# Petition for Writ of Certiorari — Mesa Petroleum Co. v. Colan > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386011_0320%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1992 - **Citation:** 504 U.S. 911 ## 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, y 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 i 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)? ii 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 iV 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 Vv 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 vi 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 18 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, Vv 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” 2 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. 3 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 4 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.” 5 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. 6 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. 7 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). 8 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). 9 “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, 10 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. 11 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). 12 § 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 ee 13 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). 14 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. 15 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 16 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 17 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 ia 18 (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). 19 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. 20 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). 21 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 | 22 (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. © For a discussion of the difficulty courts have had with this question, 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)). 23 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. 24 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 25 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). 26 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 27 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). 28 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 29 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 2a 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 IR 3a 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 4a 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 Sa 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. 6a 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 7a 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). 8a 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 9a 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 a 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.” ae 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 ve 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 intende [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386011_0320%3A1. Public record. Not legal advice.