Petition for Writ of Certiorari — Mesa Petroleum Co. v. Colan

Supreme Court brief1992

Ask Donna

What actually matters in this document.

Text

_ ,

SBo I 4 § ll | MAR 9 1992

or GF iii UL

IN THE

Supreme Court of the United States

October Term, 1991

MESA PETROLEUM CO., et al.,

Petitioners,

DAVID COLAN and UNOCAL CORPORATION,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

JAMES EDWARD MALONEY

(Counsel of Record

for Petitioners)

THOMAS GrBBs GEE

JOSEPH A. CIALONE II

STEPHEN A. MASSAD

BAKER & BoTTs

910 Louisiana Street

Houston, Texas 77002

(713) 229-1234

Louis Loss

Cambridge, Massachusetts

MICHAEL H. DIAMOND

SKADDEN, ARPS, SLATE,

MEAGHER & FLOM

Los Angeles, California

March 6, 1992

QUESTION PRESENTED

This case presents a single question under § 16(b) of the

Securities Exchange Act of 1934, 15 U.S. C. § 78p(b), which

provides that, for the purpose of preventing speculative abuse of

inside information by corporate officers, directors and more-than-

10% stockholders, any profit from such a person’s “purchase” and

“sale” of a corporation’s equity securities within a period of less

than six months is recoverable by the corporation:

Is an economically coerced exchange, pursuant to a corpora-

tion’s recapitalization, of equity securities for debt securities by a

more-than-10% stockholder (which never had access to inside

information) an “unorthodox transaction” with no potential for

speculative abuse of inside information and, therefore, not a

“sale” for purposes of § 16(b) (as Petitioner Mesa claims and the

District Court held); or is it instead a § 16(b) “sale” that may be

matched against a market purchase of stock within the prior six

months (as Respondent Unocal claims and the Court of Appeals

held)?

PARTIES TO THE FKOCEEDING

The petitioners are Mesa Petroleum Co., Mesa Southern Co.,

Mesa Asset Co., CY-41, Inc., and JACK-41, Inc.* The respon-

dents are David Colan and Unocal Corporation.

* The following information is provided pursuant to Rule 29.1 of this

Court. Mesa Petroleum Co. (which was the parent company of Mesa

Southern Co., which was in turn the parent company of Mesa Asset

Co.) has been succeeded by Mesa Inc. Mesa Inc. is a publicly held

corporation, the only non-wholly owned subsidiary of which is Clean

Fuels, Inc. CY-41, Inc. and JACK-41, Inc. have no parent companies

or subsidiaries.

ill

TABLE OF CONTENTS

Page

GUBSTION PRESENTED... 2... cece ccc cece cceees i

PARTIES TO THE PROCEEDING ................. ii

EY REED hc gca see ence cncnsseceuces iii

pe > iv

py Re A hye eh yy | rea v

eee ee re l

er 2

TE OWED ocak cass aev en cseeenenvses 2

yp ye fe le ig. | gl ev \- _ ae 3

REASONS FOR GRANTING THE WRIT .......... 7

I Kern County's Analytical Approach to § 16(b)... 8

II. The Ninth Circuit’s Decision Ignores the Close

Factual Similarity Between This Case and Kern

DE et ee eee ee ee 12

III. The Ninth Circuit’s Limitation of the Unorthodox

Transaction Analysis to Mergers Conflicts with

Kern County and with Decisions of the Second

Circuit Applying That Analysis to Recapitaliza-

RSs ie ce eo 15

IV. The Circuits Are in Conflict over Both the

Necessity for and the Meaning of “Involuntari-

ness” as an Element of the Kern County

EO A ere ee ee oe 19

A. The Circuits Are in Conflict over Whether

“Involuntariness” is a Necessary Element

ee a and baba awa ue eee 19

B. Whether “Involuntariness” Is Considered a

Necessary Element or Merely a Sufficient

Element, the Ninth Circuit’s Analysis Thereof

Conflicts with the Analysis in Kern County

and with Decisions of the Second, Sixth and

RMI conn aucsceacessscasenecess 22

V. The Insider Trading and Corporate Takeover As-

pects of This Case Underscore Its Importance .... 26

Eee eee ee eee 29

TABLE OF APPENDICES

Page

Appendix A Opinion of the United States Court of

Appeals for the Ninth Circuit, dated

December 23, 1991, in Colan v. Mesa

i EE SONY eS Re ee 3a

Appendix B_ Opinion of the United States District

Court for the Central District of California,

dated April 10, 1990, in Colan v. Mesa

PE I FG ces aA eck cadres 36a

Appendix C Order of the United States Court of

Appeals for the Ninth Circuit, dated

January 7, 1992, granting motion

for stay of mandate in Colan v. Mesa

3 Sea Raat tye poem, qm 63a

Agpendiz D Tent of § 16(a), (6) .. 2.0.0.0. .0000085. 64a

Appendix E Excerpts from this Court’s Opinion in Kern

County Land Co. v. Occidental Petroleum

COP, SEE SE. Bie CURIS os ccc ccscans 66a

TABLE OF AUTHORITIES

Page

CASES

Abrams v. Occidental Petroleum Corp.,

450 F.2d 157 (2d Cir. 1971),

aff'd sub nom. Kern County Land Co.

v. Occidental Petroleum Corp., 411 U.S. 582 (1973) ....-. 9, 15,24

American Standard, Inc. v. Crane Co.,

510 F.2d 1043 (2d Cir. 1974),

cert. denied, 421 U.S. 1000 (1975) ........--- eee e eee eee 24

Blau v. Lamb,

363 F.2d 507 (2d Cir. 1966),

cert. denied, 385 U.S. 1002 (1967) ..........--.-555: 9,11, 17, 19

Blau v. Lehman,

; al) OR. a errererr err eee rrr re er coer 27

Blau v. Max Factor & Co.,

342 F.2d 304 (9th Cir.),

cert. denied, 382 U.S. 892 (1965) ........---- eee eee: 9, 17, 19, 28

Bolton v. Gramlich,

540 F. Supp. 822 (S.D.N.Y. 1982) .....-.--- seer eee eee: 18

C.R.A. Realty Corp. v. Crotty,

878 F.2d 562 (2d Cir. 1989) ..... cau atiie tar eae 12

Colan v. Continental Telecom, Inc.,

616 F. Supp. 1521 (S.D.N.Y. 1985),

aff'd without opinion, 788 F.2d 2 (2d Cir. | ere 22, 23

Ferraiolo v. Newman,

259 F.2d 342 (6th Cir. 1958),

cert. denied, 359 U.S. 927 (1959) ....... 25... ee eee 17, 19, 24, 25

Foremost-McKesson, Inc. v. Provident Sec. Co.,

423 US. 232 (IGM) «onc ccccccccccsscccccveceecs 6, 20, 27, 28

Gold v. Sloan,

486 F.2d 340 (4th Cir. 1973),

cert. denied, 419 U.S. 873 (1974) .......- 2. ee eee ee eee eee 21

Gollust v. Mendel,

521 S CR BITS CIDA) 2c cc cccnccsccevendvesspansenenras 7,27

Hayes v. Sampson,

[1980 Transfer Binder] Fed. Sec. L. Rep. (CCH)

497, 693 (S.D.N.Y. 1980) .......--- 2c eee eee eee e eee eees 18

Heublein, Inc. v. General Cinema Corp.,

559 F. Supp. 692 (S.D.N.Y.),

aff'd, 722 F.2d 29 (2d Cir. 1983),

cart. Gemied, 465 UB. 1666 CISG4) .w.w on cc ccc ccc cscncses

International Controls Corp. v. Vesco,

490 F.2d 1334 (2d Cir.),

oar. GN, Gir WE. Gee CUBIS ion kn vv cca cvaceeseceacss

Kay v. Scientex Corp.

oe e 8 of. fe eer rere ee errr Tre

Kern County Land Co. v. Occidental Petroleum Corp.,

GEE UE SO MOTOR 6 ick keene kcaveckckueeeneeteceease passim

Marine Bank v. Weaver,

Oe Sek ee Rao hk idk ca Gewkatea eee

Matas v. Siess,

GBF Fs BEF COREG. SOUND vcnca ck ne nacnasscueeos

Mendell v. Gollust,

909 F.2d 724 (2d Cir. 1990),

g¢ BIS Oe cca). | eres rere en

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Livingston,

ES Pigs Le ee | re rrr re

Microdot, Inc. v. United States,

oe e.g fs S| eee ere rere err

Morales v. Mapco, Inc.,

541 F.2d 233 (10th Cir. 1976),

Ce. GR, GP Ga. WS CEGTTD vinin ccc ccc wanvcancasedcs 16, 18

Oliff v. Exchange Int'l Corp.,

669 F.2d 1162 (7th Cir. 1980),

re, GE, Se Ue. DED CBSA ona on oc cance cncccesesaisn 17, 25

Pay Less Drug Stores v. Jewel Cos.,

re We. Me. EDO CRC. Cal, TOGG) aac ces civevcccnsees

Petteys v. Butler,

367 F.2d 528 (8th Cir. 1966),

cert. denied, 385 U.S. 1006 (1967) .............. 17, 19-20, 24, 25

Pier 1 Imports of Georgia, Inc. v. Wilson,

Se UU ee eee ee

Portnoy v. Seligman & Latz, Inc.,

ee Be ek A) rere 18, 22

Provident Sec. Co. v. Foremost-McKesson, Inc.,

506 F.2d 601 (9th Cir. 1974),

ae Ee Sh GE LOE 6 Wi & Kins ba eee ea saws ns BA eee

vil

Reliance Elec. Co. v. Emerson Elec. Co.,

404 U.S. 418 (1972) .... 2. cece cece eee teen cere ees 8, 27, 28

Reves v. Ernst & Young,

494 U.S. 56 (1990)... 2... cece eee eee eee ete ee eeees 1]

Roberts v. Eaton,

212 F.2d 82 (2d Cir.),

cert. denied, 348 U.S. 827 (1954) .... 2... - 2 eee reece: 17, 18, 19

Rosen v. Drisler,

421 F. Supp. 1282 (S.D.N.Y. UN Sc acc k beak ee eReee wees 18

Rothenberg v. United Brands Co.,

[1977-1978 Transfer Binder]

Fed. Sec. L. Rep. (CCH) {1 96,045 (S.D.N.Y.),

aff'd without opinion, 573 F.2d 1295 (2d Cir. 1977) ........ 17

S.E.C. v. National Sec., Inc.,

393 U.S. 453 (1969) ........ cece cece eee reece eee e eens 11

Super Stores, Inc. v. Reiner,

737 F.2d 962 (Lith Cir. 1984) .......--. eee eee eee e ees 21

Texas Int'l Airlines v. National Airlines, Inc.,

714 F.2d 533 (Sth Cir. 1983),

cert. denied, 465 U.S. 1052 (1984) ........-- 522 eee reece 17, 21

STATUTES

15 U.S.C. § 78c(a) (13) ...... eee e eee erence eee e reece 2

15 U.S.C. § 78c(a) (14) «0... eee eee ee eee eee renee eee eees 2

15 UG.C. § TBi(D) 0... cscs ccc n cece ccc eeeenencnceeees 8, 26

gi Tea. () een oa 8

15 UGC. © Theale) . «0... crc c cc cer ec nccneccsnvecvecences 8

15 US.C. § TOp(a) ...... 2c cece cece cree ccnecceceenecees 2

15 U.S.C. § T8p(b) ....... eee e eee e cree eee e ec eeeeeeece passim

Let tel > eee eer et et eee 5

2B US.C. 6 1254(1) ..... 2. cc ccce cence ccneneccecccccceses 2

REGULATIONS

17 C.F.R. § 240.10D-5 2... eee eee eee eee rennet ences 8, 26

17 CF.R. § 240.14a-9 00... ccc cece reer e cece eee e tenes 8

17 C.F.R. § 240.16D-9. 0... cece eee cere eee e eee eeneees 25

viii

SECONDARY SOURCES

R. Balotti & J. Finkelstein, Delaware Law of Corporations and

Business Organizations (2d ed. 1990)................0045.

1 A. Fleischer, Tender Offers: Defenses, Responses, and

a rs cee Gena ee adbescbesanasees

H. Henn & J. Alexander, Laws of Corporations

SN EE CR Gis bode cubes eeeecaiesa sk uns cia sacks

2 L. Loss, Securities Regulation (2d ed. 1961) ...............

5 L. Loss & J. Seligman, Securities Regulation (3d ed. 1990) ..

Note, Exceptions to Liability Under Section 16(b):

A Systematic Approach, 87 Yale L.J. 1430 (1978) .........

S.E.C. Advisory Comm. on Tender Offers, Report of

Recommendations (July 8, 1983) ............ 000.0 cee euuee

IN THE

Supreme Court of the United States

October Term, 1991

MESA PETROLEUM CO., et al.,

Petitioners,

DAVID COLAN and UNOCAL CORPORATION,

Respondenis.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Petitioners Mesa Petroleum Co., Mesa Southern Co., Mesa

Asset Co., CY-41, Inc., and JACK-41, Inc. (collectively,

“Mesa”) respectfully pray that a writ of certiorari issue to review

the order and amended opinion of the United States Court of

Appeals for the Ninth Circuit, entered in this proceeding on

December 23, 1991.

OPINIONS BELOW

The opinion of the Court of Appeals for the Ninth Circuit,

reversing the District Court’s grant of summary judgment for

Mesa and directing the District Court to grant summary judg-

ment for Unocal, is to be reported at 951 F.2d 1512. App. 3a.'

This opinion amended and superseded that court’s previous opin-

ion, reported at 941 F.2d 933. The opinion and order of the

United States District Court for the Central District of California,

entering summary judgment for Mesa and denying summary

judgment for Unocal, is unreported. App. 36a.

' References to the Appendix are cited “App. —a”

JURISDICTION

The decision of the Court of Appeals was originally entered on

August 8, 1991. On December 23, 1991, the Court of Appeals

denied a timely petition for rehearing and rejected a timely

Suggestion for rehearing en banc. App. 7a. The jurisdiction of this

Court is invoked under 28 U.S.C. § 1254(1).

STATUTES INVOLVED

This case involves the application and interpretation of § 16(b)

of the Securities Exchange Act of 1934 (the “1934 Act”), 15

U.S.C. § 78p(b), which provides in pertinent part:

(b) For the purpose of preventing the unfair use of

information which may have been obtained by such benefi-

cial owner, director, or officer by reason of his relationship to

the issuer, any profit realized by him from any purchase and

sale, or any sale and purchase, of any equity security of such

issuer ... within any period of less than six months. . . shall

inure to and be recoverable by the issuer... .

The phrase “beneficial owner” is defined in § 16(a) of the 1934

Act, 15 U.S.C. § 78p(a), as “[e]very person who is directly or

indirectly the beneficial owner of more than 10 per centum of any

class of any [registered] equity security....” The full text of

§ 16(a) and (b) is set forth at App. 64a. With respect to the

terms “purchase” and “sale,” § 3(a) of the 1934 Act, 15 U.S.C.

§ 78c(a) (13), (14), provides:

When used in this chapter, unless the context otherwise

requires —

(13) The terms “buy” and “purchase” each include any

contract to buy, purchase, or otherwise acquire.

(14) The terms “sale” and “sell’’ each include any contract

to sell or otherwise dispose of.

STATEMENT OF THE CASE

This case is the final vestige of a 1985 contest for control of

Unocal that involved a hostile tender offer by Mesa, a bitter

public relations campaign, a proxy fight, acrimonious litigation in

several courts and a highly coercive defensive recapitalization by

Unocal that ended the contest.

In early 1985, Mesa acquired more than 10% of Unocal’s

common stock. From the start, Mesa’s relationship with Unocal

was characterized by “unmitigated hostility.” App. 50a. At no

time did Mesa have access to any inside information whatsoever

about Unocal. In April 1985, Mesa commenced a cash tender

offer for Unocal shares, seeking to acquire control of Unocal.

Unocal responded immediately by proposing a defensive recap-

italization.2. The recapitalization was structured as an exchange

offer (the “Exchange Offer”) of newly created Unocal bonds for

about half of Unocal’s outstanding shares of common stock. In

form, each stockholder cou!d decide whether or not to exchange

his shares. But the economics were such that any stockholder

who did not participate would suffer severe financial injury — an

immediate reduction of about 40% in the value of his Unocal

investment.2 Unocal warned its stockholders of these conse-

2 A defensive recapitalization typically involves an exchange of cash or

debt securities (or both) by the target company for its own common

stock, with a commensurate increase in debt accompanied by liens on

assets or other restrictive covenants, all intended to make the target

company less desirable and to make the tender offeror abandon its

efforts. See | A. Fleischer, Tender Offers: Defenses, Responses, and

Planning 388.172-81 (Supp. 1987). A recapitalization can be effected

by means of an exchange offer, a merger or stockholder-

approved charter amendments. Id. at 388.180.

3 The $72 in bonds that Unocal offered for each share of stock to be

exchanged was far above the then-current stock value of $49 per share.

It was generally anticipated by the trading markets, and specifically

intended by Unocal, that this reallocation of value from Unocal equity

to Unocal debt would instantly drive the post-transaction market value

quences in a prospectus that contained more than 100 printed

pages of financial and other disclosures.

To make the Exchange Offer as lethal to Mesa as possible,

Unocal provided that Mesa, alone among all its stockholders,

would not be allowed to exchange any of its shares for bonds.

Thus, if the Exchange Offer had been completed as originally

structured, the value of Mesa’s Unocal investment would have

plummeted 40%.‘

Mesa considered (and rejected) the possibility of seeking to

mount a tender offer for the Unocal shares that would remain

outstanding after the Exchange Offer.’ Mesa filed actions in both

federal and state court trying, unsuccessfully, to stop the Ex-

change Offer or to invalidate the provision excluding Mesa.

Mesa’s final challenge failed on May 17, 1985, when the Dela-

ware Supreme Court ruled that Unocal could consummate the

Exchange Offer and exclude Mesa. In light of the dire financial

consequences of being left out of the Exchange Offer, Mesa

of the remaining shares of stock down to about $30 per share, or

almost 40% less than the pre-transaction $49 value. A stockholder

who participated in the recapitalization would end up with a combina-

tion of (1) Unocal bonds (valued at $72 for each share he exchanged)

plus (2) half of his original shares of Unocal stock (valued at an

expected $30 per share) — yielding a “blended” value of about $51

per original share (i.e, % X $72 plus % X $30). (Unocal later

reduced the exchange percentage to about one third.) The value of a

non-participating stockholder’s siiares would fall immediately to about

$30 per share. ing

In Mesa’s case, this would have been a decrease in value of about

$450 million (i.e., a $19 per share decrease on 23.7 million shares).

* Although Mesa argued below that the record did not support (and

indeed contradicted) the conclusion that the possibility of such a

tender offer had in fact been realistic, Mesa does not seek review by

this Court of the Ninth Circuit’s conclusion that such an alternative

was, as a factual matter, a viable “choice” available to Mesa. App.

24a-25a. See Part IV, infra, regarding the legal relevance of this

“choice.”

concluded that its only realistic alternative was to abandon its

efforts to acquire Unocal in return for Unocal’s granting it the

right to participate in the Exchange Offer like all other stockhold-

ers. On May 20, 1985, Unocal agreed to let Mesa participate in

the Exchange Offer, subject to Mesa’s abandoning its tender offer

and signing an onerous “standstill” agreement.® Accordingly,

Mesa exchanged a portion of its Unocal common shares for

Unocal bonds. Mesa later sold these bonds, which as debt

securities were not subject to § 16(b), for cash.

In June 1986, David Colan, a Unocal stockholder, filed this

case on behalf of Unocal in the District Court, invoking jurisdic-

tion under § 27 of the 1934 Act, 15 U.S.C. § 78aa. Unocal,

originally a nominal defendant, was subsequently realigned as a

plaintiff.’ The lawsuit seeks disgorgement under § 16(b) by

Mesa to Unocal of alleged short-swing profits, plus pre-judgment

interest, of about $150 million.

Mesa moved for summary judgment arguing, in reliance on

Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S.

§82 (1973) (“Kern County” or “Kern”), that its exchange of

Unocal stock for Unocal bonds in the economically coercive

Exchange Offer was an unorthodox transaction with no possibility

for speculative abuse of inside information and, therefore, not a

“sale” for purposes of § 16(b). Unocal also moved for summary

judgment, arguing that the exchange was a § 16(b) “sale.”

On April 10, 1990, the District Court granted Mesa’s motion and

denied Unocal’s.

6 The standstill agreement prohibited Mesa from purchasing any addi-

tional Unocal stock for 25 years. In addition, since Mesa would still be

Unocal’s largest stockholder following the recapitalization (owning

about the same percentage of outstanding shares it owned beforehand),

Unocal used the agreement to impose strict controls on Mesa’s ability

to vote or sell the Unocal shares it retained.

7 Unless the context otherwise requires, the term “Unocal” as used

herein means both David Colan and Unocal Corporation.

On August 8, 1991, the Court of Appeals for the Ninth Circuit

reversed the summary judgment for Mesa and directed the

District Court to grant Unocal’s cross-motion for summary judg-

ment. On December 23, 1991, the Court of Appeals denied

Mesa’s petition for rehearing and rejected its suggestion for

rehearing en banc.®

Concluding that Mesa’s exchange was factually distinguishable

from the transaction in Kern County because it was (1) not

pursuant to a merger and (2) not an “involuntary” transaction,

the Court of Appeals held that the exchange was a § 16(b)

“sale.” The Court of Appeals further stated that, as a result of its

“determination that this exchange was not an ‘unorthodox trans-

action,’ we do not review the record to determine whether the

Mesa Defendants had the opportunity to engage in the specula-

tive abuse of inside information.” App. 34a.’

On January 7, 1992, the Court of Appeals granted Mesa’s

motion for stay of the mandate. App. 63a.

*If the decision below is allowed to stand, a trial will be required on

issues not presented in this petition, including whether Mesa’s March

1985 acquisition of 6.7 million Unocal shares (which increased Mesa’s

ownership from 9.7% to 13.6%) was effected in a single purchase or

multiple purchases. See Foremost-McKesson, Inc. v. Provident Sec.

Co., 423 U.S. 232 (1976) (holding acquisition that results in owner-

ship of more than 10% not a § 16(b) “purchase”). Whatever the

outcome of those other issues might be, it would not affect whether the

question presented here is worthy of certiorari, since it would not

remedy the substantial confusion in the law concerning the important

and recurring issue of “unorthodox transactions” under § 16(b), confu-

sion that is exacerbated by the Court of Appeals’ decision.

* Mesa does not seek review of the Court of Appeals’ rejection of Mesa’s

argument regarding the nature of the proceedings before the District

Court. Contrary to the suggestion in the Ninth Circuit’s opinion, App.

17a, however, Mesa argued below that the District Court’s judgment

should have been affirmed on appeal whether reviewed on a summary

judgment standard or on a “clearly erroneous” standard.

REASONS FOR GRANTING THE WRIT

The question presented concerns the proper application of this

Court’s analytical approach to “unorthodox transactions” under

§ 16(b), as set forth in Justice White's landmark opinion in Kern

County. The Ninth Circuit’s decision (which is supported by

decisions of the Fifth, Seventh and Eleventh Circuits) conflicts

with numerous decisions of the Second Circuit and with decisions

of the Fourth, Sixth and Eighth Circuits.

Presented with facts strikingly parallel to those of Kern County,

the Ninth Circuit nevertheless concluded that Kern was inappli-

cable both because Mesa exchanged securities in a recapitaliza-

tion rather than a merger and because Mesa’s exchange was

“voluntary” rather than “involuntary.”'° In both respects, the

Ninth Circuit’s decision conflicts with decisions of the Second

and other Circuits. If the Court does not grant the wnt, the law

regarding “unorthodox transactions,” an important and recurring

issue'! under an important section’? of the 1934 Act, will be left in

substantial confusion.

On the broader issue of federal statutory construction, the

Ninth Circuit has departed from the analytical approach em-

ployed by this Court and by the Second Circuit in recent cases,

not involving unorthodox transactions, that have construed key

statutory terms in §16(b) and other sections of the 1934 Act in

context and in light of the purpose of the statutory provision.

101n the course of denying the rationale of Kern County, the Ninth

Circuit’s opinion circumscribed Kern as merely a “fact-specific” case,

App. 22a, and dismissed a frequently cited statement in Kern because

this Court “did not cite any authority to support [it].”” App. 32a-33a.

See Part III, infra.

\! Kern County is perhaps the most significant decision under §16(b)

and has been cited in more than 100 cases.

12 Gollust v. Mendell, 111 S. Ct. 2173, 2178 (1991) (describing §16(b)

as “an important part of Congress’ plan in the 1934 Act” to insure fair

and honest trading markets).

Indeed, the conflicts presented here with Second Circuit decisions

applying the unorthodox transaction approach and otherwise

construing §16(b) terms are so numerous and direct that, without

question, had this case been filed in that Circuit, the result would

have been different.

If the decision below is allowed to stand, Mesa could be

saddled with a judgment for $150 million, even though it could

not possibly have engaged in the speculative abuse of inside

information — the sole and specific evil that §16(b) is designed

to prevent. Such a windfall for Unocal would serve no statutory

or other legitimate purpose.

I. Kern County’s Analytical Approach to §16(b)

Section 16(b) establishes a “flat rule”? that any profits real-

ized by a statutory insider from the “purchase” and “sale” of an

issuer's equity securities within six months are recoverable by the

issuer. In sharp contrast with other provisions of the federal

secunities laws that deal with misuse or misstatement of informa-

tion,'* §16(b) requires no proof of scienter, reliance, causation,

misrepresentation or materiality. Instead, if (1) a “purchase”

and (2) a “sale” by (3) a statutory insider took place (4) within

six months, §16(b) is applied “mechanically” to require “auto-

matic” disgorgement of any profit. In most instances, therefore,

application of §16(b) is simpie, giving the rule its intended and

stringent deterrent effect. See generally 5 L. Loss & J. Seligman,

Securities Regulation 2331-36 (3d ed. 1990).

On the other hand, this “automatic” aspect of §16(b) does not

eliminate the judicial function in deciding what the statute means.

Courts long ago began to interpret the critical statutory terms

'3 Reliance Elec. Co. v. Emerson Elec. Co., 404 U.S. 418, 422 (1972).

'* E.g., Rule 10b-5 under §10(b) of the 1934 Act, 15 U.S.C. §78j(b),

17 C.F.R. §240.10b-5; Rule 14a-9 under §14(a) of the 1934 Act, 15

U.S.C. §78n(a), 17 C.F.R. §240.14a-9; §14(e) of the 1934 Act, 15

U.S.C. §78n(e).

“purchase” and “sale” in light of the statutory purpose unambigu-

ously stated in §16(b) itself:

For the purpose of preventing the unfair use of information

which may have been obtained by such beneficial owner,

director, or officer by reason of his relationship to the

jesuer....

(emphasis added). Well before Kern County, the Ninth Circuit

had concluded that §16(b)’s “exceedingly general” terms

“purchase” and “sale” should be interpreted in light of the

statute’s purpose “to avoid purposeless harshness.” Blau v. Max

Factor & Co., 342 F.2d 304, 306-07 (9th Cir.), cert. denied, 382

U.S. 892 (1965). As the Second Circuit put it, “(t]here is no

rule so ‘objective’ (‘automatic’ would be a better word) that it

does not require some mental effort in applying it on the part of

the person or persons entrusted by law with its application.” Blau

v. Lamb, 363 F.2d 507, 520 (2d Cir. 1966) (construing §16(b)),

cert. denied, 385 U.S. 1002 (1967).

This Court’s decision in Kern County endorsed the 20-year

trend of Max Factor, Lamb and other decisions. See 411 U.S. at

$94 n.26 (citing five such cases with approval and endorsing their

“pragmatic” approach).' Kern, like its predecessors, recognized

that many “borderline” or “unorthodox” transactions — as Op-

posed to “garden-variety” or “traditional cash-for-stock” transac-

tions — could not possibly be used for the speculative abuse of

inside information'® that Congress sought to prevent and thus

- -

'S For a discussion tracing ‘the development of §16(b) law from the

“simplistic,” “mechanistic” approach of older cases through the

unorthodox transaction cases ultimately endorsed in Kern County, see

Abrams v. Occidental Petroleum Corp., 450 F.2d 157, 162-63 (2d Cir.

1971) (Friendly, C.J.), affd sub nom. Kern County.

16 “Inside information” about an issuer, of course, is nonpublic inforrmna-

tion about the business and affairs of the issuer, as distinguished from

both public information about the issuer and nonpublic information

that is not about the issuer (e.g., information about the objectives and

plans of one of its stockholders). See, e.g. Merrill Lynch, Pierce,

should not be deemed “purchases” or “sales” within the scope of

§ 16(b). Jd. at 591-95. The “unorthodox transaction” approach

is the analytical framework within which transactions are scruti-

nized to determine whether they present an opportunity for

speculative abuse of inside information:

In deciding whether borderline transactions are within the

reach of the statute, the courts have come to inquire whether

the transaction may serve as a vehicle for the evil which

Congress sought to prevent — the realization of short-swing

profits based upon access to inside information — thereby

endeavoring to implement congressional objectives without

extending the reach of the statute beyond its intended limits.

Id. at 594 (footnote omitted).

Consistent with the aspect of § 16(b)’s “flat rule” that truly is

mechanical, the unorthodox transaction doctrine does not require

the courts to address the often difficult fact issue of whether

inside information was in fact used in connection with a purchase

or sale. Instead, the doctrine holds that a transaction does not

constitute a “purchase” or “sale” for § 15(b) purposes (whether

Or not it is a purchase or sale for other purposes) when — as

here — the circumstances are such that the defendant could not

possibly have used or benefitted from any inside information.’

For to hold the nominal “insider” liable in the latter case would

be punishment without purpose, which Congress (as evidenced by

Fenner & Smith, Inc. v. Livingston, 566 F.2d 1119, 1122-23 (9th Cir.

1978); Heublein, Inc. v. General Cinema Corp., 559 F.Supp. 692,

702-03 (S.D.N.Y.), afd, 722 F.2d 29 (2d Cir. 1983), cert. denied,

465 U.S. 1066 (1984).

'’ Reaching a conclusion to this effect, however, rarely requires a court

to resolve disputed fact issues. Since the meaning of statutory terms is

a question of law for the courts, the overwhelming majority of cases

applying the unorthodox transaction approach under § 16(b), includ-

ing Kern itself and almost all such cases cited herein, have been

disposed of by summary judgment or at the pleading stage.

the statutory words) did not intend. Cessante ratione legis, cessat

et ipsa lex.'*

Not only has Kern County been the law for almost 20 years, but

its analytical approach to interpreting the terms “purchase” and

“sale” under § 16(b) is entirely consistent with recent decisions

of this Court interpreting other statutory terms under other

sections of the 1934 Act. These decisions have focused both on

the statutory purpose of the particular section at issue and on the

language of § 3(a) of the 1934 Act, which defines various terms

used in the Act, including “purchase” and “sale,”!? but introduces

and explicitly qualifies every such term with the phrase “unless

the context otherwise requires” (emphasis added). For example,

in Reves v. Ernst & Young, 494 U.S. 56 (1990), construing

another 1934 Act term, members of this Court observed that

§ 3(a)’s “context clause” leaves it to the judiciary to “harmonize

_.. facially rigid terms ... with the evident intent of Congress,”

id. at 75-76 (Stevens, J., concurring), and “to flesh out ...

‘context clause’ exceptions.” Jd. at 81 (Rehnquist, C.J., concur-

ring in part and dissenting in part). See also Marine Bank v.

Weaver, 455 U.S. 551, 556 (1982) (noting that specified defini-

tions may not apply if context otherwise requires). The Ninth

Circuit’s decision contravenes the analytical approach of these

more recent decisions of this Court, as well as Kern County.

Similarly, the Ninth Circuit’s decision conflicts with the analyt-

ical approach that the Second Circuit has applied in recent

8 See, e.g, Blau v. Lamb, 363 F.2d 507, 516 (2d Cir. 1966) (construing

§ 16(b); cited with approval in Kern, 411 U.S. at 594 n.26), cert.

denied, 385 U.S. 1002 (1967).

'9 Section 3(a) does not, though, provide comprehensive definitions of

these two terms. Virtually all other subsections of § 3(a) state that

the term X “means” Y, but §§ 3(a)(13) (“purchase”) and

3(a) (14) (“sale”) simply state that the term purchase (or sale)

“includes” a contract to purchase or otherwise acquire (or to sell or

otherwise dispose of). See S.E.C. v. National Sec., Inc., 393 U.S. 453,

466 (1969) (describing § 3(a) as “for the most part unhelpful” in

determining appropriate meanings of “purchase” and “sale” for pur-

poses of § 10(b) of 1934 Act).

§ 16(b) cases interpreting terms other than “purchase” and

“sale.” See Mendell v. Gollust, 909 F.2d 724, 728 (2d Cir. 1990)

(“We and most other courts have developed a ‘pragmatic’ ap-

proach, construing §16(b) in a manner that seems most consis-

tent with Congress’ purpose.”), affd, 111 S.Ct. 2173 (1991);

C.R.A. Realty Corp. v. Crotty, 878 F.2d 562, 566-67 (2d Cir.

1989) (using “functional” approach to construe term “officer”

under §16(b) to include only those with “potential access to

inside information”). Cf. International Controls Corp. v. Vesco,

490 F.2d 1334, 1343-45 (2d Cir.) (holding spin-off of securities a

“sale” for § 10(b) purposes even though not a “sale” for § 16(b)

purposes), cert. denied, 417 U.S. 932 (1974).

II. The Ninth Circuit’s Decision Ignores the Close Fac-

tual Similarity Between This Case and Kern County

The undisputed facts of this case are overwhelmingly, indeed

strikingly, parallel to those of Kern County. The factual differ-

ences, see App. 24a (characterizing this case as “factually distin-

guishable” from Kern), are immaterial in light of the fundamental

rationale of Kern. In Kern, Occidental Petroleum had made a

hostile tender offer for common stock of Old Kern. Like Mesa,

Occidental was a true outsider (although it eventually owned 20%

of Old Kern’s stock) with absolutely no access to any inside

information about Old Kern. Kern County, passim. Old Kern’s

management, like Unocal’s, vigorously opposed the hostile offer.

411 US. at 598. To defeat Occidental’s offer, Old Kern agreed to

merge into Tenneco, with new preferred stock of Tenneco to be

issued in exchange for Old Kern common stock. /d. at 599. The

new Tenneco shares, like the Unocal bonds here, were to be freely

tradeable.

When the merger agreement was announced, Occidental had

several alternatives. It could have sold its Old Kern stock in the

market (as Mesa could have done with its Unocal stock), but as

this Court noted, that sale would have unquestionably resulted in

§16(b) liability and thus was not a “realistic alternative.” /d. at

599. Or Occidental could have made a higher tender offer for Old

Kern shares or otherwise attempted to frustrate Old Kern’s

defensive strategy with a proxy fight or legal challenge. Here,

Mesa’s legal challenges to Unocal’s Exchange Offer failed, as had

its earlier proxy fight. Mesa also considered (and rejected) the

possibility of seeking to mount a tender offer for additional

Unocal shares to compete with Unocal’s Exchange Offer. After

reviewing its alternatives, Occidental, like Mesa here, decided to

abandon its takeover efforts and entered into settlement discus-

sions with its adversary. Jd. at 587.

In the concluding paragraph of its analysis, the Ninth Circuit

emphasized that Mesa “voluntarily” sought to persuade Unocal

to permit Mesa to participate in the Exchange Offer and

“shrewdly calculated [its] options.” App. 34a. But this does not

distinguish Mesa’s predicament from Occidental’s; the Exchange

Offer was engineered not by Mesa, but by Unocal for the very

purpose of frustrating Mesa’s efforts. See 411 U.S. at 599 (“That

merger was not engineered by Occidental but was sought by Old

Kern to frustrate” Occidental’s takeover efforts). Once the

Delaware Supreme Court had ruled against Mesa on May 17,

1985, Unocal had the absolute right to proceed with the Ex-

change Offer and to exclude Mesa from participating in it. The

“negotiations” that Mesa and Unocal then had which resulted in

the May 20, 1985 agreement permitting Mesa to participate

concerned, not the terms of the Exchange Offer, but the terms of

Mesa’s capitulation. App. | la-12a.

Moreover, in Kern County, Occidental “took ... steps to

protect itself,” 411 U.S. at 587, including voluntarily (and pre-

sumably “shrewdly”) negotiating a separate option agreement

with Tenneco, an arrangement available only to it and not to other

Old Kern stockholders. Jd. Upon signing the option agreement

and receiving a substantial cash payment therefor, Occidental

publicly announced that it supported the Old Kern-Tenneco

merger, id. at 587-88, and even authorized its shares to be voted

in favor of the transaction if its votes were needed to obtain the

requisite majority. Id. at 616 (Douglas, J., dissenting).

Occidental’s “plight” was hardly as “hapless” as the Ninth

Circuit suggested. See App. 27a. Occidental’s chief executive

described his company’s $17 million profit from his dealings with

Old Kern and Tenneco as “ ‘not bad for two weeks’ work.’”’ 411

U.S. at 617 n.23 (Douglas, J., dissenting). That Mesa’s chief

executive characterized the financial outcome of the transaction

as a “victory” for Mesa, App. 27a, is equally irrelevant under the

Kern County analysis.

Applying the unorthodox transaction analysis articulated in

Part II of the opinion to these facts, Kern County held, in Part

III, that Occidental’s disposition of stock in the merger was not a

“sale” for purposes of § 16(b) and, in Part IV, that its execution

of the option agreement was not a § 16(b) “sale” either.””

Here, though, the Ninth Circuit ignored the factual parallels of

this case with Kern County. Instead, it emphasized two differ-

ences: (1) the transaction here was a recapitalization in the form

of an exchange offer, not a merger like the transaction at issue in

0 In holding that the execution of the option agreement (which by its

terms related to the Tenneco stock Occidental would receive in the

merger) did not constitute a § 16(b) “sale” of Occidental’s Old Kern

stock, the Court rejected two independent arguments advanced by the

plaintiff. Most of Part IV of Kern deals with the Court’s analysis

under the unorthodox transaction approach:

[W]e do not find in the execution of the Occidental-Tenneco

option agreement a sufficient possibility for the speculative abuse of

inside information with respect to Old Kern’s affairs to warrant

holding that the option agreement was itself a “sale” within the

meaning of § 16(b).

411 U.S. at 601. The Court noted that even though Occidental

wanted the option to avoid being a minority stockholder in Tenneco

and Tenneco wanted to rid itself of a potentially troublesome minority

stockholder, “[mJotivations like these do not smack of insider

trading.” Jd. In the last paragraph of Part IV, the Court rejected the

plaintiff's second argument, that the option was an option in form but

a sale in fact. Id. at 603-04.

Part III of Kern, and (2) Mesa’s disposition was “voluntary,”

because it “negotiated” the nght to participate in the coercive

Exchange Offer and because participation in an exchange offer

(even an economically coercive exchange offer) requires a “vol-

untary” act on the part of the stockholder, whereas a merger does

not.

Ill. The Ninth Circuit’s Limitation of the Unorthodox

Transaction Analysis to Mergers Conflicts with Kern

County and with Decisions of the Second Circuit

Applying That Analysis to Recapitalizations

The Court in Kern County did not attempt to articulate a

precise, all-encompassing definition of the term “unorthodox”

transaction (or its sometime substitute, “borderline” transaction ).

The term entered the § 16(b) lexicon simply as a short-hand

device for differentiating transactions that are not “traditional

cash-for-stock” transactions (the phrase used, e.g., in Kern, 411

U.S. at 593) or “garden-variety” transactions (the phrase used,

e.g., in Abrams v. Occidental Petroleum Corp., 450 F.2d 157, 162

(2d Cir. 1971), aff'd sub nom. Kern County).

Nevertheless, the Court did state in Kern's oft-cited footnote 24

that the term “unorthodox transaction” had been applied to

“stock conversions, exchanges pursuant to mergers and other

corporate reorganizations, stock reclassifications, and dealings in

options, rights, and warrants.” 411 U.S. at 593 n.24 (emphasis

added) (citing 2 L. Loss, Securities Regulation 1069 (2d ed.

1961)7'). Here, Unocal’s Exchange Offer was a recapitaliza-

tion — a recognized form of corporate reorganization” — of

21 This treatise, in turn, at 1069-72, discussed several of the early

unorthodox transaction Cases.

2 See, e.g, H. Henn & J. Alexander, Laws of Corporations § 386 at

1161-62 (3d ed. 1983) (noting that “term ‘reorganization’ . . . under

state law is sometimes used as a synonym for recapitalization or

reclassification of shares”); Microdot, Inc. v. United States, 728 F.2d

593 (2d Cir. 1984) (holding exchange offer of new debt securities for

Unocal, and thus squarely within the listing enumerated in Kern's

footnote 24. Mesa’s disposition in the Exchange Offer was

obviously not a “garden-variety” or “traditional cash-for-stock”’

transaction.

The Ninth Circuit, however, confined Kern County to mergers.

App. 29a. (“We conclude that the facts in this matter do not

come within the holding of Kern County that an involuntary

transaction that results from a merger is ‘unorthodox.’ ” (empha-

sis added) ).” Further, the Ninth Circuit dismissed the listing of

unorthodox transactions in Kern's footnote 24 as irrelevant, stat-

ing that “the [Supreme] Court did not cite any authority to

support [it].” App. 32a-33a.**

a portion of corporation’s common stock to be a “reorganization”

under § 368 of the Internal Revenue Code and, more specifically, a

“recapitalization” under § 368(a)(1)(E)).

3 See also, e.g. App. 24a (this case “factually distinguishable” from

Kern because “Unocal did not merge”); App. 29a (Kern “simply held

that an automatic exchange . . . pursuant to a merger” is not covered

by §16(b)). The Ninth Circuit also stated that the “majority” of the

transactions that have been considered unorthodox under the “excep-

tion announced” in Kern County were exchanges pursuant to mergers,

App. 29a, thus implicitly acknowledging that other courts have ap-

plied Kern to non-merger transactions — and presumably suggesting

that those “minority” courts went beyond Kern.

Even if the Ninth Circuit’s decision is narrowly read as a holding

that a recapitalization (and/or a tender offer or exchange offer) must

always be a § 16(b) “sale,” its holding conflicts with the rationale of

Kern, and its numerous statements limiting Kern to mergers demon-

strate that that holding was reached by applying a highly flawed

approach to § 16(b) that conflicts with the approach mandated by

Kern.

**In contrast, the Tenth Circuit has interpreted footnote 24 as a

meaningful list of types of unorthodox transactions, and the Fifth and

Seventh Circuits have (in dicta) characterized footnote 24 as a

nonexhaustive listing thereof. Morales v. Mapco, Inc., 541 F.2d 233,

235 (10th Cir. 1976) (holding transaction in warrants “unorthodox”

because encompassed by footnote 24), cert. denied, 429 U.S. 1053

But it is plain that this Court in Kern did not limit the

unorthodox transaction approach to mergers. Part IV of Kern

applied the unorthodox transaction approach to the option

granted by Occidental and concluded it was not a § 16(b) “sale.”

In Part II of the opinion, where the Court set forth an overview of

its analytical approach before applying that approach to the two

transactions at issue in Parts III and IV, the Court (1) included

footnote 24, listing various types of transactions that had been

deemed unorthodox; and (2) cited five earlier Court of Appeals

decisions — not one of which involved a merger — as examples of

the unorthodox transaction approach.”

In addition, the Ninth Circuit’s decision conflicts with two

decisions of the Second Circuit applying the unorthodox transac-

tion approach to an exchange in a recapitalization. Rothenberg v.

United Brands Co., [1977-1978 Transfer Binder] Fed. Sec. L.

Rep. (CCH) 996,045 (S.D.N.Y.), affd without opinion, 573

F.2d 1295 (2d Cir. 1977);7° and Roberts v. Eaton, 212 F.2d 82

(1977); Texas Int'l Airlines v. National Airlines, Inc., 714 F.2d 533,

539 n.9 (Sth Cir. 1983) (describing footnote 24 as a “nonexhaustive

list”), cert. denied, 465 U.S. 1052 (1984); Oliff v. Exchange Int'l

Corp., 669 F.2d 1162, 1166 (7th Cir. 1980) (noting that Kern applies

to “ ‘unorthodox,’ or perhaps a broader class of ‘borderline’ transac-

tions”; citing footnote 24), cert. denied, 450 U.S. 915 (1981).

> 411 US. at 594 n.26 (citing Roberts v. Eaton, 212 F.2d 82 (2d Cir.)

(exchange of stock in recapitalization, which was initiated at behest of

insider), cert. denied, 348 U.S. 827 (1954); Ferraiolo v. Newman, 259

F.2d 342 (6th Cir. 1958) (economically coerced conversion), cert.

denied, 359 U.S. 927 (1959); Blau v. Max Factor & Co., 342 F.2d 304

(9th Cir.) (voluntary exchange of one class of equity security for

another), cert. denied, 382 U.S. 892 (1965); Blau v. Lamb, 363 F.2d

507 (2d Cir. 1966) (voluntary conversion of preferred stock into

common), cert. denied, 385 U.S. 1002 (1967); and Petteys v. Butler,

367 F.2d 528 (8th Cir. 1966) (economically coerced conversion),

cert. denied, 385 U.S. 1006 (1967)).

® The Second Circuit’s holding in Rothenberg was dismissed by the

Ninth Circuit on the ground that the exchange there did not result in a

(2d Cir.) (cited with approval in Kern County, 411 U.S. at 594

n.26), cert. denied, 348 U.S. 827 (1954).?” Other courts have

also, since Kern, applied its analysis to hold numerous types of

transactions, other than mergers, to be unorthodox.”

change in “either the character of the investment or the nature of the

market risk assumed,” in contrast to Mésa’s exchange. App. 33a. But

the district court opinion in Rothenberg said only that absent such a

change, there was not a “sale.” It did not say, as the Ninth Circuit

concluded, that the presence of such a change ipso facto yields a

“sale” within the scope of § 16(b). That proposition, in addition to

being a non sequitur, would contravene Kern County, where Occiden-

tal exchanged common stock of one company for preferred stock of

another.

7 In Roberts, a combination of new preferred stock and new common

stock was exchanged, pursuant to a plan approved by stockholder vote,

for previously outstanding common stock. 212 F.2d at 83. The

opinion termed the transaction a “reclassification,” id., a term now

more commonly used for changes in the par value of an outstanding

class of stock. See, e.g., R. Balotti & J. Finkelstein, Delaware Law of

Corporations and Business Organizations § 8.4 (2d ed. 1990).

78 Other types of transactions that courts have labeled unorthodox under

Kern County include: (1) cash tender offer — Pier | Imports of

Georgia, Inc. v. Wilson, 529 F. Supp. 239, 243 (N.D.Tex. 1981); (2)

recapitalization — Hayes v. Sampson, [1980 Transfer Binder] Fed.

Sec. L. Rep. (CCH) 4 97,693 (S.D.N.Y. 1980); (3) exercise of

options — Pay Less Drug Stores v. Jewel Cos., 579 F. Supp. 1396,

1400-01 (N.D. Cal. 1984); (4) liquidation — Bolton v. Gramlich, 540

F. Supp. 822, 841 (S.D.N.Y. 1982); (5) exercise of stock apprecia-

tion rights — Matas v. Siess, 467 F. Supp. 217, 221 (S.D.N.Y. 1979);

(6) sale of stock option rights — Rosen v. Drisler, 421 F. Supp. 1282,

1286 (S.D.N.Y. 1976); (7) open market transaction in war-

rants — Morales v. Mapco, Inc., 541 F.2d 233, 235 (10th Cir. 1976),

cert. denied, 429 U.S. 1053 (1977); (8) overissuance of shares —

Kay v. Scientex Corp., 719 F.2d 1009, 1012 (9th Cir. 1983); and

(9) underwniting of warrants — Portnoy v. Seligman & Latz, Inc., 516

F. Supp. 1188, 1197-98 (S.D.N.Y. 1981).

IV. The Circuits Are in Conflict over Both the Necessity

for and the Meaning of “Involuntariness” as an

Element of the Kern County Analysis

The Ninth Circuit’s decision exacerbates a substantial conflict

among the Circuits, including the Second Circuit, over the

treatment of “involuntariness” under the unorthodox transaction

analysis.

A. The Circuits Are in Conflict over Whether

“Involuntariness” Is a Necessary Element

Under Kern County

The Ninth Circuit concluded that the critical element of the

Kern County analysis was the “involuntary” and “automatic”

nature of the merger transaction at issue there. App. 24a, 29a.

And indeed, the Court stated in Kern that “the involuntary nature

of Occidental’s exchange [in the merger], when coupled with the

absence of the possibility of speculative abuse of inside informa-

tion, convinces us that § 16(b) should not apply to transactions

such as this one.” 411 U.S. at 600.

Yet much of the Kern opinion suggests that the critical issue in

the Court’s analysis was not “involuntariness,” but rather the

absence of opportunity for speculative abuse of inside informa-

tion. The option transaction that Kern held not to be a “sale” was

entirely voluntary. Three of the five pre-Kern unorthodox trans-

action cases cited with approval in footnote 26 of Kern involved

wholly voluntary transactions; ” the other two were voluntary in

-form but economically coerced. Footnote 24 of Kern County

411 U.S. at 594 n.26 (citing Roberts v. Eaton, 212 F.2d 82 (2d Cir.)

(exchange in recapitalization initiated and controlled by insider), cert.

denied, 348 U.S. 827 (1954); Blau v. Max Factor & Co., 342 F.2d 304

(9th Cir.) (voluntary exchange), cert. denied, 382 U.S. 892 (1965);

and Blau v. Lamb, 363 F.2d 507 (2d Cir. 1966) (voluntary conver-

sion), cert. denied, 385 U.S. 1002 (1967)).

* Ferraiolo v. Newman, 259 F.2d 342 (6th Cir. 1958) (economically

coerced conversion), cert. denied, 359 U.S. 927 (1959); Petteys v.

includes other transaction forms that are by definition purely

voluntary in form (conversions and dealings in rights and war-

rants). 411 U.S. at 593 n.24. Nowhere did Kern say that

“involuntariness” is essential to unorthodoxy. In contrast to

Kern's single use of the word “involuntary,” 411 U.S. at 600,

Appendix E hereto presents eight excerpts from the Kern County

majority opinion that refer to the impossibility of speculative

abuse of inside information.*' App. 66a-67a.

The fundamental thrust of the Kern analysis, based on the

opinion as a whole, is directed at the impossibility of speculative

abuse of inside information and is best summarized in the

following:

In deciding whether borderline transactions are within the

reach of the statute, the courts have come to inquire whether

the transaction may serve as a vehicle for the evil which |

Congress sought to prevent — the realization of short-swing |

profits based upon access to inside information. . . .

411 U.S. at 594 (emphasis added).** Thus, the absence of

opportunity for speculative abuse by a defendant in a transaction

might be demonstrated not only by “involuntariness,” but alterna-

tively by the defendant’s lack of access to inside information

and/or by other characteristics of the transaction (such as the

fact. that a reorganization or other corporate transaction was

equally available to all stockholders, was not initiated or con-

Butler, 367 F.2d 528 (8th Cir. 1966) (same), cert. denied, 385 U.S.

1006 (1967).

*' The phrase “inside information” appears 20 times in the majority

opinion in Kern. The word “automatic” never appears.

2 In another § 16(b) case three years later, the Court described its

holding in Kern with no mention of involuntariness: “[{In Kern

County] we held that an ‘unorthodox transaction’ in securities that

did not present the possibility of speculative abuse of inside informa-

tion was not a ‘sale’ within the meaning of § 16(b).” Foremost-

McKesson, Inc. v. Provident Sec. Co., 423 U.S 232, 237 (1976)

(emphasis added).

trolled by the defendant, was accompanied by full disclosure of

information by the corporation to its stockholders and/or resulted

in no change in the stockholders’ relative percentage ownership

interests) .°

Other Circuits have reached conflicting conclusions about

whether “involuntariness” is essential under Kern. Compare

Texas Int'l Airlines v. National Airlines, Inc., 714 F.2d 533, 540

(Sth Cir. 1983) (holding a voluntary transaction to be a “sale”

under § 16(b) even though the 10% stockholder defendant had no

access to inside information and thus could not have engaged in

speculative abuse), cert. denied, 465 U.S. 1052 (1984),** and

Super Stores, Inc. v. Reiner, 737 F.2d 962 (11th Cir. 1984)

(holding a voluntary disposition in a tender offer to be a § 16(b)

“sale” even though the tender offer was available to all stockhold-

ers and was not controlled by the insider), with Gold v. Sloan, 486

F.2d 340, 346 (4th Cir. 1973) (holding a disposition in a merger

not to be a “sale” under Kern County as to defendant Scurlock,

who had no access to inside information, even though he cast the

deciding vote to approve the merger), cert. denied, 419 U.S. 873

Such factors (sometimes singly, sometimes in combination) are

common threads through the cases that have applied the unorthodox

transaction approach, both before and after Kern. See, e.g., the cases

cited in notes 25 and 28, supra.

* Texas International, however, should not be read to stand for the

overly general proposition ascribed to it by the Ninth Circuit, viz., that

a disposition “in the face of defeat in a takeover contest... is not an

‘unorthodox transaction’ under Kern County.” App. 30a. The defen-

dant in Texas International was indeed a defeated tender offeror. But

the transaction at issue there was not a disposition in a tender offer

(coercive or otherwise); it was a garden-variety cash-for-stock trans-

action available only to the 10% stockholder who sold. The defen-

dant’s argument there, which the Fifth Circuit rejected, was that such

a transaction should not be a § 16(b) “sale” for the sole reason that

the defendant was a defeated tender offeror who had no access to

inside information. In contrast, Mesa’s argument here turns on the

nature of the transaction, as well as the status of the defendant.

a |

(1974),*° and Colan v. Continental Telecom, Inc., 616 F. Supp.

1521 (S.D.N.Y. 1985) (holding voluntary grant of option by

defeated corporate suitor with no access to inside information not

to be a § 16(b) sale), aff'd without opinion, 788 F.2d 2 (24 Cir.

1986).

B. Whether “Involuntariness” Is Considered a Nec-

essary Element or Merely a Sufficient Element, |

the Ninth Circuit’s Analysis Thereof Conflicts |

witk the Analysis in Kern County and with Deci- |

sions of the Second, Sixth and Eighth Circuits |

“Involuntariness” (i.e., the absence of realistic alternatives to

the transaction at issue) has been a characteristic of many

transactions held to be outside the scope of § 16(b), both before

and after Kern County. Whether it is deemed a necessary

element under the unorthodox transaction analysis or, instead,

simply one of several potential indicia that a transaction provided

*> In the same case, the Fourth Circuit held that the disposition in the

merger by defendant Sloan was a § 16(b) “sale” because, unlike

Scurlock, he had access to inside information. 486 F.2d at 352-53.

see Portnoy v. Seligman & Latz, Inc., 516 F. Supp. 1188, 1194-95

(S.D.N.Y. 1981):

[T]he Court [in Kern County] suggested several factors to con-

sider ... [in the analysis]: access to inside information, the volun-

tariness of the transaction, and the possibility of speculative

abuse ....

... [B]ecause of the variety of statements in Kern County, lower

courts cannot be certain how to evaluate the factors mentioned in

relation to one another. “The Court did not specify which find-

ings ... are necessary, and which sufficient, to yield the conclusion

that a given transaction lies outside the purview of section 16(b).”

(quoting Note, Exceptions to Liability Under Section 16(b): A

Systematic Approach, 87 Yale L.J. 1430 (1978)).

no opportunity for speculative abuse, its analytical significance is

that it demonstrates that a transaction provided no opportunity for

speculative abuse of any inside information the defendant might

have had. Here, however, the Ninth Circuit (relying in part on a

decision of the Seventh Circuit) applied a three-part analysis of

the term that conflicts with the concept of involuntariness used in

Kern itself, with three decisions of the Second Circuit and with

decisions of the Sixth and Eighth Circuits.

First, the Ninth Circuit concluded that Mesa’s disposition was

“voluntary” because Mesa “voluntarily” negotiated with Unocal

seeking participation in the Exchange Offer. App. 25a, 34a. But

in Kern, Occidental voluntarily negotiated its option agreement —

and did so to improve its position vis-a-vis other Old Kem

stockholders, not, as Mesa did here, to eliminate discrimination

against it. See Part II, supra. This Court said Occidental’s

motivation “d[id] not smack of insider trading,” 411 U.S. at 601,

and held that neither the grant of the option nor the disposition in

the merger was a “sale.” Accord Colan v. Continental Télecom,

Inc., 616 F. Supp 1521, 1528 (S.D.N.Y. 1985) (holding option

agreement negotiated by defeated corporate suitor with no access

to inside information not to be a § 16(b) “sale”), affd without

opinion, 788 F.2d 2 (2d Cir. 1986).

Second, the Ninth Circuit concluded that Mesa’s disposition

was “voluntary” because it had the alternative “choice” of hold-

ing its Unocal stock and making another tender offer for addi-

tional shares. App. 24a-27a. The Second Circuit, however, has

twice held that such a “choice” is not relevant under § 16(b). In

Abrams, the Second Circuit decision affirmed in Kern, Judge

Friendly specifically rejected the relevance of such a choice,

which was available to Occidental:

We fail to see the possibility of speculative abuse in a

situation where such an offeror simply declines to make a

still higher offer or to attempt to block a transaction which it

regards as advantageous to all the shareholders including

itself.

Abrams v. Occidental Petroleum Corp., 450 F. 2d 157, 163 (2d

Cir. 1971) (emphasis added), aff'd sub nom. Kern County. The

Second Circuit reached the same conclusion in American Stan-

dard, Inc. v. Crane Co., 510 F.2d 1043, 1055 (2d Cir. 1974), cert.

denied, 421 U.S. 1000 (1975):

We hold that whether the tender offeror quits fighting when

the defensive merger is announced or continues to fight in

the hope of winning, his exchange of stock on the merger

after he has been defeated is not ipso facto a “sale” for

§ 16(b) purposes.

There, the Second Circuit emphasized the tender offeror’s “in-

ability ... to affect the course of the target company” in holding

the transaction not to be a “sale.” 510 F.2d at 1055.

Third, the Ninth Circuit concluded that Mesa’s disposition was

“voluntary” because it had the “alternative” of simply holding its

Unocal shares (notwithstanding the consequent reduction in

share value of 40% for any stockholder who did so, or $450 million

in Mesa’s case), and thus the court rejected Mesa’s argument

that a transaction voluntary in form is “involuntary” in substance

if it is economically coerced. App. 28a-29a. In this respect, the

Ninth Circuit’s holding conflicts with decisions of the Sixth and

Eighth Circuits holding that economically coerced transactions

are “involuntary” for purposes of the unorthodox transaction

analysis. Ferraiolo v. Newman, 259 F.2d 342 (6th Cir. 1958),

cert. denied, 359 U.S. 927 (1959); Petteys v. Butler, 367 F.2d 528

(8th Cir. 1966), cert. denied, 385 U.S. 1006 (1967).*’ Both of

*” In Ferraiolo, convertible preferred stock was “called” by the corpora-

tion for redemption at $27 per share in cash. Each preferred share was

convertible by the holder into a certain number of common shares,

which at the time of the call had an aggregate market value that had

risen to $36 per preferred share. The insider chose to convert his

preferred into the more valuable common, rather than let it be

liquidated into cash by operation of contract on the redemption date.

According to the court, the insider’s conversion — even though

voluntary in form — “was in a very real sense involuntary” since his

(or any holder’s) failure to convert would have resulted in a loss of

these decisions were cited with approval in Kern on the very

subject of “alternatives,” 411 U.S. at 600, as well as for being

seminal cases in the development of the unorthodox transaction

doctrine. Jd. at 594 n.26.°% See also Provident Sec. Co. v.

Foremost-McKesson, Inc., 506 F.2d 601, 605 (9th Cir. 1974)

(suggesting that inability to avoid §16(b) liability “without seri-

ous detriment” would constitute involuntariness under Kern anal-

ysis), aff'd on other grounds, 423 U.S. 232 (1976).

On the other hand, the Ninth Circuit found support for its

conclusion regarding economic coercion in Oliff v. Exchange

International Corp., 669 F.2d 1162 (7th Cir. 1980), cert. denied,

450 U.S. 915 (1981). There the Seventh Circuit held that a

reacquisition of shares was a § 16(b) “purchase” even though it

about 25% of the value of the investment. Thus the Sixth Circuit held

the transaction not to be within the scope of § 16(b). 259 F.2d at 346.

Petteys involved substantially identical facts (insiders were forced to

convert “rather than suffer a needless and substantial economic loss,”

again about 25% of the value of the investment), and the Eighth

Circuit held to the same effect. 367 F.2d at 537. Here, every Unocal

stockholder confronted an automatic, immediate 40% decrease in the

value of his shares if he failed to participate in the Exchange Offer.

*® Unocal argued to the Ninth Circuit that the promulgation of

Rule 16b-9, 17 C.F.R. § 240.16b-9, under § 16(b) relegated Ferraiolo

and Petteys to mere “historical significance,” since by that rule the

Securities and Exchange Commission exempted certain conversion

transactions from the application of § 16(b). Yet these two cases

were among the five cases cited by the Court in Kern as principal

examples of the unorthodox transaction doctrine. 411 U.S. at 594

n.26. Rule 16b-9 was promulgated in 1966, seven years before Kern,

and this Court was aware of the rule when it decided Kern. See 411

U.S. at 612 (Douglas, J., dissenting). The promulgation of Rule 16b-

9 did not override or eliminate the analytical force or precedential

value of Ferraiolo and Petteys, it merely relieved the courts, even

before Kern County, of the burden of deciding cases in this one area of

unorthodox transactions. See 411 U.S. at 612 (Douglas, J., dissent-

ing) (acknowledging continued significance of these cases).

was motivated by the defendant’s desire to avoid paying a tax of

205% of its earlier sale price.

After ignoring the striking similarity of this case to Kern,

confining Kern to mergers, and concluding that “involuntariness”

(as narrowly defined by it) was necessary and had not been

shown, the Ninth Circuit concluded its opinion by stating that

“we do not review the record to determine whether the Mesa

Defendants had the opportunity to engage in the speculative

abuse of inside information.” App. 34a. Thus the Ninth Circuit

never even considered — on the fundamental thrust of the Kern

test — the fact that the transaction in question was one in which

there was no possibility for speculative abuse by the defendant.

Numerous characteristics of the transaction — in addition to

the undisputed fact that Mesa, a true outsider, had no access to

inside information — establish that there would have been no

opportunity for speculative abuse of inside information by Mesa

even if it had received any. Unocal’s Exchange Offer was

initiated and controlled by Unocal, not Mesa. It was a transaction

available to all of Unocal’s stockholders, not just Mesa. It was

accompanied by fuli disclosure of information by Unocal to all

stockholders. It was economically coercive to all stockholders.

V. The Insider Trading and Corporate Takeover Aspects

of This Case Underscore Its Importance

In weighing the importance of the question presented by this

petition, it is of particular significance that § 16(b) is one of the

two principal federal weapons against insider trading, along with

§ 10(b)’s Rule 10b-5. 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-

5. Because § 16(b) is drawn with greater precision than

Rule 10b-5, under which the law is largely judge-made, and also

because § 16(b) gives the Securities and Exchange Commission

exemptive authority, the courts have not played as great a role

under § 16(b) as under Rule 10b-5. Nevertheless, the hundreds

of reported § 16(b) cases attest to the very substantial role that

the courts have played in the development of the section.*”

This Court’s decision in Kern County, which has now been in

the books for almost two decades, may well be the most important

of any of these cases in its endorsement of the “unorthodox”

transaction doctrine. That endorsement has brought a measure of

certainty into counsel’s advisory task. But the conflicts described

above, unless resolved, severely undermine Kern County. The

Ninth Circuit’s decision turns the clock back to pre-Kern days

and adds substantial confusion to § 16(b) law.

Stability is particularly important in the law affecting corporate

takeovers, where the transactions, which often determine the

allocation of huge amounts of capital and other resources, have a

tremendous impact on the national economy. And history clearly

shows that takeovers are a substantial and frequently recurring

phenomenon, not only during the mid- and late 1980s, but also

over the long term.”

If the Ninth Circuit’s decision stands, a statute designed to

deter short-swing purchase and sale combinations by classic

company insiders will have become a weapon for incumbent

management to use as a deterrent against any further purchase of

stock by any 10% stockholder disfavored by management (who is

*? The application of § 16(b) liability to 10% stockholders has received

particular focus. Three of the five cases decided by this Court under

§ 16(b) have resolved liability questions in favor of a 10% stockholder

in a takeover or acquisition context. Foremost-McKesson, Inc. v.

Provident Sec. Co., 423 U.S. 232 (1976); Kern County; Reliance

Electric Co. v. Emerson Elec. Co., 404 U.S. 418 (1972). The Court’s

other § 16(b) cases are Gollust v. Mendell, 111 S.Ct. 2173 (1991)

(interpreting standing requirements), and Blau v. Lehman, 368 U.S.

403 (1962) (holding partnership not liable for trades by partner).

“ See, e.g, S.E.C. Advisory Comm. on Tender Offers, Report of

Recommendations 11 n. 9 (July 8, 1983) (setting forth number of

reported tender offers per year, 1965 through 1982, and citing earlier

studies).

thus a de facto outsider despite being a de jure insider). Any such

stockholder must fear that if he purchases more shares, a hostile

management will be able, at least in the Ninth Circuit, to

structure an economically coercive transaction that will create

“profits” for all stockholders but then immediately recoup the

10% stockholder’s share for the company, leaving him and him

alone economically punished. That is not the purpose of § 16(b).

If not reconciled by this Court, the sharp conflicts described

herein among the Circuits — especially those between the Ninth

Circuit and the Second Circuit — will encourage substantial

forum shopping. Forum shopping is particularly likely because of

the nationwide service of process and broad choice of venue

available under the 1934 Act and because § 16(b) questions lend

themselves so readily to declaratory judgment actions by the

insider.*!

The decision of the Court of Appeals collides with Kern

County, with numerous decisions of the Second Circuit and with

decisions of three other Circuits. It confuses the law. It is

retrogressive. It embraces — indeed all but revels in — an “auto-

matic” and “mechanical” (App. 2la.) interpretation of § 16(b)

that produces “purposeless harshness.’”“? It should not be allowed

to stand.

*! Both Foremost-McKesson, 423 U.S. 232, and Reliance Electric, 404

U.S. 418, for example, were declaratory judgment actions.

” See Blau v. Max Factor & Co., 342 F.2d 304 (9th Cir.), cert. denied,

382 U.S. 892 (1965).

iiiciaceaicaenieeilicaieeaaaidaaanaiacniaieaiadiaaldl

CONCLUSION

For the reasons set forth above, the petition for a writ of

certiorari should be granted.

Respectfully submitted,

/s/

JAMES EDWARD MALONEY

(Counsel of Record

for Petitioners)

THOMAS GIBBS GEE

JOSEPH A. CIALONE II

STEPHEN A. MASSAD

BAKER & Botts

910 Louisiana Street

Houston, Texas 77002

(713) 229-1234

Louis Loss

Cambridge, Massachusetts

MICHAEL H. DIAMOND

SKADDEN, ARPS, SLATE,

MEAGHER & FLOM

Los Angeles, California March 6, 1992

APPENDICES

Appendix A

Appendix B

Appendix C

Appendix D

Appendix E

TABLE OF APPENDICES

Opinion of the United States Court of

Appeals for the Ninth Circuit, dated

December 23, 1991, in Colan v. Mesa

gS Ey ry re re 3a

Opinion of the United States District

Court for the Central District of California,

dated April 10, 1990, in Colan v. Mesa

PE AN in hn hak sc cca bounsaakaens 36a

Order of the United States Court of

Appeals for the Ninth Circuit, dated

January 7, 1992, granting motion

for stay of mandate in Colan v. Mesa

PE GL hin ho nid sae chs oe 63a

rr. £ gy OU Rewer ee 64a

Excerpts from this Court’s Opinion in Kern

County Land Co. v. Occidental Petroleum

Com, S44 US. S62 CISTS) on oa scncscces 66a

Appendix A

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Davip CoLan,

Plaintiff,

and No. 90-55641

UNOCAL CORPORATION, D.C. No.

Plaintiff-Appellant, CV-86-3564-JGD

Vv.

MEsA PETROLEUM Co., et al.,

Defendants-Appellees.

Davip CoLan,

Plaintiff-Appellant, No. 90-55643

and D.C. No.

UNOCAL CORPORATION, CV-86-3564-JGD

Plaintiff, ORDER AND

Vv. AMENDED

MESA PETROLEUM Co., et al., OPINION

Defendants-Appellees.

Appeal from the United States District Court

for the Central District of California

John G. Davies, District Judge, Presiding

Argued and Submitted

June 6, 1991—Pasadena, California

Filed August 8, 1991

Amended December 23, 1991

16851

ee rt—“(‘“‘COCt

16852 Coan Vv. MESA PETROLEUM Co.

Before: Alfred T. Goodwin, Harry Pregerson and

Arthur L. Alarcon, Circuit Judges.

Opinion by Judge Alarcon

SUMMARY

Securities

Reversing a district court judgment, the court of appeals

held that the sale or purchase of common stock pursuant to a

tender offer is a “sale” under section 16(b) of the Securities

Exchange Act of 1934 (15 U.S.C. § 78p(b)) rather than an

“unorthodox transacuon” from which the issuer may not seek

recovery of profits.

Appellees Mesa Petroleum Company and others (collec-

tively, the Mesa defendants) acquired subtantial stock in

appellant Unocal Corporation. Unocal initiated defensive

measures to discourage the possibility of a takeover. Mesa

continued acquiring common stock and informed the Secun-

ties and Exchange Commission that it might seek to obtain

control over Unocal’s operations. Mesa made a tender offer

to purchase Unocal common stock. Unocal rejected the offer.

Unocal then offered to exchange debt securities for outstand-

ing Unocal common stock, expressly excluding Mesa from

participating in the exchange offer. Negotiations to settle the

dispute were unsuccessful. The Delaware Supreme Coun

upheld Unocal’s right to exclude Mesa from the self-tender

offer. Following further negotiations, Mesa entities were .

allowed to participate in Unocal’s offer. Mesa exchanged

shares of common stock for negotiable debt securities. A

Unocal shareholder filed a derivative action on Unocal’s

behalf, alleging that the Mesa defendants violated section

16(b) and seeking recovery of Mesa’s short-swing profits.

Unocal joined the suit as a plaintiff. Mesa responded that the

CoLaNn Vv. MESA PETROLEUM Co. 16853

exchange of stock for negotiable debt was not a sale because

it fell within the “unorthodox transaction” defense to section

16(b) liability stated in Kern County Land Co. v. Occidental

Petroleum Corp., 411 U.S. 582 (1973). Prior to trial, Unocal

moved for an in limine ruling that the “unorthodox

transaction” defense was not applicable. The parties agreed

that the matter would be heard as a motion and cross motion

for summary judgment and that the factual record on this

issue was already fully developed. The court found in favor

of the Mesa defendants, concluding that, although the transac-

tion was a section 16(b) sale, the Kern County “unorthodox

transaction” defense applied in this case.

{1] Mesa argued that the distnct court conducted a bench

tnal, not a hearing on cross motions for summary judgment,

and that this court should therefore apply a clearly erroneous

standard. [2] Because the record indicates that the district

court decided the applicability of the “unorthodox

transaction” defense in response to Mesa’s request that the

matter be treated as a motion for summary judgment, [3] the

lower court's order was subject to de novo review on appeal.

[4] Section 16(b) provides that an issuer may recover prof-

its realized by a beneficial owner from the sale of the issuer's

equity securities within a six-month period. [5] A sale occurs

when an insider becomes irretrievably entitled to receive a

sum certain for his security. [6] In Kern County, the Supreme

Court held that an exchange of stock was not a section 16(b)

sale because of the involuntary nature of the exchange, which

was required pursuant to the merger of two corporations. [7]

This case is factually distinguishable because the exchange of

stock for debt securities was not an involuntary or automatic

transaction. [8] The Mesa defendants had a choice of partici-

pating in the offer or holding onto their stock. [9] They initi-

ated arms-length negotiations with Unocal, seeking

participation in the self-tender offer. [10] The record conclu-

sively shows that the exchange of stock for negotiable debt

was voluntary.

16854 CoLaNn Vv. MESA PETROLEUM Co.

[11] The Mesa defendants argued that otherwise volitional

transactions are unorthodox if a beneficial owner is coerced

economically into exchanging his common stock. [12] An

economic coercion test is contrary to the intent of Congress

in enacting a bright-line, flat rule requiring disgorgement of

profits. [13] The facts in this case do not come within the

Kern County holding that an involuntary transaction resulting

from a merger is unorthodox. [14] The sale or purchase of

stock pursuant to a tender offer is not an unorthodox transac-

tion.

[15] The Mesa defendants also argued that the exchange

was an unorthodox transaction because it resulted from a

recapitalization of Unocal. [16] Kern County did not involve

recapitalization, and [17] other cases cited by the Mesa defen-

dants do not support this argument.

COUNSEL

Darryl Snider, Brobeck, Phleger & Harmson, Los Angeles,

California, for the appellant Unocal; William Lerach, Mil-

berg, Weiss, Bershad, Specthrie & Lerach, San Diego, Cali-

fornia, for the plaintiff-appellant David Colan.

James Edward Maloney, Baker & Botts, Houston, Texas, for

the defendants-appellees.

ORDER

The opinion filed on August 8, 1991, is amended bv delet-

ing the following sentence:

Once in control of Unocal, the Mesa Defendants

would have the option of selling off Unocal’s assets

and thereby recouping any of their losses in the

CoLaN Vv. MESA PETROLEUM Co. 16855

value of the stock purchased prior to the self-tender

offer.

Slip. op. at 10764.

With the opinion so amended, the panel has voted unani-

mously to deny the petition for rehearing. Judges Pregerson

and Alarcon have voted to reject the suggestion for rehearing

en banc, and Judge Goodwin recommends such rejection.

The full court has been advised of the suggestion for

rehearing en banc and no judge of the court has requested a

vote on the suggestion for rehearing en banc. Fed. R. App. P.

35(b).

The petition for rehearing is denied and the suggestion for

rehearing en banc is rejected.

OPINION

ALARCON, Circuit Judge:

In this action for recovery of short-swing profits brought

pursuant to section 16(b) of the Securities Exchange Act of

1934, 15 U.S.C. § 78p(b), Unocal Corporation appeals from

the denial of its cross motion for summary judgment, and the

order granting a motion for summary judgment in favor of

Mesa Petroleum Company, Mesa Southem Company, Mesa

Asset Company, CY-41, Inc., and Jack-41, Inc. (Mesa Defen-

dants). We must decide whether an exchange by a beneficial

Owner of its common stock for non-convertible debt securi-

ties, in response to a self-tender offer, is a “sale within the

meaning of section 16(b) of the Securities Exchange Act of

1934. We reverse because we have concluded that an

exchange of common stock for a negotiable debt security pur-

suant to a self-tender offer is a “sale” within section 16(b).

16856 CoLan Vv. MESA PETROLEUM Co.

Unocal’s contentions on appeal can be summarized as fol-

lows:

One. The district court erroneously weighed the

evidence and made credibility determinations on rul-

ing on cross motions for a summary judgment.

Two. The district court erred in concluding that

Mesa’s exchange of Unocal common stock for nego-

tiable debt securities in response to its self-tender

offer was an “unorthodox transaction,” and not a

“sale” requiring a disgorgement by the Mesa Defen-

dants of any profits that may have been realized as

a result of this transaction.

PERTINENT FACTS

In October of 1984, Mesa Partners II was formed and

began accumulating stock in Unocal. The general partners in

Mesa Partners II were: (1) Mesa Asset Company, a wholly

owned subsidiary of Mesa Southem Company, which is a

wholly owned subsidiary of Mesa Petroleum Company; (2)

Cy-41, Inc., wholly owned by Cyril Wagner, Jr.; and (3) Jack-

41, Inc., wholly owned by Jack E. Brown.

Cyril Wagner, Jr., and Jack E. Brown are the sole partners

of Wagner & Brown, and Brown & Wagner. Cyril Wagner,

Jr., and Jack E. Brown, along with Brown & Wagner, are also

the partners of Wagner & Brown II. T. Boone Pickens was the

President and Chairman of the Board of Directors of Mesa

Petroleum Company, President of Mesa Assets Company, and

President of Mesa Southern Company. This joint venture shall

be referred to as Mesa Partners II in this opinion.

On February 14, 1985, Mesa Partners II filed a Schedule

13D statement’ with the Securities and Exchange Commission

"Section 13(d) of the Securities Exchange Act of 1934 requires any per-

son who becomes a beneficial owner, directly or indirectly, of more than

CoLAN v. MESA PETROLEUM Co. 16857

(SEC), in which it reported that it had acquired 7.3 percent of

Unocal’s common stock for investment purposes. By Febru-

ary 22, 1985, Mesa Partners II owned 17 million shares of

Unocal’s common stock, representing 9.7 percent of the out-

Standing shares.

Unocal initiated defensive measures in order to discourage

a perceived takeover threat by Mesa Partners II. On February

25, 1985, Unocal amended its bylaws concerning the proce-

dures for nominating directors and making shareholder pro-

posals. Unocal also filed an action in the Superior Court of the

State of California for the County of Los Angeles against

Security Pacific National Bank on March 12, 1985, for breach

of fiduciary duty, breach of contract, and deceit and misrepre-

sentation in connection with loans it made to Mesa Partners

I]. Mesa Partners II used the money obtained from these loans

to purchase Unocal common stock. Mesa Petroleum Company

and Mesa Asset Company responded by filing an action in the

same court against Unocal on March 21, 1985, alleging

wrongful interference with their banking relationships.

On March 27, 1985, Mesa Partmers II acquired a total of 6.7

million shares of Unocal common stock at $48.10 per share.

This transaction increased Mesa Partners II's shares to 23.7

million and its ownership interest to 13.6 percent of Unocal’s

common stock.

On March 28, 1985, Mesa Partners II amended its Schedule

13D statement. Mesa Partners II reported to the SEC that it

“may seek to obtain control of the company or to participate

in the formulation, determination or direction of the basic

business decisions of the Company.” Mesa Partners II also

five percent of any class of equity security to file a statement of ownership

with the Securities and Exchange Commission within ten days after reach-

ing the five percent threshold. 15 U.S.C. § 78mid)(1) (1988). See also |

T. Hazen, The Law of Securities Regulation § 11.10 at 688 (2d ed. 1190).

10a

16858 CoLaN V. MESA PETROLEUM Co.

indicated that it intended to solicit proxies to gain postpone-

ment of the annual Unocal shareholders meeting then sched-

uled for April 29, 1985.

On April 1, 1985, Unocal filed a complaint alleging viola-

tions of section 13(d) of the Securities and Exchange Act of

1934 against T. Boone Pickens, Jr., Cyril Wagner, Jr., Jack E.

Brown, Mesa Partnership, the Partners and certain affiliates of

the Partners in the United States District Court for the Central

District of California. Unocal claimed that the named defen-

dants or their agents made false and misleading representa-

tions in Mesa Partners II’s original Schedule 13D statement

by indicating that it acquired Unocal common stock for

investment purposes. The defendants filed a counterclaim on

April 12, 1985, alleging that Unocal violated proxy solicita-

tion rules.

On April 8, 1985, Mesa Partners II made a tender offer to

purchase 64 million shares of Unocal common stock at $54

per share.? Unocal’s Board of Directors recommended that

Unocal’s shareholders reject Mesa Partners II’s tender offer as

inadequate and not in their best interests.

On Apmil 16, 1985, Unocal offered to exchange “a package

of its debt securities with an aggregate principal amount of

$72 ... consisting of (i) $20 principal amount of 14% Senior

Secured Notes Due 1990, (ii) $32 principal amount of Float-

ing Rate Senior Secured Notes Due 1991 and (iii) $20 princi-

pal amount of Senior Secured Extendible Notes Due 1997”

for up to 87.2 million shares (approximately one-half) of Uno-

cal’s outstanding common stock. This offer was originally

conditioned upon Mesa Partners IIs “acceptance for payment

of 64,000,000 Shares pursuant to the Mesa Offer.” Unocal

modified its offer on April 23, 1985, to provide for the pur-

chase of “up to 50 million shares of its common stock in

*Mesa Easter, Inc., a wholly owned subsidiary of Mesa Partners II,

joined with Mesa Partners II in this tender offer.

lla

CoLaN v. MESA PETROLEUM Co. 16859

exchange for $72 per share in senior secured notes. whether

or not Mesa purchased the 64 million shares it was seeking

through its tender offer.”

Unocal stated in its offer that one of its express purposes

was “to make it more difficult for Mesa Bidders to complete

the Mesa Offer.” Unocal expressly excluded Mesa Partners II

from participating in its exchange offer. Unocal’s exchange

offer provided that

[t]he Company [Unocal] will not accept for

exchange, or issue Securities in exchange for, any

Shares tendered by or on behalf of Mesa Petroleum.

Mesa Partnership, Mesa Sub or any person control-

ling, controlled by or under common control with

any of the forégoing (collectively, the “Mesa

Group”), nor any Shares tendered by or on behalf of

any other person that were transferred. directly or

indirectly, after the date of this Offer to Purchase to

such person by any member of the Mesa Group.

On April 22, 1985, Mesa Partners II Challenged its exclu-

sion from Unocal’s tender offer in Delaware State court. On

April 29, 1985, the Court of Chancery temporarily restrained

Unocal from proceeding with its offer unless it included Mesa

Partners II.

On May 14, 1985, representatives of Unocal and Mesa

Partners II, including T. Boone Pickens, met in an attempt to

negotiate a settlement. These discussions broke off without

resolution. On May 17, 1985, the Delaware Supreme Court

reversed the Court of Chancery and held that Unocal was not

prohibited by law from excluding Mesa Partners I] from its

tender offer.

Following the Delaware Supreme Court's decision. repre-

sentatives of Mesa Partners II contacted Unocal and sought to

l2a

16860 CoLaNn Y MESA PETROLEUM Co.

reopen negotiations. After several rounds of negotiations, an

agreement was reached on May 20, 1985.

Pursuant to the agreement, the “Mesa Entities” were

allowed to participate in Unocal's self-tender offer.* Mesa

Partners II agreed to terminate its tender offer. In addition,

Mesa Partners II agreed that it would not participate in any

proxy solicitation and would not acquire any additional Uno-

cal shares for a period of twenty-five years. Mesa Partners I

also agreed that, for a period of ten years, it would vote its |

Unocal stock on all matters in the same way and “in the same

proportion as the votes cast by holders of Shares other than

the Mesa Entities.” In addition, Mesa Partners II agreed to

strict controls on its ability to sell its Unocal common stock.

On the same date, Mesa Partners II exchanged approxi-

mately 7.8 million shares of Unocal common stock for nego-

tiable debt securities.* Each of these securities had a stated

maturity date and provided for periodic interest payments.

Mesa Asset Company sold these debt securities on July 3,

1985, for approximately $589 million.

PROCEDURAL BACKGROUND

On June 3, 1986, David Colan, a shareholder in Unocal,

filed a derivative action on behalf of Unocal, alleging viola-

tions of section 16(b) by the Mesa Defendants. The action

sought recovery of short-swing profits realized by Mesa. Uno-

cal was originally named as a defendant in this action, but was

realigned as a real party plainuff on August 3, 1989.

On September 25, 1989, the Mesa Defendants filed a

>The Mesa Enuties included Mesa Petroleum Company, Mesa Asset

Company, Mesa Partners II, Mesa Eastern, Inc., Cy-41, Inc., Jack-41, Inc.,

Cyn! Wagner, Jr., Jack E. Brown, T. Boone Pickens, Jr., Wagner &

Brown, Brown & Wagner, and Wagner & Brown II.

“Mesa Partners II was dissolved on May 20, 1985.

inner eel

l3a

CoLaN v. MESA PETROLEUM Co. 16861

motion for summary judgment, in which they argued that the

exchange of their common stock for Unocal's debt securities

was not a sale within section 16(b). The Mesa Defendants

argued that their exchange of stock for negotiable debt securi-

ties was not a sale because it fell within the “unorthodox

transaction” defense to section 16(b) liability announced by

the Supreme Court in Kern County Land Co. v. Occidental

Petroleum Corp., 411 U.S. 582 (1973). The district court

denied the Mesa Defendants’ motion for summary judgment

on October 23, 1989, concluding that genuine issues of mate-

rial fact existed.

On December 1, 1989, Unocal filed a motion in limine in

which it requested the district court to rule, as a matter of law.

that the “unorthodox transaction” defense to a section 16(b)

violation was inapplicable. In addition, Unocal sought a pro-

tective order precluding the Mesa Defendants from introduc-

ing any evidence before the jury conceming the “unorthodox

transaction” defense. Unocal asserted that if any facts were in

dispute concerning the applicability of the “unorthodox

transaction” defense, the district court should conduct an evi-

dentiary hearing to resolve the issue before the selection of

the jury.

{In their opposition to Unocal’s motion in limine, the Mesa

Defendants “renew[ed] [their] motion for a summary judg-

ment and urge(d] th[{e] court to accept plaintiff's belated

admission that this is an issue for the Court where the record

is sufficiently developed to permit the Court to determine

whether the unorthodox transaction exception applies to these

facts.”

A hearing on the motion in limine was scheduled for Janu-

ary 4, 1990. On that date, the court informed counsel that it

would decide the in limine motion concerning the

“unorthodox transaction” defense “if there is agreement,

unequivocal agreement among counsel that the facts are suffi-

ciently developed to rule on this matter.”

l4a

16862 CoLaNn Vv. MESA PETROLEUM Co.

Mr. Michael Diamond, counsel for Mesa Petroleum Com-

pany, argued that a motion in limine was not the proper vehi-

cle to decide this question. Instead, Mr. Diamond contended

that summary judgment is “the way we think it should be

decided.” After further colloquy, Mr. Diamond stated: “[W]e

now renew our summary judgment motion... .”

After a bref recess was granted so that Unocal’s counsel

could consider Mr. Diamond’s suggestion, Mr. William

Lerach, one of Unocal’s attorneys, informed the court as fol-

lows: “We are prepared to have the Court treat this issue as

tendered to it, if you will, on cross summary judgment

motion... .”

After further discussion, the court stated: “[YJour motion in

limine will be considered as a cross motion for summary

judgment, and Mesa’s previously filed summary judgment

mouon will be reconsidered by the Court, and the record is to

be supplemented by a national best seller.” The court granted

Unocal’s unopposed request to receive, as an exhibit, a book

written by Mr. T. Boone Pickens. The court declined to hear

oral argument concerning the “unorthodox transaction”

Gefense issue.

On January 22, 1990, the court entered an order which

“grants Defendants’ Motion for Summary Judgment and

denies Plaintifts’ Cross-Motion for Summary Judgment.”

On January 26, 1990, a hearing was held to determine

whether the case should proceed to mal before a jury on Janu-

ary 30, 1990. Unocal argued that a trial was necessary even

if the May 20, 1985, exchange of stock for debt securities was

an “unorthodox transaction,” because the July 3, 1985, dispo-

sition of the debt securities by Mesa was a “sale” within sec-

tion 16(b). The district court reminded Unocal’s counse! that

during the January 4, 1990, hearing

you stipulated and agreed that [the in limine] motion

may be considered as a cross motion for summary

lSa

CoLan v. MEsA PETROLEUM Co. 16863

judgment, and also the representation was made that

all of the facts necessary to decide those issues were

in the record, either in the motion that was filed by

Mesa as Mesa’s second motion for summary judg-

ment or in your motion for in limine and elsewhere.

The court informed the parties that they could file supple-

mental motions relating to the January 19, 1990, order. Coun-

sel for Unocal then inquired as follows:

MR. LERACH: Your Honor, just so I’m clear.

You want this done on the existing factual record.

THE COURT: Well, if there are facts that —

you see, again, you pose great problems for me.

Because the representation was made, it was an une-

quivocable representation on January the 4th that all

of the facts were in the record upon which I could

base whatever findings, whatever inferences I could

draw for the purpose of ruling on the cross motions

for summary judgment. Those facts were before me.

MR. LERACH: That is still our position.

THE COURT: All right.

MR. LERACH: I'm not changing that. I just

want to reaffirm that, that we're working off the

existing record.

THE COURT: Yes.

MR. LERACH: Thank you.

MR. SNIDER: Neither side will then supple-

ment the record; is that correct. your Honor?

THE COURT: Well —

l6a

16864 ~ = COoLaN v. MESA PETROLEUM Co.

MR. SNIDER: The reason I say it’s very impor-

tant, when the submission was made on January 4th,

one of the reasons the submission was made to have

it treated that way, as a Motion for Summary Judg-

ment. We recessed and we conferred with one

another, your Honor will recall, and we came back

because we knew what facts were in the record on

the issue of voluntariness. And there was a complete

void of facts on that record from our point of view

with respect to Mesa’s position as to either May 20th

or July 3rd.

On February 9, 1990, counsel for Mesa Petroleum Com-

pany filed a document enutled “Supplemental Mouon for

Summary Judgment.” Mesa Petroleum Company also submit-

ted a proposed order entitled “Supplemental Summary Judg-

ment and Dismissal of Action With Prejudice.”

On April 10, 1990, the district court entered a new judg-

ment and vacated the January 19, 1990, order. The court ruled

that “[a]lthough Mesa’s tender of its Unocal stock in

exchange for debt securities can be considered a ‘sale’, the

Court finds that the Kern County unorthodox transaction

exception applies to the May 1985 exchange offer to exempt

it from Section 16(b) liability.” The district court again

entered an order that granted the Mesa Defendants’ motion

for summary judgment and denied Unocal’s cross motion for

Summary judgment.

Unocal has timely appealed from the judgment which

finally disposes of this section 16(b) action.

DISCUSSION

I. Nature of the Proceedings Before the Trial Court

[1] Unocal contends that the district court violated its nght

to tial by jury by weighing the evidence submitted by the

17a

CoLaNn Vv. MESA PETROLEUM Co. 16865

parties, drawing inferences from conflicting circumstantial

evidence, resolving disputed issues of fact, and determining

the credibility of T. Boone Pickens’ testimony, in ruling on

cross motions for a summary judgment. The Mesa Defendants

do not dispute Unocal’s argument that the district court failed

to consider the evidence in the light most favorable to Unocal

in ruling on the motion for a summary judgment. Instead, the

Mesa Defendants contend that the district court conducted a

bench trial, not a hearing on cross motions for summary judg-

ment. The Mesa Defendants argue that we must review the

district court’s judgment under the clearly erroneous standard.

The record does not support the Mesa Defendants’ conten-

tion that the parties “authorized the court to conduct a bench

trial.” Appellees’ Brief at 14. The Mesa Defendants requested

that the district court reconsider their motion for a summary

judgment rather than act on Unocal’s motion in limine. The

Mesa Defendants prepared a proposed order granting their

motion for a summary judgment and dismissing Unocal's

action with prejudice.

The Mesa Defendants’ reliance on Wolfe v. United States,

798 F.2d 1241 (9th Cir.), amended on other grounds, 806

F.2d 1410 (9th Cir. 1986), cert. denied, 482 U.S. 927 (1987),

is misplaced. In Wolfe, we concluded, after reviewing the

record, that “the parties intended to submit the case for a

bench trial on stipulated facts.” /d. at 1243-44 n.2. The other

cases relied upon by the Mesa Defendants also involve facts

showing that the parties intended to waive trial by jury and try

their cases on stipulated or agreed facts. Starsky v. Williams,

512 F.2d 109, 111 (9th Cir. 1975); Southwest Forest Indus..

Inc. v. Westinghouse Elec. Corp., 422 F.2d 1013, 1016-17

(9th Cir.), cert. denied, 400 U.S. 902 (1970); Gillespie v. Nor-

ris, 231 F.2d 881, 883 (9th Cir. 1956).

Unlike the situation in the cases relied upon by the Mesa

Defendants, in the instant matter the parties expressly agreed

to have the court decide the applicability of the “unorthodox

18a

16866 Coan Vv. MESA PETROLEUM Co.

transaction” defense on cross motions for summary judgment.

The court reflected this mutual understanding by stating: “It’s

now stipulated to be a motion, a cross summary judgment

motion.”

On the same date that the “unorthodox transaction” defense

issue was submitted to the court for decision without oral

argument on the cross motions for summary judgment, the

record reflects that the court inquired of counsel about the

“timing for mal.” The court stated that “[t]here is a distinct

possibility that I can start this case on January 30th.” After

some discussion, the trial date was set for January 30, 1985.

Mr. Diamond, an attorney for Mesa Petroleum Company, then

inquired of the court how counsel should respond “on the

question of our desires on the jury/non-jury issue?” The court

replied: “Make up your mind and let me know.” Another of

Mesa Petroleum Company’s attorneys, Mr. James Edward

Maloney, whose law office is in Texas, then asked the court

whether the trial judge conducts the voir dire in the Central

District of California. Thereafter, Mr. Maloney’s request to be

allowed to question the prospective jurors on voir dire was

granted.

In light of the state of the record in this matter, which

shows that the Mesa Defendants requested that the court

determine the applicability of the “unorthodox transaction”

defense on summary judgment rather than in a non-

reviewable motion in limine proceeding, and sought permis-

sion to participate in the voir dire examination of the jurors,

if they decided not to waive a trial by jury, we are troubled

that they now argue that the record shows that the parties

agreed to a bench mal. This type of overzealous advocacy

burdens the court with a frivolous argument and does little to

guide us in our efforts to reach a just result. '

{2] Because the record demonstrates that the district court

decided the applicability of the “unorthodox transaction”

defense in response to the Mesa Defendants request that the

19a

CoLaN Vv. MESA PETROLEUM Co. 16867

denial of its motion for a summary judgment be reconsidered,

we must reject their contention that we should review the

judgment for clear error.

[3] We review an order granting summary judgment de

novo. Ashton v. Cory, 780 F.2d 816, 818 (9th Cir. 1986).

Thus, we are required to review all the evidence presented to

the district court in the light most favorable to the non-moving

party. Jd. We must also make an independent, non-deferential,

determination concerning the question whether the district

court correctly applied the law. Jd. Because our review is

independent, any error committed by the district court in

weighing the evidence, drawing inferences from disputed

facts, and in determining credibility in this matter was harm-

less."

II. Applicability of the “Unorthodox Transaction” Defense

Under These Facts

Unocal argues that the district court erred in concluding

that the “unorthodox transaction” defense to an action for dis-

gorgement of short-swing profits by a beneficial owner is

applicable if the facts in the record in this matter are viewed

in the light most favorable to the Mesa Defendants. Unocal

asks this court to direct the entry of a summary judgment in

its favor on the ground that the exchange of the Mesa Defen-

dants’ common stock for negotiable debt securities was a

“sale” within section 16(b). Unocal asserts that the

“unorthodox transaction” defense to an action brought pursu-

ant to section 16(b) is not applicable to a self-tender offer in

which a beneficial owner exchanges his common stock for

negotiable debt securities issued as a result of a recapitaliza-

uon of the issuer.

[4] Section 16(b) of the Securities Exchange Act of 1934

provides that an issuer may recover any profits realized by a

beneficial owner from the sale of the issuer’s equity securities

20a

16868 CoLan V. MESA PETROLEUM Co.

within a six-month period.’ A beneficial owner is a share-

holder who owns, directly or indirectly, more than ten percent

of any class of equity security. 15 U.S.C. § 78p(a) (1988).

One goal of the Securities and Exchange Act of 1934 is to

“ “insure the maintenance of fair and honest markets.” Kern

County Land Ce. v. Occidental Petroleum Corp., 411 U.S.

582, 591 (1973) (quoting 15 U.S.C. § 78b). In adcnting sec-

tion 16(b), Congress intended “to curb manipulative and

unethical practices resulting from misuse of corporate infor-

mation for personal enrichment or unfair profit of the insider,

thereby assuring the strict observance of the insider’s fidu-

Ciary duties to outside shareholders and the corporation by

removing the profit from short-swing dealing in corporate

securities.” Oliff v. Exchange Int'l Corp., 669 F.2d 1162,

1165 (7th Cir. 1980), cert. denied, 450 U.S. 915 (1981).

In order to achieve these goals, Congress adopted “‘a flat

rule taking the profits out of a class of transactions in which

the possibility of abuse was believed to be intolerably great.”

Reliance Elec. Co. v. Emerson Elec. Co., 404 U.S. 418, 422

(1972). “ ‘The objective standard of Section 16(b) imposes

strict liability upon substantially all transactions occurring

within the statutory time period, regardless of the intent of the

insider or the existence of actual speculation.” “ /d. (quoting

Bershad v. McDonough, 428 F.2d 693, 696 (7th Cir. 1970),

cert. denied, 400 U.S. 992 (1971)).

"Section 16(b) provides in pertinent part:

For the purpose of preventing the unfair use of information which

may have been obtained by such beneficial owner, director, or

officer by reason of his relationship to the issuer, any profit real-

ized by him from any purchase and sale, or any sale and pur-

chase, of any equity security of such issuer... within any penod

of less than six months . . . shall inure to and be recoverable by

the issuer, irrespective of any intention on the part of such benefi-

cial owner, director, or officer in entering into such transaction .

15 U.S.C. § 78p(b) (1988).

2la

CoLAN Vv. MESA PETROLEUM Co. 16869

Section 16(b) has been referred to as a “crude mule of

thumb.” Kern County Land Co., 411 U.S. 582, 592-93 n.23

(1973) (quoting Hearings on Stock Exchange Practices before

the Senate Committee on Banking and Currency, 73d Cong..

2d Sess., pt. 15, at 6557 (1934)). We have described the appli-

cation of section 16(b)’s bright-line rule as “mechanical,”

Portnoy v. Memorex Corp., 667 F.2d 1281, 1282 (9th Cir.

1982), and “automatic,” Whittaker v. Whittaker Corp., 639

F.2d 516, 522 (9th Cir.), cert. denied, 454 U.S. 1031 (1981).

Where a transaction involving an equity security falls within

the objective standards established by Congress for section

16(b), liability attaches. Id.

[5] The Securities Exchange Act of 1934 broadly defines

“sale” as “any contract to sell or otherwise dispose of” any

security. 15 U.S.C. § 78c(a)(14) (1988). A “sale” has been

deemed to occur “when an insider becomes irrevocably

entitled to receive a sum certain for his security,” Seinfeld v.

Hospital Corp. of Am., 685 F. Supp. 1057, 1062 n.5 (N.D. II.

1988) (emphasis in original), or when “the insider has

incurred an ‘irrevocable liability’ to dispose of the stock so

that his ‘rights and obligations’ have become fixed,” Lewis v.

Bradley, 599 F. Supp. 327, 330 (S.D.N.Y. 1984).

The district court concluded that “[a]lthough Mesa’s tender

of its Unocal stock in exchange for debt securities can be con-

sidered a ‘sale’, the Court finds that the Kern County

unorthodox transaction exception applies to the May 1985

exchange offer to exempt it from Section 16(b) liability.”

The Mesa Defendants conceded, at oral argument, that their

exchange of Unocal equity stock for debt securities pursuant

to Unocal’s self-tender offer was a “sale” if section 16(b) is

given a literal interpretation.* The Mesa Defendants contend

“During oral argument, the court questioned whether the exchange

transaction would fit within the broad definition of “sale,” as that term is

used in section 16(b). Counsel for the Mesa Defendants responded: “Yes,

your honor, were it not for the [unorthodox transaction} exemption, it

would.”

22a

16870 Coan Vv. MESA PETROLEUM Co.

that their exchange of stock for non-convertible debt securi-

ties on May 20, 1985, falls within the “unorthodox

transaction” defense to section 16(b) liability established by

the Supreme Court in Kern County.

In Kern County, the Supreme Court addressed the follow-

ing fact-specific question: “[I]s it a § 16(b) ‘sale’ when the

target of [a] tender offer defends itself by merging into a third

company and the tender offeror then exchanges his stock for

the stock of the surviving company and also grants an option

to purchase the latter stock that is not exercisable within the

Statutory six-month period?” 411 U.S. at 584.

In Kern County, Occidental Petroleum Corporation

announced a tender offer to purchase 500,000 shares of Kern

County Land Company (Kern County) common stock. The

tender offer was expressly due to expire on June 8, 1967. /d.

Kern County opposed Occidental’s takeover attempt and, on

May 19, 1967, announced the Board of Directors’ approval of

a “defensive” merger with Tenneco, Inc. Jd. at 585-86. Pursu-

ant to the merger, the Kern County shareholders would

receive one share of Tenneco cumulative convertible prefer-

ence stock for each share of Kern County common stock. /d.

The Kern County shareholders approved the merger with

Tenneco on July 17, 1967. Id. at 588. Occidental issued a

statement that it had decided not to oppose the merger, but it

refrained from voting its shares in favor of the merger. /d. The

merger between Kern County and Tenneco became effective

on August 30, 1967, within six months from the expiration

date of the Occidental tender offer. Jd. at 589. On this date,

all Kern County shareholders became irrevocably entitled to

receive one share of Tenneco preference stock in exchange

for each share of Kern County stock. Jd. Occidental realized

a $19,506,419.22 profit on the Kern County shares it acquired

through its tender offer. Jd. at 589-90.

The new Kern County Land Company that was formed as

a result of the merger, filed an action against Occidental under

23a

CoLan v. MEsa PETROLEUM Co. 16871

section 16(b) to recover the profits from the sale. Jd. at 590,

The district court held that the automatic exchange of shares

on August 30, 1967, constituted a “sale” within the meaning

of section 16(b). Jd. The Second Circuit reversed, holding that

the automatic exchange of shares pursuant to the merger did

not constitute a “sale” for section 16(b) purposes. Id. at 590-

91. The Supreme Court granted certiorari. Jd. at 591.

In determining whether the exchange of stock pursuant to

the merger between Kern County and Tenneco was a “sale”

giving rise to section 16(b) liabiliry, the Supreme Court first

recognized that the statute imposed a “ ‘flat rule.’ ” Jd. at 592

(quoting Reliance Elec. Co., 404 U.S. at 422). The Court then

noted that

[a]lthough traditional cash-for-stock transactions that

result in a purchase and sale or a sale and purchase

within the six-month, statutory period are clearly

within the purview of § 16(b), the courts have wres-

tled with the question of inclusion or exclusion of

certain “unorthodox” transactions. ... In deciding

whether borderline transactions are within the reach

of the statute, the courts have come to inquire

whether the transaction may serve as a vehicle for

the evil which Congress sought to prevent — the

realization of short-swing profits based upon access

to inside information — thereby endeavoring to

implement congressional objectives without extend-

ing the reach of the statute beyond its intended lim-

its.

Id. at 593-95 (footnotes omitted).’

’Courts have referred to Kern County’s approach to determining section

16(b) liability in unorthodox transactions as a “pragmatic” approach,

Provident Sec. Co. v. Foremosi-McKesson, Inc., 506 F.2d 601, 604 (9th

Cir. 1974), aff'd on other grounds, 423 U.S. 232 (1976), in contrast to the

“objective” approach of imposing liability in transactions which are

Clearly within the ambit of section 16(b).

24a

16872 CoLaN v. MESA PETROLEUM Co.

[6] The Court held that the exchange of Kern County stock

for Tenneco stock on August 30, 1967, was not a “sale”

within the scope of section 16(b). Jd. at 596. The Court con-

cluded that “the involuntary nature of Occidental’s exchange,

when coupled with the absence of the possibility of specula-

tive abuse of inside information, convinces us that § 16(b)

should not apply to transactions such as this one.” /d. at 600.

In reaching this conclusion, the Court characterized as

“critical” the fact that the exchange was required pursuant to

the merger between Kern County and Tenneco. /d. at 599.

“Once the merger and exchange were approved, Occidental

was left with no real choice with respect to the future of its

shares of Old Kern.” Jd. at 600.

[7] The exchange of Unocal stock for debt securities pursu-

ant to Unocal’s tender offer is factually distinguishable from

the transaction in Kern County. The exchange of Occidental’s

stock for equity shares of the new corporation which was

formed as the result of the merger in Kern County was invol-

untary and automatic. The May 20, 1985, exchange of stock

for debt securities by the Mesa Defendants was not an invol-

untary or automatic transaction. Unocal did not merge into a

new corporation so as to compel its shareholders to exchange

their stock.

The Mesa Defendants not only were not compelled to

exchange their stock for Unocal’s debt securities, but Unocal

expressly excluded them from its self-tender offer. The Mesa

Defendants filed a suit in Delaware seeking an injunction to

force Unocal to permit the Mesa Defendants to participate in

Unocal’s tender offer.

[8] The Mesa Defendants had the choice of participating in

the tender offer or holding onto their stock. The record shows

that it was anticipated that Unocal’s stock would sell at $30

a share as a result of the exchange set forth in the tender offer.

One of the choices available to the Mesa Defendants was to

25a

COLAN Vv. MESA PETROLEUM Co. 16873

buy up Unocal’s stock at the reduced price of $30 a share and

acquire control of the corporation.

[9] The evidence is undisputed that the Mesa Defendants

initiated negotiations with Unocal, seeking participation in the

self-tender offer. In the book, Boone, which is part of the

record in this matter, T. Boone Pickens states that one of his

attomeys told Unocal representatives that “{Mesa] would

have to be included in their tender offer or take action to pro-

tect [them]selves.” T. Pickens, Boone 282 ( 1987). The parties

dealt at arms length in the negotiations that followed. Unocal

was concerned that if the Mesa Defendants were excluded.

they might buy up the devalued shares at a bargain price and

seize control of the corporation. Mr. Pickens describes the

stakes for each side in the negotiations following the Dela-

ware Supreme Court’s decision in favor of Unocal as follows:

This meant that Hartley didn’t have to offer Mesa

anything. He could buy back the stock from all the

Shareholders but us, decreasing the value of the

remaining Unocal stock. If Unocal bought back 70

million shares at $72, that left 100 million shares that

would be worth a lot less, including all of the Mesa

Partners holdings, which would drop to around $30

a share after the buyback. Our stock would then be

worth less than $700 million — a loss of about $300

million.

This new ruling was unprecedented, but there was

no use crying about it. We had a choice: we could

make a deal with Unocal, or after they concluded

their tender offer we could make a 100 percent all-

cash offer for the company. We got a call from

Drexel asking us not to fold. They had raised $3 bil-

lion and were ready to raise the additional funds for

us to make a 100 percent offer. It was an unqualified

endorsement of Mesa, and it naturally gave us a lift.

26a

16874 CoLaN Vv. MESA PETROLEUM Co.

It would be a great campaign, no doubt about it,

but the nsks were getting very high. It wasn't time

to get emotionally involved. It hadn't been a year

since we had gotten out of a $300 million jam, so |

wasn't ready to step up to the table and put every-

thing on 7 and call for the dice. It might work — but

it might not. If Mesa went all out for Unocal, Hartley

would probably pull the same exclusionary self-

tender the second time, and then we would be back

in the Delaware court. We had been nailed once, and

that was one time too many.

We could force Fred to take on even more debt.

and he was gagging now. But there was no guarantee

we would win.

Id. at 281.

In a subsequent passage, Mr. Pickens stated:

Stillwell got a call from Los Angeles on Sunday

afternoon. Hartley was ready to talk. He would agree

to Mesa’s demands but had one of his own. He

wanted us to pay Unocal’s expenses — a silly

request but a big point to Hartley. If he could get us

to pay his expenses, he would never let us forget it.

We still had our tax treatment “ace” up our sleeve.

If we were included in Unocal’s offer and held the

remainder of our stock for a year, we would make

around $80 million after taxes. The trick was to keep

Unocal from figuring it out.

Id. at 282.

Mr. Pickens describes the effect of the negotiations on

Unocal and the Mesa Defendants as follows:

Our team signed the deal and flew home on Monday

night. The Mesa-Unocal deal was history. Hartley

27a

COLAN Vv. MESA PETROLEUM Co. 16875

was soon crowing that he had defeated Pickens and

tied up Mesa for a year because we had to hold their

stock. He claimed we had lost $100 million. It was

just the opposite. We were going to make money,

but we couldn’t announce it until Our auditors,

Arthur Anderson, had signed off. We also wanted to

receive the proceeds from Unocal before announcing

any profit. That meant waiting sixty days or so, but

we just didn’t trust them.

I could barely keep quiet as I read Hartley’s

Claims of having ‘beaten’ Mesa. Then, two months

later, the Unocal bonds in hand, we enjoyed the last

laugh — $83 million profit after taxes, twice what

we had made in the Phillips deal.

When you have to explain a victory, it becomes

something less. Gradually the financial community,

the press, and the academicians came to understand

what we had done.

Id. at 284.

[10] Unlike the plight of the hapless beneficial owner in

Kern County, the record conclusively shows that the Mesa

Defendants voluntarily exchanged their common stock for

negouiabie debt securities. The exchange in the matter sub

judice was not the inexorable consequence of corporate mach-

inations that forced the stockholders to exchange their shares

as the result of the dissolution of the corporation. Here, the

beneficial owners controlled their own destiny and skillfully

negouated a result that Mr. Pickens characterized as a victory

for his side.

Courts following Kern County have recognized tha: invol-

untariness is an important factor in determining whether or

not a transaction constitutes a “sale” or “purchase” within sec-

tion 16(b). In Provident Sec. Co. v. Foremost-McKesson, Inc..

28a

16876 Coan V. MESA PETROLEUM Co.

506 F.2d 601 (9th Cir. 1974), affd on other grounds, 423

U.S. 232 (1976), we stated that “[a]bsent a showing of invol.

untariness, we would not be justified in applying the Kern

County rule.” Id. at 606. See also Texas Int'l Airlines v.

National Airlines, Inc., 714 F.2d 533, 540 (Sth Cir. 1983)

(“{T]he volitional character of the exchange is sufficient rea-

son to trigger applicability of the language of section 16(b).”),

cert. denied, 465 U.S. 1052 (1984); Gund v. First Florida

Banks, Inc., 726 F.2d 682, 686 (11th Cir. 1984) (“The vast

majority of cases in which the pragmatic approach has been

followed involve involuntary transactions which are triggered

by a corporate reorganization ....”).

[11] The Mesa Defendants argue that “otherwise volitional

transactions” are unorthodox under section 16(b) if a benefi-

cial owner is coerced economically into exchanging his com-

mon stock or suffer a financial loss. In Oliff v. Exchange Int'l

Corp., 669 F.2d 1162 (7th Cir. 1980), cert. denied, 450 U.S.

915 (1981), the Seventh Circuit found that although a 205%

tax payment was not a “reasonable alternative” to the repur-

chase of shares which gave rise to section 16(b) liability, the

acquisition of the stock was not “so involuntary as to take it

out of the definition of ‘purchase’ for 16(b) purposes.” /d. at

1168. In Tyco Laboratories, Inc. vy. Cutler-Hammer, Inc., 490

F. Supp. 1 (S.D.N.Y. 1980), the court rejected the argument

that section 16(b) should not apply because the sale of stock

was coerced. The court stated that

[aJlthough plaintiffs had the option to maintain their

ownership interest in C-H stock, they chose not to

exercise that option. The fact that plaintiffs may

have found it to be more financially advantageous to

sell their C-H stock on June 12, 1978 than at a later

time cannot be a basis for characterizing the sale

transaction as involuntary.

Id. at 8.

29a

CoLaN v. MESA PETROLEUM Co. 16877

[12] An economic coercion test would allow corporate

insiders to avoid section 16(b) liability by presenting evidence

of a variety of unfortunate circumstances that forced them to

sell their common stock. The objective standards of section

16(b) were adopted to avoid the necessity for an inquiry into

an insider’s subjective “intent.” Reliance Elec. Co., 404 U.S.

at 422 (quoting Bershad, 428 F.2d at 696). We reject the

“economic coercion” test as contrary to the intent of Congress

in enacting the bright-line, flat rule set forth in section 16(b)

requiring disgorgement of profits.

[13] We conclude that the facts in this matter do not come

within the holding of Kern County that an involuntary trans-

action that results from a merger is “unorthodox.”

The cases that have applied the Kern County “unorthodox

transaction” defense to a short-swing sale by a beneficial

owner have characterized it as a narrow exception to section

16({b). See, e.g., Texas Int'l Airlines, 714 F.2d at 539 (“In

Kern County the Supreme Court approved an extremely nar-

row exception to the objective standard of section 16(b).”).

The Supreme Court did not indicate that the courts should

conduct an ad hoc, case-by-case analysis of all securities

transactions involving a sale by a beneficial owner. The Court

in Kern County simply held that an automatic exchange of

stock in one company for stock in another company pursuant

to a merger between the two companies, over which the

shareholder had no control, is not a form of transaction cov-

ered by section 16(b). 411 U.S. at 600.

The majority of the transactions which have been consid-

ered “unorthodox” within the narrow exception announced in

Kern County involve exchanges of stock pursuant to a merger.

See, e.g., Heublein, Inc. v. General Cinema Corp., 722 F.2d

29, 31 (2d Cir. 1983) (section 16(b) is not intended to apply

to an involuntary exchange of shares resulting from a merger),

cert. denied, 465 U.S. 1066 (1984); American Standard. Inc.

v. Crane Co., 510 F.2d 1043, 1053 (2d Cir. 1974) (Kern

30a

16878 CoLaN Vv. MESA PETROLEUM Co.

County applies to a defensive merger where the beneficial

owner tnes to defeat it), cert. denied, 421 U.S. 1000 (1975);

Gold v. Sloan, 486 F.2d 340, 344 (4th Cir. 1973) (exchange

of shares pursuant to a merger may not constitute a purchase

under section 16(b)), cert. denied, 419 U.S. 873 (1974);

National Westminster Bancorp v. Leone, 702 F. Supp. 1132,

1138 (D.N.J. 1988) (merger is an “unorthodox transaction”

requiring an examination of the goals of section 16(b)); Colan

v. Prudential-Bache Secs., Inc., 577 F. Supp. 1074, 1081

(N.D. Ill. 1983) (“forced exchange of securities pursuant to a

merger” is not a sale within section 16(b)).

Those courts that have directly addressed the issue of sec-

tion 16(b) liability in a tender offer or hostile takeover context

have concluded that the disposition of shares pursuant to a

tender offer, or in the face of defeat in a takeover contest, is

not an “unorthodox transaction” under Kern County. In Super

Stores, Inc. v. Reiner, 737 F.2d 962 (11th Cir. 1984), the

Eleventh Circuit held that Kern County did not create an

exception from the short-swing profit prohibitions of section

16(b) for a transaction in which “a corporate officer and direc-

tor facing defeat in a tender offer battle voluntarily tendered

his stock to his opponents for cash.” /d. at 965. In T-Bar, Inc.

v. Chatterjee, 693 F. Supp. 1 (S.D.N.Y. 1988), a defeated ten-

der offeror converted debentures into common stock of the

target corporation and tendered those shares into a competing

cash tender offer for 70% of the target’s stock. /d. at 4. The

court held that this transaction was not the form of transaction

held to be “unorthodox” in Kern County. Id. at 5. Instead, the

court stated that “[u]nlike the defendant in Kern County, Beall

made a business decision to tender its shares into the Data

Switch offer.” Id.

In a hostile takeover situation, the Fifth Circuit held that

Kern County did not apply to a transaction in which a

defeated tender offeror sold its shares in the target corporation

to a company with which the target had entered into a merger

agreement. Texas /nt'l Airlines, 714 F.2d at 540. In Tyco Lab-

3la

COLAN Vv. MEsA PETROLEUM Co. 16879

“control contest type of situation” renders the sale of stock to

a third party “unorthodox” within the meaning of Kern

County. 490 F. Supp. at 6. In Lane Bryant, Inc. v. Hatleigh

Corp., 517 F. Supp. 1196 (S.D.N.Y. 1981), a ten-percent

Shareholder facing opposition to its intended proxy contest

sold all of its stock to the corporation for a premium. /d. at

1197-98. The court found that Kern County's pragmatic test

for “unorthodox transactions” was inapplicable, ruling instead

that

the objective test [of § 16( b)] should clearly apply to

the instant case since the defendant here both pur-

chased and sold plaintiff’s stock for cash and, while

there was a contest for control, this case differs from

Kern County and American Standard, where the tar-

get merged with a third corporation, Causing the

defendant tender offeror to become a minority share-

holder in the third Corporation, in that here there was

no defensive merger, but rather the defendant simply

decided it was unprofitable to pursue the proxy con-

test.

Id. at 1200.

Mesa cites only one case, Pier / Imports of Georgia, Inc.

v. Wilson, 529 F. Supp. 239 (N.D. Tex. 1981), in which a ten-

der offer was determined to be an “unorthodox transaction”

for section 16(b) purposes. In Pier / Imports, the court stated

that “a tender offer has been found to fal! within the unortho-

dox transaction rubric rather than a ‘garden variety’ Section

16(b) claim.” Id. at 242-43. The district court in Pier ]

Imports cited Makofsky v. Ultra Dynamics Corp., 383 F.

Supp. 631, 637 (S.D.N.Y. 1974), and Securities and

Exchange Commission v. Texas Int'l Co., 498 F. Supp. 1231,

1239 (N.D. Ill. 1980), for this Proposition. Pier ] Imports, 529

F. Supp. at 242-43. Makofsky and Texas Int’! do not support

the district court’s holding in Pier / Imports.

32a

16880 CoLaN Vv. MESA PETROLEUM Co.

Makofsky does not involve a tender offer. It involves a sec-

tion 16(b) action seeking recovery of profits realized by an

insider through the purchases and sales of option shares.

Makofsky, 383 F. Supp. at 636. The court held that section

16(b) was applicable. /d. at 643. The language in Makofsky,

upon which Pier / Imports relies, stating that “tender offers

... are not suited to mechanical application of the statute,” is

dictum and is based on pre-Kern County cases, none of which

involve an exchange of stock pursuant to a tender offer. /d. at

637.

In Texas Int'l, the district court had before it a claim filed

by the SEC pursuant to section 14(b) of the Williams Act. The

applicability of section 16(b) was not an issue in Texas /nt’l.

Section 16(b) was referred to in a parenthetical explanation of

Kern County's application of the “unorthodox transaction” in

deciding whether to apply section 16(b). 498 F. Supp. at 1239.

[14] We agree with the Eleventh Circuit in Super Stores,

and the district court in 7-Bar Inc., that the sale or purchase

of stock pursuant to a tender offer is not an “unorthodox

transaction.”

[15] The Mesa Defendants assert that the exchange of their

common stock for debt securities was an “unorthodox

transaction” because it resulted from a recapitalization of

Unocal. The Mesa Defendants rely primarily on the Supreme

Court’s comment in foomote 24 in Kern County to support

this proposition. 411 U.S. at 593 n.24. In footnote 24, the

Court observed that “[t]he term [unorthodox transaction] ...

has been applied to stock conversions, exchanges pursuant to

mergers and other corporate reorganizations, stock reclassifi-

cations, and dealings in options, rights, and warrants.” /d. The

Mesa Defendants reason that since a recapitalization is a form

of corporate reorganization, it must constitute an “unorthodox

transaction.”

[16] The comment in footnote 24 in Kern County was not

necessary to the opinion in Kern County. Kern County did not

33a

CoLaN v. MEsA PETROLEUM Co. 1688 1

involve recapitalization. The Court, without expressing its

approval, enumerated the types of business transactions that

others have labeled as “unorthodox.” The Court did not cite

any authority to support its observation in footnote 24. Thus,

we Cannot determine whether the Court was referring to deci-

sions construing section 16(b).

The Mesa Defendants rely on two district court decisions

published solely in the Federal Securities Law Reporter to

Support their view that a corporate recapitalization is an

“unorthodox transaction.” Neither Supports their position. In

Rothenberg v. United Brands Co., (1977-1978 Transfer

Binder] Fed. Sec. L. Rep. (CCH) ¢ 96,045 (S.D.N.Y. May 11,

1977), affd without opinion, 573 F.2d 1295 (2d Cir. 1977),

the district court concluded that no violation of section 16(b)

occurred because the record showed that “{w]hen United

exchanged or converted these common shares into Class A,

the total amount of its investment in Foster did not change.”

Id. at 91,694. The court concluded that this exchange did not

involve a new investment. Jd. The court held that “{iJt would

appear that to be a sale under § 16(b), there must be some

change in either the character of the investment or the nature

of the market risk assumed.” /d.

[17] In Hayes v. Sampson, [1980 Transfer Binder] Fed.

Sec. L. Rep. (CCH) § 97,693 (S.D.N.Y. Nov. 18, 1980), the

district court, relying on Rothenberg, held that no sale within

section 16(b) occurred where the directors of a corporation

exchanged old debentures for new debentures because

“neither the amount invested nor the percentage of ownership

of this class of security Changed within the six month period

relevant under Section 16(b).” Jd. at 98,644. If anything,

Rothenberg and Hayes stand for the proposition that a recapi-

talization which results in a change in the nature of a benefi-

cial owner’s investment and market risk is a Sale within

section 16(b).

In the instant matter, the nature of the Mesa Defendants’

investment was changed. They exchanged common stock for

34a

16882 CoLaN Vv. MESA PETROLEUM Co.

negotiable debt securities with a higher market value. The

Mesa Defendants’ market risk also changed from that of an

equity owner of shares in a corporation, subject to market

fluctuations, to a holder of negotiable debt securities which

obligated Unocal to pay a fixed sum at a certain maturity date

together with periodic interest payments.

CONCLUSION

The evidence is undisputed that the Mesa Defendants made

a voluntary business decision to persuade Unocal to permit

them to participate in the corporation’s self-tender offer. As

a result, the Mesa Defendants exchanged common stock,

whose value was subject to the nsks of a free market, for

negotiable debt securities of a higher current value with fixed

payments and interest rates. The record also shows that the

Mesa Defendants shrewdly calculated their options, which

included a complete buy out of all of Unocal’s stock or accep-

tance of the self-tender offer because of undisclosed tax

advantages. We conclude that the exchange of the Mesa

Defendants stock for Unocal’s negotiable debt securities was

a Sale within section 16(b). Because of our determination that

this exchange was not an “unorthodox transaction,” we do not

review the record to determine whether the Mesa Defendants

had the opportunity to engage in the speculative abuse of

inside information.

The order granting summary judgment in favor of the Mesa

Defendants is REVERSED. The order denying Unocal’s

cross motion for a summary judgment is REVERSED with

directions to enter an order granting Unocal’s motion for a

Summary judgment.

35a

[This page intentionally left blank. ]

36a

Appendix B

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

DAVID COLAN AND UNOCAL )

CORPORATION, dite CasE No. CV 86-3564 JGD

aintiffs,

se ORDER RE: CROSS

" MOTIONS For

MESA PETROLEUM CoO., et. al. SUMMARY JUDGMENT

Defendants.

This securities case arising under Section 16(b) of the Securi-

ties and Exchange Act of 1934 is presently before the Court on

the parties’ Cross-Motions for Summary Judgment. The question

presented to the Court is whether on the facts of this case a sale

exists for the purpose of Section 16(b) liability.

STATEMENT OF THE CASE

Unocal is a corporation organized and existing under the laws

of the state of Delaware with its principal place of business in Los

Angeles, California. Unocal engages in exploration and produc-

tion activities in the major oil and gas areas of the United States

and 14 foreign countries. Mesa Petroleum Co. was a corporation

organized under the laws of the state of Delaware with its

principal place of business in Amarillo, Texas. Until Decem-

ber 27, 1985, Mesa Petroleum was engaged in the exploration for

and production of natural gas. Mesa Partners II was a Texas

general partnership which was dissolved on May 20, 1985. The

remaining defendants are either wholly owned subsidianes of

Mesa Petroleum or general partners in Mesa Partners II.' Prior

' Defendants, hereinafter “Mesa”, are Mesa Petroleum Co., Mesa

Southern Co., Mesa Asset Co., Cy-41, Inc. and Jack-41, Inc. Mesa

37a

to this litigation, Mesa had invested in, owned, and traded various

securities.

In October 1984, Mesa began to invest in Unocal stock. From

October into early February 1985, Mesa purchased Unocal shares

through the Fayez Sarofim Trust Company. In February 1985,

Mesa began to purchase Unocal stock through Jefferies & Co., a

Los Angeles stock brokerage firm. Mesa first publicly announced

its Unocal holdings on February 14, 1985; on that date, Mesa filed

a Schedule 13D with the Securities and Exchange Commission

(“SEC”) indicating that Mesa had acquired 7.3 percent of

Unocal’s outstanding stock as an investment.2 As of February 22,

1985, Mesa owned 17 million shares which equalled 9.7 percent

of the outstanding shares of Unocal stock.

By March 27, 1985, Mesa had purchased 6.7 million additional

shares of Unocal stock at a price of $48.10 per share.’ Mesa now

owned 23.7 million Unocal shares and was a more than 10%

owner of Unocal stock. On March 28, 1985, Mesa announced its

intention to wage a proxy fight to postpone the annual Unocal

shareholders’ meeting. At the same time, Mesa filed a third

amendment to its Schedule 13D which stated that Mesa might

seek control of Unocal. On April 1, 1985, Unocal sued Mesa in

the United States District Court for the Central District of

Partners II originally named as a defendant in this action was dissolved

on May 20, 1985.

? Any person who either directly or indirectly becomes a beneficial

owner of more than five percent of stock shall, within ten days of such

acquisition, send to the issuer of the stock, the exchanges upon which

the security is traded, and the Commission certain Statutorily required

information. 15 U.S.C. 78m(d).

; Although the parties continue to dispute the manner in which this

stock was obtained and whether the stock price was actually $48.10 or

$48 with a 10 cents per share commission to Jefferies & Co. as broker,

the issue of a Section 16(b) purchase is not relevant to these motions.

The unorthodox transaction exception concerns the applicability of a

“sale” for the purpose of Section 16(b) liability.

38a

California challenging the accuracy of statements in Mesa’s

original Schedule 13D. Mesa counterclaimed urging violations of

the proxy solicitation rules.

On April 8, 1985, Mesa commenced a tender offer to purchase

64 million shares of Unocal stock at $54 per share. The market

price of Unocal stock at the time was $49 per share. Unocal’s

Board of Directors publicly rejected Mesa’s tender offer on

April 14, 1985. On April 16, Unocal responded to Mesa’s tender

offer by proposing its own self tender offer which Unocal made

contingent upon Mesa’s success. In essence, Unocal offered to

exchange debt securities in the principal amount of $72 per share

for up to 87.2 million shares, approximately one-half of the

173.9 million shares of Unocal stock outstanding. Unocal modi-

fied this offer on April 23 to reflect its willingness to purchase up

to 50 million shares of its common stock regardless of whether

Mesa actually purchased the 64 million shares it was seeking. It

was generally anticipated that any shares not acquired by Unocal

in the exchange would have a market value thereafter equalling

$30 per share.‘

The novel aspect of Unocal’s exchange offer was that it

specifically excluded Mesa from tendering its Unocal stock.

Assuming arguendo that Mesa made no other attempt to alter its

Unocal holdings, such exclusion, upon completion of the ex-

change, would result in a decrease in the value of Mesa’s Unocal

holdings from $1,160 million (23.7 million shares at $49 per

share) to $711 million (23.7 million shares at $30 per share).

Mesa filed lawsuits in both federal court and Delaware state

court challenging Unocal’s exchange offer and its discriminatory

provision. On April 22, 1985, the United States District Court for

the Central District of California postponed Unocal’s annual

* To cushion the drop in the price of the Unocal stock expected from the

$3.6 billion increase in Unocal’s debt that would result from the

exchange, Unocal also announced its intention to form a master limited

partnership affecting certain assets of its principal operating subsidiary,

Union Oil Company of California.

39a

meeting for two weeks; the court further found that Unocal’s

exclusion of Mesa from its offer did not violate federal law and

was in fact a state law matter. Although the Delaware Chancery

Court temporarily enjoined the offending provision, the Delaware

Supreme Court on May 17, 1985 reversed the Chancery Court

and upheld the exclusion of Mesa from Unocal’s exchange offer.

In late April, Unocal announced that midnight, EST, May 17,

1985, would constitute the proration and withdrawal date for its

exchange offer. However, wanting to end Mesa’s tender offer as

well as the threat of a future offer, Unocal and Mesa representa-

tives met to discuss settlement options on May 14. Due to

restrictions imposed by federal law on purchases during a tender

offer or exchange offer,° the only mechanism available to Unocal

to make a payment to Mesa and at the Same time reduce Mesa’s

Ownership interest in Unocal was the inclusion of Mesa in

Unocal’s exchange offer.

On May 15, Unocal Proposed to include Mesa in the exchange

offer and to devise a standstill agreement whereby Mesa’s future

role with regard to Unocal would be significantly \imited. Mesa

rejected Unocal’s proposal. On May 17, after the Delaware

Supreme Court rendered its decision against Mesa, Mesa sought

to reopen discussions with Unocal. On May 20, 1985, the parties

reached a settlement agreement which encompassed the following

principal provisions:

(1) Mesa agreed to terminate its tender offer and to adhere

to the following standstill provisions:

a) Mesa agreed for a period of twenty five years not to

participate in any proxy solicitation and not to acquire any

additional Unocal shares:

b) Mesa agreed for a period of ten years to vote its Unocal

stock on all matters in the same way and in the same

Proportion as those held by non-Mesa shareholders;

* See 17 CFR 240.!0b-13.

40a

c) Mesa agreed to strict controls upon the sale of its

Unocal stock.

(2) In return, Mesa would be allowed to tender its Unocal

stock into the exchange offer.

The exchange provided for shareholder participation to an

extent proportional to the shareholder’s Unocal holdings. In

exchange for its Unocal stock, a shareholder received debt securi-

ties valued at $75 per share of Unocal stock. On May 20, 1985,

Mesa exchanged 7,846,705 shares of Unocal stock for noncon-

vertible debt securities. In light of the participation of other

shareholders on a proportional basis, Mesa’s ownership interest in

Unocal after the exchange remained the same, 13.6%. On July 3,

1985, Mesa cashed out its debentures for approximately $589

million.

By letter dated November 25, 1985, a Unocal shareholder,

David Colan, communicated through his lawyer to Unocal a

belief that a possible violation of Section 16(b) may have resulted

from Mesa’s acquisition and subsequent sale of its Unocal stock.

On December 17, 1985, Dennis Codon, Assistant to the General

Counsel at Unocal, wrote to Mr. Colan that after an internal

review and consultation with outside counsel, Unocal had con-

cluded that Mesa had not violated Section 16(b).°

On June 3, 1986, David Colan filed a derivative action on

behalf of Unocal Corporation alleging violations of Section 16(b)

of the Securities and Exchange Act by Mesa. 15 U.S.C. 78p(b).

Unocal was named as a defendant. As late as June 26, T1989,

Unocal in its First Amended Answer denied that Unocal had

given Mesa access to any inside information. However, in this

° Specifically, Unocal stated that the one time block purchase which

caused Mesa to exceed ten percent ownership was not considered a

“purchase” for purpos¢s of the “purchase” requirement under Section

16(b); therefore, Mesa’s sale of Unocal stock did not create the

necessary “purchase” and “sale” for imposition of Secticn 16(b)

liability.

4la

same document, Unocal stated that on the basis of discovery and

information from the U.S. Attorney about investigations into

insider trading which indicated that the principal transaction in

question was not a single block trade, Unocal believed that

disgorgement of profits pursuant to Section 16(b) was proper. On

August 23, 1989, Unocal was realigned as a party-plaintiff.

Mesa initially raised the unorthodox transaction exception to

Section 16(b) created by the Supreme Court in Kern County

Land Co. v. Occidental Petroleum Corp., 411 U.S. 582, 93 S.Ct.

1736, 36 L.Ed.2d 503 (1973) as an affirmative defense in its

Answer filed on July 14, 1986. Subsequently, Mesa filed its

Second Motion for Summary Judgment in which it asserted that

none of the three key Section 16(b) elements was present in this

case. In denying Mesa’s motion on October 23, 1989, the Court

found that genuine issues of material fact remained in dispute

concerning, inter alia, the existence of a Section 16(b) sale. On

November 3, 1989, the Court denied Mesa’s Ex Parte Applica-

tion to Certify this question for Interlocutory Appeal.

On December !, 1989, Plaintiffs filed a motion seeking an order

in limine that the unorthodox transaction exception did not apply

in this case. In conjunction with other in limine motions, this

question came before the Court for hearing on January 4, 1990.

At the hearing, Mesa renewed its request that the Court recon-

sider its Second Motion for Summary Judgment as it relates to

the unorthodox transaction exception. At the same time, Plain-

tiffs requested that the Court consider their in limine motion as a

cross-summary judgment motion on this issue. All parties agreed

that the facts were fully developed in the present record so that

the Court could decide this issue as a question of law. On the

basis of this representation, the Court took the two motions for

summary judgment under submission on January 4, 1990.

The Court considered the two motions as cross motions for

summary judgment. The Court reviewed and considered all

papers which were filed in conjunction with Plaintiffs’ in limine

motion and again reviewed and considered Mesa’s Second Sum-

mary Judgment Motion, as well as all pleadings and all other

42a

papers filed in this action. On January 19, 1990, the Court issued

an Order granting Defendant’s Motion for Summary Judgment

and denying Plaintiff's Cross-Motion for Summary Judgment. In

so holding, the Court found that Mesa’s tender of its Unocal stock

in the May 1985 exchange was an unorthodox transaction to

which Section 16(b) liability did not attach.

On January 26, 1990, a status conference was held to determine

the extent, if any, to which the January 19, 1990 Order was

dispositive of the case. Mesa argued that since there was no

applicable Section 16(b) sale, Plaintiffs could not state a claim

upon which relief could be granted and therefore the case should

be dismissed. Plaintiffs responded that although they respectfully

disagreed with the merits of the Court’s ruling, the Order itself

did not dispose of the second event which might be considered a

sale under Section 16(b): Mesa’s conversion of the debt securi-

ties, received in exchange for its Unocal stock, into cash in July

1985. Since neither party had adequately addressed the July 1985

transaction in its motion, the Court requested additional briefing

on this issue.

The parties have since submitted addendums to their origina!

briefing papers. The Court construes these supplemental papers

as part of the previously filed Cross-Motions for Summary Judg-

ment. In essence, Plaintiffs assert that either the May 1985

exchange or Mesa’s conversion of its debt securities for cash in

July 1985 must be a sale pursuant to Section 16(b). Mesa

submits that the May 1985 exchange is an unorthodox transaction

which is not susceptible to Section 16(b) liability. Since Mesa

sold its stock in an unorthodox transaction in May 1985, the

Court need not examine subsequent events since Mesa-could not

have sold the same stock twice. In any event, Mesa asserts that

Plaintiffs’ claim based upon the July 1985 transaction is time-

barred. Mesa further argues that this claim fails as a matter of

law because transactions involving debt securities do not fall

within the purview of Section 16(b).

In this case, both Plaintiffs and Defendants moved for sum-

mary judgment as a matter of law on facts which they agreed

43a

were not in dispute. The principal question initially presented to

the Court in the cross-motions concerned the application of the

Kern exception to the May 1985 exchange. When the potentially

dispositive nature of the cross-motions became clear in light of

the Court’s ruling in favor of Defendants, Plaintiffs directed the

Court’s attention to the July 1985 transaction. The Court has

now considered both events to determine whether on the facts of

this case a Section 16(b) sale exists as a matter of law.

Based on this review, the Court finds that Mesa’s tender of its

Unocal stock to Unocal in exchange for debt securities in May

1985 was an unorthodox transaction. In applying the Kern

exception to the May transaction, the Court finds that although

Mesa sold its Unocal stock within six months of its purchase, the

sale is exempt from Section 16(b) liability. Such a finding

precludes the need for the Court to consider subsequent events

which absent the May sale might have provided the basis for a

Section 16(b) sale.

Nevertheless, the Court proceeds to address the merits of the

July 1985 transaction. Liberally interpreting Plaintiffs’ Com-

plaint, the Court finds that Plaintiffs’ claim of liability premised

upon the July 1985 conversion of debt securities into Cash is not

time-barred. However, as a matter of law, the Court cannot find

that the July 1985 conversion is a Section 16(b) sale. Accord-

ingly, the Court grants Defendants’ Motion for Summary Judg-

ment and denies Plaintiffs’ Cross-Motion for Summary

Judgment.

This Order replaces the January 19, 1990 Order Re: Cross-

Motions for Summary Judgment. The present Order governs in

this case. The Court deems the previous ruling on these cross-

motions to be without force and effect.

STANDARD OF PROOF

“It is well settled that the filing of cross-motions for summary

judgment, both parties asserting that there are no contested issues

of material fact, does not vitiate the court’s responsibility to

44a

determine whether disputed issues of material fact are present. A

summary judgment cannot be granted if a genuine issue as to any

material fact exists.” United States v. Fred. A. Arnold, Inc., 573

F.2d 605, 606 (9th Cir. 1978). However, if a decision is to be

reached by a court, and there are no issues of witness credibility,

the court may conclude on the basis of affidavits, depositions, and

other evidence that there are no genuine issues of material fact in

dispute, even though the decision may depend on inferences to be

drawn from what has incontrovertibly been proven. Nunez v.

Superior Oil Co., 572 F.2d 1119, 1123-24 (Sth Cir. 1979).

Interpretation of a statute is appropriate for adjudication as a

matter of law if all the facts before a court are undisputed. See

Smith v. Califano, 597 F.2d 152, 155 (9th Cir 1979), cert. denied.

444 U.S. 980. The definition of the term “sale” and its applica-

tion to a particular set of facts is like any other question of

statutory construction, a question of law. See e.g. Kern County

Land Co., supra.

When both parties cross move on the same legal theory, a

court’s granting of one party’s motion entails the denial of the

adversary’s motion. See Schlycter v. Baker, 580 F.2d 848, 849

(Sth Cir. 1978). Since all the evidentiary facts are now before the

Court, an interpretation of those facts in the process of determin-

ing the application of Section 16(b) as a question of law is

appropriate in considering these summary judgment motions. See

Nunez v. Superior Court, supra at 1123.

DISCUSSION

For the purpose of preventing the unfair use of information

which may have been obtained by reason of a person’s relation-

ship to the issuing cOrporation, Section 16(b) of the Securities

Exchange Act of 1934 provides that officers, directors, and

holders of more than 10 percent of the listed stock of an issuing

company shall be liable to the company for any profits realized

from any purchase and sale or sale and purchase occurring within

a period of six months. 15 U.S.C. (78p(b). Section 16(b) “was

45a

designed to discourage corporate insiders from reaping profits

from fluctuations in the price of the corporation’s stock, that were

predictable on the basis of inside information.” Provident Securi-

ties Co. v. Foremost-McKesson, 506 F.2d 601, 604 (9th Cir.

1974), affd 423 U.S. 232, 96 S.Ct. 508, 46 L.Ed 2d 464 (1976).

Determination of Section 16(b) liability is premised on an

objective test: If a sale and purchase by a ten percent shareholder

results in a net gain, the gain is recoverable. Arrow Distributing

Corp. v. Baumgartner, 783 F.2d 1274, 1281 (Sth Cir. 1986). The

short swing trader must disgorge any profits without proof of

actual abuse of inside information and without proof of intent to

profit on the basis of such information. Kern County, 44 U.S. at

595. If a transaction falls within the literal terms of the statute,

liability is automatic. Gund v. First Florida Banks, Inc., 726 F.2d

682, 686-87 (11th Cir. 1984): Kay v. Scientex, 719 F.2d 1009,

1013 (9th Cir. 1983).

In drafting Section 16(b), Congress “recognized that short-

swing speculation by stockholders with advance, inside informa-

tion would threaten the goal of the Securities Exchange Act to

‘insure the maintenence of fair and honest markets’. Kern

County, supra at 1743 citing 15 U.S.C. sec. 78b. Congress

deemed the stringent requirements of Section 16(b) necessary to

eliminate undue problems of proof and to have a general rule to

take all possible projit out of those transactions in which the

possibility of abuse was intolerably great. Reliance Elec. Co. y

Emerson Elec. Co., 404 US. 418. 422, 92 S.Ct. 596, 599. 30

L.Ed.2d 575 (1972).

Despite the mandztory language of Section 16(b), the Su-

preme Court in Kern County recognized that “courts have wres-

tled with the question of inclusion or exclusion of certain

‘unorthodox’ transactions.” 93 S.Ct. at 1744. “Transactions

which on their face do not clearly involve a purchase and a sale

and which therefore require analysis ... to determine if the

possibility for speculative abuse exists, have been described as

‘unorthodox’.” Portnoy v. Memorex Corp., 667 F.2d 1281, 1285

(9th Cir. 1982) (Reinhardt, Chief Judge, Concurring). To

46a

account for these unorthodox transactions and to prevent an

overly broad interpretation of Section 16(b), the Supreme Court

adopted a more “pragmatic approach” to the application of the

statute. Xern County Land Co., supra at 1744.

In Kern County, the Supreme Court stated in pertinent part:

In deciding whether borderline transactions are within the

reach of the statute, the courts have come to inquire whether

the transaction [served] as a vehicle for the evil which Con-

gress sought to prevent — the realization of short-swing profits

based upon access to inside information — thereby endeavoring

to implement congressional objectives without extending the

reach of the statute beyond its intended limits.

Id. at 1744-45. In light of the strict terms of the statute, where

alternative constructions of the terms of Section 16(b) are possi-

ble, the statute should be applied only where its application would

serve Congress’ goals. /d., at 1745. Thus, Section 16(b) is

applied automatically only to ‘orthodox’ transactions as defined by

case law; unorthodox transactions are actionable under Section

16(b) only if a court’s pragmatic analysis demonstrates that the

transaction presented an opportunity for speculative abuse.

I. The May 1985 Unocal Exchange Offer

In Kern County, the Supreme Court established a two part test

to determine the applicability of Section 16(b) liability to a

purported sale: (1) Was the stock “sold” in an unorthodox

transaction?’ and (2) Was there any opportunity for the party to

’ It appears that to be a sale under Section 16(b), there must be some

change in either the character of the investment or the nature of the

market risk assumed. Rothenburg v. United Brands Co., [1977-1978

Transfer Binder] Fed. Sec. L. Rep. (CCH) 96,045 (S.D.N.Y. 1977).

There is little question that the risk associated with Mesa’s Unocal

investment, and the nature of the investment itself, changed after Mesa

exchanged its stock for debt securities. In this case, however, the

question is not whether Mesa sold its Unocal stock in May 1985, but

rather whether the stock was sold in an unorthodox transaction.

47a

engage in the kind of speculative abuse of inside information

which Section 16(b) was designed to prevent? /d. at 1744-45. A

finding that the Mesa-Unocal exchange was in fact an unorthodox

transaction would in essence dispose of the case since there would

be no applicable sale to which section 16(b) liability could attach.

A simple cash for stock transaction is “clearly within the

purview of [section] 16(b)”. Kern County, 411 U.S. at 593.

Transactions which have been found to be unorthodox include

“stock conversions, exchanges pursuant to mergers and other

corporate reorganizations, stock reclassifications, and dealings in

options, rights, and warrant: ” Jd. citing 2 L. Loss, Securities

Regulation 1069 (2d ed. *,1). Although the Ninth Circuit has

determined that this list is not all inclusive, the Court has not

applied the Kern exception to transactions which are essentially

cash for stock and orthodox in all other respects. See Provident

Securities Co. v. Foremost-McKesson, supra at 604-605 (The

court found “no meaningful distinction between consideration in

the form of cash and consideration in the form of corporate

assets.”’).

Any mechanical application of Section 16(b) is limited to

“garden variety transaction[s]”. Whittaker v. Whittaker, 639

F.2d 516, 523 (9th Cir.), cert. denied, 454 U.S. 103] (1981).

The fact that stock is exchanged for cash or a cash equivalent

within six months, however, is not determinative of the question

of unorthodoxy. The critical issue is not the form of consideration

paid for the stock but rather the nature of the disposition of the

stock. See Colan v. Prudential-Bache Sec Inc., 577 F. Supp.

1074, 1082 (N.D.IIl. 1983). Similarly, profit is not in and of itself

an indication of Section 16( b) liability.

Unocal claims that Mesa exchanged its stock for a cash

equivalent — debt securities — which were immediately converti-

ble into cash. Mesa responds that its sale of Unocal stock

Pursuant to a settlement agreement was part of a corporate

reorganization which was an_unorthodox transaction.

48a

The Unocal exchange offer was a type of corporate reorganiza-

tion commonly described as a recapitalization. A recapitalization

is in essence a “reshuffling of a capital structure, within the

framework of an existing corporation.” Helvering v. Southwest

Consol. Corp., 315 U.S. 194, 202, 62 S.Ct. 546, 552, 36 L.Ed. 789

(1942). Commentators have generally classified exchange offers

as a type of corporate recapitalization:

A recapitalization may . . . be structured as an exchange offer

in which the company offers to purchase a certain number of

its shares in exchange for cash or debt securities. The

transactions involving Phillips Petroleum, Unocal, and Union

Carbide are the most celebrated examples of this structure.

Notably, this structure has been largely used in response to

hostile tender offers.

Ledderman & Goroff, Recapitalization Transactions, 19 Rev.

Sec. & Commodities Reg. (1986).% In at least one case,

Rothenburg v. United Brands Co., a court has held that an

exchange of stock in a recapitalization following a tender offer

was not a sale pursuant to Section 16(b). [1977-1978 Transfer

Binder] Fed. Sec. L. Rep. (CCH) 96,045 (S.D.N.Y. 1977).

Mesa’s tender of its Unocal stock for debt securities in response

to Unocal’s exchange offer was not a garden variety stock for cash

transaction. In this case, Mesa’s “sale” of its Unocal stock was in

response to Unocal’s direct solicitation for the stock. Mesa’s

stock was tendered in conjunction with other Unocal shareholders

and in the same proportion. Absent Unocal’s consent to Mesa’s

* See also A. Fleisher, | Tender Offers: Defenses, Responses and Plan-

ning, 388.172 (Supp. 1987) ; Block & Hoff, Recapitalizations and

Restructurings 186, reprinted in Block & Radin, The Business Judg-

ment Rule in Derivative and Corporate Takeover Litigation, Hostile

Battles for Corporate Control 1989 (PLI Corporate Law & Practice

Series No. 633, 1989); Nathan & Sobel, Corporate Stock Repurchases

in the Context of Unsolicited Takeover Bids, 35 Bus.Law. 1545 (July

1980); Fogelson, Recent Takeover Defense Strategies, Hostile Battles

for Corporate Control 1986 at 467 (PLI Corporate Lew & Practice

Series No. 513, 1986).

49a

participation in the exchange offer, Section 16(b)’s six month

provision would have precluded Mesa from disposing of this stock

in a more traditional sale transaction. A sale pursuant to a

recapitalization of this type is outside the scope of the definition

of a Section 16(b) “sale”. The Court finds that Mesa’s exchange

of its Unocal stock for debt securities in the May 1985 exchange

was an unorthodox transaction under Kern County; therefore, the

transaction deserves closer scrutiny to determine whether the

potential for abuse of inside information existed.

The potential for abuse of inside information is considered only

after a transaction is found to be unorthodox or borderline.

Whittaker v. Whittaker, 639 F.2d 516, 522 (9th Cir.), cert. denied

454 U.S. 1031, 102 S.Ct. 566, 70 L.Ed.2d. 473 (1981). Ifa

transaction falls within the literal terms of the Statute, it is

irrelevant that the defendant actually received or used inside

information. See e.g. National Medical Enterprises, Inc. v. Small,

680 F.2d 83, 84 (9th Cir. 1982). However, “because of the

mechanical application of Section 16(b) imposing liability with-

out fault on transactions within its scope, courts more recently

have been hesitant to bring borderline transactions under that

scope ... where congressional intent is unclear and the transac-

tion in question was not of a type giving rise to speculative abuse.”

Whittaker v. Whittaker., supra at 522: See also Blau v. Lamb, 363

F.2d 507, 516 (2d Cir. 1966).

Congress adopted Section 16(b) to prevent insiders of publicly

held corporations, who had advance knowledge of facts or access

to information not available to other investors that, upon public

disclosure, would produce either a rise or fall in the market price

of the stock, from realizing a personal profit by buying or selling

the corporation’s shares before the good or bad news was made

public. Reliance Electric Co. v. Emerson Elec. Co.. 404 US. 418,

92 S.Ct. 596, 599 (1972): Arrow Distributing Corp., supra at

1277. The Ninth Circuit has defined inside information for

Section 16(b) Purposes as “the kind of information that is

commonly reserved for company management and is thus the

type of information that would ‘aid [one] if he engaged in

50a

personal market transactions.’” Merri!l Lynch, Pierce, Fenner &

Smith, Inc. v. Livingston, 566 F.2d 1119, 1123 (9th Cir. 1978).

In determining whether a transaction has the potential for

speculative abuse, a court must look at two factors: 1) Could the

defendant reasonably be expected to have had access to inside

information? and 2) Did the defendant initiate the transaction

voluntarily? Provident Securities Co. v. Foremost-McKesson, Inc.,

506 F.2d 601 (9th Cir. 1974) citing Kern County, supra at 596-

600. Contrary to Mesa’s contention, the Court must focus not on

Mesa’s literal access to inside information, but rather on Mesa’s

potential for speculative abuse of inside information. Provident

Securities, supra at 605. A hostile relationship may justify the

conclusion that there was only a remote possibility of access to

inside information. See e.g. Kern Co.; American Standard Inc. v.

Crane Co., 510 F.2d 1043 (2d Cir. 1974), cert. denied 421

U.S.(1975)?

Unocal claims that Mesa had access to important information

not available to the general public regarding, inter alia, the

various actions it intended to take in buying and selling the

Unocal siock, the timing of such actions, and the status and likely

outcome of its negotiations with Unocal. By initiating a tender

offer, Unocal contends that Mesa caused Unocal to pursue a

financial policy from which Mesa benefited.

However, on the facts of this case, Mesa was a true outsider

despite its ten percent stockholder status. Both Mesa and Unocal

have admitted that “unmitigated hostility” ch

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.