- ; ment, standing alone, does not necessarily give rise to a purchase or sale under § 16(b) (Champion Home Builders Co. v. Jeffress (6 Cir. 1974) 490 F.2d 611, 616). The court below made reference only to paragraph 7 ‘ of the underwriting agreement which permitted termina- tion under certain adverse conditions until such time as the registration statement became effective. The statement became effective on October 21 and the court concluded that therefore the agreement was not subject to termina- tion after that date. In reaching that conclusion, the court overlooked the fact that, under paragraph 5(h), the agree- nent was subject to the express condition ‘That, between the time of execution of this agree- ment [October 21] and the time of purchase [October 28], there shall oceur no material and unfavorable change, financial or otherwise (other than as referred to in the Registration Statement and the Prospectus), in the condition of the Company [Foremost] and its consolidated subsidiaries as a whole * * *” (R., p. 713). APLOMB Rm a Re Therefore, Provident could not have obtained speculative advantage through the October 21 agreement. Provident could not share in a rising market and, because the agree- ment was terminable under adverse conditions, it was not insulated from a falling one. Possession and ownership rights were not transferred until October 28 and _ that, accordingly, was the date of sale (ef. Nern County Land Co. v. Occidental Corp, (1973) 411 U.S. 582, 602). Se See Tee se) eS ERE REE eR 16 IV. PROVIDENT HELD THE FOREMOST DEBENTURES SOLELY FOR THE BENEFIT OF ITS SHAREHOLDERS AND THEREFORE THE TRANSACTION WAS NOT SUB- JECT TO § 16(b). This case also involves certain questions pertaining to ‘‘beneficial ownership’? which were not considered in the opinions below. The record temonstrates that at all per- tinent times Provident was acting solely for the benefit of its shareholders. A plan of complete liquidation had been approved prior to the acquisition of the Foremost deben- tures. Under California law, this required Provident to cease all business other than ‘‘beneficial winding up’’ and also required distribution of all assets to the shareholders (Cal.Corp.Code §§ 4600, 4605, 5000). We submit that, under these circumstances, § 16(b) was not applicable to the sale of the Foremost debentures because Provident’s shareholders, not Provident, were in fact and in law the beneficial owners of those debentures. We also submit that Provident had become a liquidating agent or other similar person authorized by Cali- fornia law to administer the assets of its shareholders, rendering the transaction exempt under Securities and Exchange Commission Rule 16a-4 (17 C.F.R. § 240.16a-4). We have not presented here all the factual detail per- taining to these points. If, however, this Court should take up this case, we expect to argue these points in full. “\ canine Nie REST HCI DY to eae 17 CONCLUSION For the foregoing reasons, we respectfully submit that in the event that the Court should grant: -Foremost’s petition for a writ of certiorari in this case, this cross- petition should likewise be granted. JoHN B. Bates Nosie K. Grecory Watrter R. ALLAN Attorneys for Cross-Petitioner (Appendices Follow) MRE EOE RE IER TEN” IN EE Pehle VIMO w emuaer ENN DRE ARUP. MON OYE --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385608_1753%3A1. Public record. Not legal advice.