Opposition Brief — Mesa Petroleum Co. v. Colan

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TITLED

APR 24 1992

No. 91-1451 cicE OF THE CLERK |

1201 West Fifth Street

In The

Supreme Court of the United States

October Term, 1991

MESA PETROLEUM CO., ei al.,

Petitioners,

DAVID COLAN and UNOCAL CORPORATION,

Respondents.

On Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The Ninth Court

JOINT BRIEF FOR RESPONDENTS IN OPPOSITION

DArRRYL SNIDER* WILLIAM LERACH*

Rosert P. VARIAN PATRICK COUGLIN

Daniet J. TyuKkopy, Jr. Mivserc Weiss BERSHAD

Broseck, PHLEGER & SPECTHRIE & LERACH

HARRISON 225 Broadway, Suite 2000

444 S. Flower Street San Diego, CA 92102

Los Angeles, CA 90017 Telephone: (619) 231-1058

Seiaprene: (205) 459-4060 Attorneys for Respondent

JASMINA A. THEODORE David Colan

Unocal Corporation *Counsel of Record

Los Angeles, CA 90017

Telephone: (213) 977-7600

Attorneys for Respondent

Unocal Corporation

COCKLE LAW BRIEF PRINTING CO, (800) 225-6964

OR CALL COLLECT (402) 42-2831

QUESTION PRESENTED

Pursuant to this Court’s Rule 15.1, respondents point out

that petitioner’s statement of the question presented is erro-

neous. Petitioner’s statement asserts that Mesa’s decision to

exchange its stock was economically coerced, that the

exchange occurred pursuant to a corporate recapitalization,

and that there was no potential for speculative abuse of inside

information. As the Court of Appeals held, “the evidence is

undisputed that the Mesa Defendants made a voluntary busi-

ness decision to persuade Unocal to permit them to participate

in the corporation’s self-tender offer” after “the Mesa Defen-

dants shrewdly calculated their options.” (Pet. at 34a.)

Accordingly, the question actually presented is that framed by

the Court of Appeals in issuing its ruling:

Is “an exchange of common stock for a negotiable debt

security pursuant to a tender offer... a ‘sale’ within section

16(b)"? (Pet. at 7a.)

TABLE OF CONTENTS

19 —

Page

QUESTION PRESENTBO 5.x édivcs ys cs eens i

STATEMENT OF ‘THRE GRiiee 2 V4 sos eenceedeeresera 2

REASONS FOR DENYING THE WRIT.............. 7

I. BACKGROUND AND PURPOSE OF SECTION

tt) 7

Il. THE COURT OF APPEALS CORRECTLY CON-

CLUDED THAT THIS CASE FALLS OUTSIDE

THE EXCEPTION DEFINED IN KERN COUNTY 9

A. The Facts In This Case Are Decisively Differ-

ent From Those In Kern County............ 10

B. Mesa Misstates The Court Of Appeals’ Hold- |

ing And Ratiogele . «5 .sicnsceayeerhinaeees 14

C. The Court of Appeals Did Not Ignore Footnote

24 From Kere COMMU « 65c50cs5s these 15

Ill. THE COURT OF APPEALS’ DECISION DOES

NOT CONFLICT WITH THE ANALYTICAL

APPROACH EMPLOYED BY THIS COURT OR

THE SECOND CORAM Secs nbskucessceeereree 17

IV. THERE IS NO CONFLICT AMONG THE CIRCUITS;

MESA’S ARGUMENTS UNQUESTIONABLY

WOULD HAVE MET THE SAME FATE HAD SUIT

BEEN FILA) EL es + ban ca waneeeerenesan 18

A. Mesa’s Reliance On The “Recapitalization”

Cases is MOIGREOIOE. «i ih cons ena

B. Mesa’s Reliance On The Involuntariness Cases

is Migpiaceel. ok 04 saceucesae eee ee 21

ili

TABLE OF CONTENTS - Continued

Page

Mesa’s Claim That The Result In This Case

Would Have Been Different In The Second Cir-

ee auavucteaten 26

V. THERE IS NO REASON TO CREATE ANY SPE-

CIAL SECTION 16(b) EXEMPTION FOR DE-

FEATED TENDER OFFERORS AND

oes ig ok kone Ae ADM ew OD Cw 28

CONCLUSION 30)

awe yee eee ee ee ee en ee ee ee ee et ee 2 oe en nn ee oe

liaise

TABLE OF AUTHORITIES

Page

CasES

Abrams vy. 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

ff Ene mt Seer ere ert ire rarer ys 25, 26

Allis-Chalmers Mfg. Co. v. Gulf & W. Indus., Inc., 527 |

F.2d 335 (7th Cir. 1975), cert. denied, 423 U.S. :

ee ae ee See FN owe canokewcs beaeeeeh cues 8 |

American Standard, Inc. v. Crane Co., 510 F.2d 1043

(2d Cir. 1974), cert. denied, 421 U.S. 1000 (1975)

Pe Te Sires BY. Sx AD) anode pian eG RNa Yt IAN we Spee 23, 25, 26, 27

Arrow Distribution Corp. v. Baumgartner, 783 F.2d

Pee BS ae | ee Pere ee ee One Cree rere 29

Bershad v. McDonough, 428 F.2d 693 (7th Cir. 1970),

cert. denied, 400 U.S. 992 (1971) ................. 6, 7

Blau v. Lamb, 363 F.2d 507 (2d Cir. 1966), cert. |

denied, 385 U.S. 1002 (1967) ......... 8, 17, 18, 20, 29

Blau v. Lehman, 286 F.2d 786 (2d Cir. 1960), aff'd,

ee a cachet ecco ceese bees sasasees 20 |

Bunker Ramo-Eltra Corp. v. Fairchild Industries, 639 |

Pam. SOP CORE. TDDB)... oc ccc ccscensrccenss 24

Champion Home Builders Co. v. Jeffress, 490 F.2d

611 (6th Cir.), cert. denied sub nom. Jeffress v.

GEO. Ua ee RE Ry 6 ke vn eds eke veo ban 23

CRA Realty Corp. v. Crotty, 878 F.2d 562 (2d Cir.

RAEN eT a i nee OR, Rd oie Aart A EA oe A a 17, 18

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

Cort. Gemeed, Sam UD. Bae CUGSS) occ ccc cstcucisecs 22

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

Gare See ee CRs bc bance ese areetinuuonen 6, 8, 26

TABLE OF AUTHORITIES - Continued

Page

Gold v. Sloan, 486 F.2d 340 (4th Cir. 1973), cert.

denied sub nom. Gold v. Scurlock, 419 U.S. 873

2) Seamer wemermnemen s ART LOI em oF on! 22, 24, 25

Gollust v. Mendell, ___ U.S. __, 111 S.Ct. 2173

4} | } Fer IMI ere M RN AOS nog Phe ck em Pa 7

Griggs v. Duke Power Co., 401 U.S. 424 (1971)....... 29

Gund vy. First Fla. Banks, Inc., 726 F.2d 682 (11th Cir.

| NEE ar RAN oy Sorhety ary hes OI MEE GA AS) SY oh §

Heckler v. Chaney, 470 U.S. 821 (1985)............... 29

Heublein, Inc. v. General Cinema Corp., 722 F.2d 29

(2d Cir. 1983), cert. denied, 465 U.S. 1066 (1984) 23, 28

International Controls Corp. v. Vesco, 490 F.2d 1334

(2d Cir.), cert. denied, 417 U.S. 932 (1974)..... 17, 18

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

Sa Us. Bee Caer ees cas enee dee passim

Lane Bryant, Inc. v. Hatleigh Corp., 517 F.Supp. 1196

CBA Bs. TODO D sos 0000nkeuath cane eee 8, 20, 28

Makofsky v. Ultra Dynamics Corp., 383 F.Supp. 631

(SAINT, CRORE 6s cvan'd isan eee 23

Marine Bank v. Weaver, 455 U.S. 551 (1982) .......... 17

Mendell v. Gollust, 909 F.2d 724 (2d Cir. 1990), aff'd,

meen OS ccs MAD Re BRED COPE i ee 17

National Medical Enterprises, Inc. v. Small, 680 F.2d

o> Coe Ge. -POeP oh aea ewe kaon cc ke 8

Oliff v. Exchange Int'l Corp., 449 F. Supp. 1277 (N.D.

Ill. 1978), aff’d, 669 F.2d 1162 (7th Cir. 1980),

cert. denied sub nom. Sax v. Oliff, 450 U.S. 915

8) ee ee rene ert a ap ing pe SF MoT no ae t

Perine v. William Norton & Co., 509 F.2d 114 (2d Cir.

TABLE OF AUTHORITIES — Continued

Page

Petteys v. Butler, 367 F.2d 528 (8th Cir. 1966), cert.

denied, 365 U.S. 1006 CiRGT) « cccvsccacucn desde 9 ae

Red Lion Broadcasting v. FCC, 395 U.S. 367 (1969)... . 29

Reliance Elec. Co. v. Emerson Elec. Co., 404 U.S.

Bi ly) peer rer 6. 7, 8.9. 1 IZ, 26s 27

Reves v. Ernst & Young, 494 U.S. 56 (1990)........... 17

Roberts v. Eaton, 212 F.2d 82 (2d Cir.), cert. denied,

343 US. Gar CESSG: 6 soc cdv ca ene 21

Rothenberg v. United Brands Co., {1977-1978 Trans-

fer Binder] Fed.Sec.L.Rep. (CCH) J 96,045

(S.D.N.Y. May 11, 1977), aff’d mem., 513 F.2d

Sooo COB CH. TPF E eos cowed dere 8, 21

Schur v. Salzman, 365 F.Supp. 725 (S.D.N.Y. 1973)..... &

Shearson/American Express Inc. v. McMahon, 482

J.D. SOO CIGGT Ds 6 cee nvenesaeseenverseeetenae 29

Sprague Electric Co. v. Mostek Corp., 488 F.Supp.

SGE (NUD. FOR. PROGP. .<csccncacnvebadeneee seein 23

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

ISOS) as ch buen yu ee cee ee One ee ee 28

T.W. Elec. Serv. v. Pacific Elec. Contractors Ass'n,

SUP F.20 G26 (9 CM. I9RE) oi ici cc ccdeccsesasne es 4

T-Bar Inc. v. Chatterjee, 693 F.Supp. 1 (S.D.N.Y.

bo) rere rer rr rr sree re 20, 28

Texas Int’l Airlines v. National Airlines, Inc., 714

F.2d 533 (Sth Cir. 1983), cert. denied, 465 US.

LOSS CEDOS6) ua ovis esc cuag cede dee keene 29

Vii

TABLE OF AUTHORITIES ~- Continued

Page

Tyco Laboratories, Inc. v. Cutler-Hammer Inc., 490

Pee: © CREE BPO ook bis dk ove vnc avene 20, 28

Udall v. Tallman, 380 U.S. 1 (1965) ..............005. 29

Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946

Ge ss bs eee an beten sas kacaaveeveueieee a 3

Unocal Corp. v. T. Boone Pickens, Jr., No. 85-2179

ears COR, AON ZG, TOGS) woos cccecvccssasasscds 5

Western Auto Supply Co. v. Gamble-Skogmo, Inc., 348

Peel Foe COM MAE, TOGO) 5 cos ck cin cenicacdoecinar 8, 23

STATUTES AND RULES

SD Sisto OFM 6 ab bea denn eeu ces Gicnkuaevsens passim

Securities and Exchange Commission

Rule 16b-9, 17 C.F.R. § 240.16b-9 (1991).........2, 20

OTHER

Hearings on Stock Exchange Practices before the

Senate Committee on Banking and Currency, 73d

Cong., 2d Sess. 6557-58 (1934). ....... ccc cceeevcccs 9

Arnold S. Jacobs, Section 16 of the Securities

Exchange Act (1989).................... 12, 20, 23, 28

No. 91-1451

In The

Supreme Court of the United States

October Term, 1991

c 7

MESA PETROLEUM CO., et al.,

Petitioners,

DAVID COLAN and UNOCAL CORPORATION,

Respondents.

On Petition For A Writ Of Certiorari

To The United States Court Of Appeals

For The Ninth Court

JOINT BRIEF FOR RESPONDENTS IN OPPOSITION

Unocal! files this brief in opposition to Mesa’s2 petition

for a writ of certiorari to the United States Court of Appeals

for the Ninth Circuit.

Nothing in the Court of Appeals’ decision merits review

on certiorari. The Ninth Circuit’s opinion is a straightforward

' In this brief we follow the practice of the parties and refer to both

Unocal Corporation and David Colan, plaintiffs in the underlying action,

as “Unocal.” Pursuant to Rule 29.1 of this Court, Unocal informs the

Court that it owns approximately 96% of Unocal Exploration Corporation

which is publicly traded (symbol “UXC’”’); all other Unocal subsidiaries

are wholly owned.

2 Again pursuant to the custom and practice in this case, we refer to

all petitioners — Mesa Petroleum Co., Mesa Southern Co., Mesa Asset

Co., CY-41, Inc. and JACK-41, Inc. - as “Mesa.”

application of the principles enunciated by this Court in Kern

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

582 (1973). Those principles have been consistently applied

in a myriad of decisions throughout the federal judiciary,

including a unanimous body of cases refusing to create a

section 16(b) exemption for short-swing profits garnered by

“defeated” tender offerors.

Mesa’s pronouncements of “sharp conflicts” between the

Court of Appeals’ decision and the law of other circuits can

only be attributed to the “overzealous advocacy” for which

Mesa was chastised by the Ninth Circuit. (Pet. at 18a.) There

is no conflict. There is no split among the circuits.

Several of the handful of cases cited in the petition predate

Kern. By definition they can create no conflict regarding the

application of Kern. Virtually all of the cases relied upon by Mesa

pertain to corporate reorganizations and stock reclassifications that

changed the form of the insider’s equity investment. The insider

technically became a “seller,” without any volitional act on its part

and without altering the fundamental nature of the investment.*

That is not what happened here.

Mesa made a calculated and wholly voluntary business

decision to exchange its equity investment for notes obtained

from Unocal in a tender offer. The exchange was made pur-

suant to a separate agreement negotiated exclusively between

Mesa and Unocal, which, according to Mesa’s chairman,

brought Mesa a great “victory” in the form of an $83 million

after-tax profit.

STATEMENT OF THE CASE

Section 16(b) of the Securities Exchange Act of 1934

requires disgorgement of “short-swing” profits realized by an

3 By and large these situations are now dealt with by SEC rules

pursuant to the authority specifically granted to the Commission to

exempt categories of transactions “not comprehended within the purpose

of" § 16(b). 1S U.S.C. § 78p(b). See, e.g., Rule 16b-9, 17 CFR.

§ 240.16b-9 (1991) (“Exemption from section 16(b) of transactions

involving the conversion of equity securities”).

officer, director or more-than 10% shareholder. 15 U.S.C.

§ 78p(b). Unocal seeks disgorgement because Mesa sold

Unocal shares within six months of its purchase after becom-

ing a Statutory insider by virtue of crossing the 10% owner-

ship line. This section 16(b) claim arises out of Mesa’s 1985

attempt to take over Unocal or exact a substantial “greenmail”

payment.* After having had some success with this strategy in

the early 1980’s, in 1984 Mesa targeted Unocal and by late

February 1985, Mesa had accumulated just below 10% of the

outstanding shares of Unocal.> Mesa’s agent, Boyd Jefferies,

disguised Mesa’s purchase of an additional 6.7 million shares

of Unocal to make it appear that Mesa purchased these shares

in a single block trade that would avoid 16(b) liability. In

actuality, Mesa crossed the 10% line earlier (and in a series of

separate steps) when Jefferies was accumulating the stock on

Mesa’s behalf.

On April 8, 1985, Mesa made a tender offer to purchase a

controlling interest in Unocal at $54 per share. On April 16,

Unocal responded by offering to purchase Unocal stock in

exchange for senior notes with a par value of $72 per share.

Unocal’s offer was made to all shareholders except Mesa.°

The threat of takeover remained, however, so long as Mesa

continued to own so much Unocal stock. As the Court of

# It has been judicially determined that Mesa’s “principal objective”

in purchasing the Unocal stock “was greenmail.’’ Unocal Corp. v. Mesa

Petroleum Co., 493 A.2d 946, 952, 956 n.13, 959 (Del. 1985). See also,

Unocal Corp. v. T. Boone Pickens, Jr, No. 85-2179, at 13 (C.D. Cal

April 26, 1985) (memorandum decision) (“the Court finds . . . that Mesa

II from the outset intended to put Unocal ‘in play’ and thereby either

obtain control or ‘greenmail’ the corporation... . ”).

5 Despite statements in Mesa’s original SEC Schedule 13D that its

purpose was for “investment” only, Mesa claimed that it had changed its

mind on March 28, 1985, when Mesa first announced that it was

considering a takeover of Unocal.

the Delaware Supreme Court, which upheld Unocal’s tender offer. Unocal

Corp. v. Mesa Petroleum Co., 493 A.2d 946, 958-59 (Del. 1985).

Appeals pointed out, “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 deval-

ued shares at a bargain price and seize control of the corpora-

tion.” (Pet. at 25a.) After a period of intense settlement

negotiations, Unocal and Mesa agreed that Mesa could partic-

ipate in the Unocal self-tender which allowed Mesa to

exchange some of its Unocal stock for senior notes. As a

result of Mesa’s attempted takeover, Unocal incurred over $4

billion in debt and was substantially harmed.

On May 20, 1985, Mesa sold 7,846,705 shares of Unocal

stock to Unocal for senior notes worth $75 per share. Mesa

was thus able to sell in May for $75, nearly 8 million shares

of stock purchased two months earlier for $48 a share or less.

On July 3, 1985, Mesa liquidated the senior notes for some

$589 million in cash on the day it received them. With these

transactions Mesa closed its greenmail campaign within six

months of its March 1985 purchases, and, according to Mesa,

pocketed a handsome $83 million after-tax profit.

Mesa of course disputes many of the facts which bear

upon its section 16(b) “purchase” and which remain for the

jury.’ The only facts that are essential to this appeal, however,

are that Mesa exchanged its stock voluntarily for debt instru-

ments (essentially cash)® obtained via a tender offer. Mesa

negotiated its own terms of sale. Despite Mesa’s frequent

7 In this procedural posture Unocal is, in any event, entitled to the

benefit that all nonessential facts be construed in its favor. See T:W. Elec.

Serv. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630 (9th Cir.

1987).

8 Mesa conceded that its exchange of Unocal equity stock for debt

securities pursuant to Unocal’s self-tender offer was a “sale” if § 16(b) is

given literal interpretation. (Pet. at 21a, n.6.) In any event, Mesa

exchanged the debt instruments for cash within six months of Mesa’s

March “purchase” of the Unocal shares at issue.

—— LlLlLll—“—s—™OSO

hyperbole regarding this case being “strikingly parallel to”

Kern, the plain truth is that unlike the defendant in Kern,

whose shares were going to be automatically converted to

shares of the new entity no matter what it did, Mesa had a

variety of options, including simply holding its stock or

making a larger tender offer. As noted by the Court of

Appeals, citing to Mr. Pickens’ own words:

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 billion 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.

It would be a great campaign, no doubt about it, but

the risks were getting very high... .

* * *

It was time to make a deal.

(Pet. at 25a-26a, quoting Boone.)

Mesa argues that its participation in the exchange was

not voluntary because Mesa was “economically coerced”

since it acted to avoid an alleged “substantial loss.” Section

16(b), however, contains no language limiting its application

in situations in which the insider acts to avoid a loss.° As the

9 Although Mesa emphasizes the paper loss that it would have

recorded had it been forced to liquidate its investment immediately after

Unocal’s self-tender without participating in that exchange (which no one

was forcing Mesa to do), the fact is that had Mesa merely held on to its

Unocal stock until December 1989, the $450 million paper loss that it

complains of could have turned into a more than $500 million gain. This

billion dollar swing amply demonstrates the unworkability of Mesa’s

economic rationality test. Federal courts are ill-equipped to take on the

additional role of investment banker, especially where to do so would

eviscerate what Congress intended to be a simple, bright line test for

§ 16(b) liability.

Court of Appeals noted in response to Mesa’s economic

coercion argument: “An economic coercion test would allow

corporate insiders to avoid section 16(b) liability by present-

ing evidence of a variety of unfortunate circumstances that

forced them to sell their common stock. The objective stan-

dards 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).”

(Pet. at 29a.)

Mesa filed two summary judgment motions which were

initially rejected by the trial court. The first pertained to

whether Mesa had crossed the ten percent threshold in a

single purchase exempting it from disgorgement under Fore-

most-McKesson, Inc. v. Provident Securities Co., 423 U.S.

232 (1976), or in;a Series of steps with Jefferies acting as

Mesa’s agent. This fact issue remains to be decided by the

jury.

On the eve of trial, and in response to the briefing on

motions in limine, Mesa asked the district court to reconsider

its second summary judgment motion, which pertained to the

so-called “unorthodox transaction” exception to section 16(b).

The parties agreed that the in limine motions could be treated

as cross motions for summary judgment. On January 19,

1990, the district court granted Mesa’s motion in a written

opinion that was later amended. Neither opinion is reported.

(The amended opinion of April 10, 1990 is found in the

Petition at 36a-62a.)

On appeal the Ninth Circuit reversed the granting of

summary judgment for Mesa and directed the district court to

grant Unocal’s motion for partial summary judgment on the

inapplicability of the unorthodox transaction exception to this

case. That opinion (as amended) is reported at 951 F.2d 1512

(9th Cir. 1991). On December 23, 1991, Mesa’s petition for

rehearing and rehearing en banc was denied.

REASONS FOR DENYING THE WRIT

BACKGROUND AND PURPOSE OF SECTION 16(b)

In section 16(b), Congress enacted a bright-line pro-

phylactic rule of strict liability. Such a rule was deemed

necessary in order to curb speculative abuse of inside infor-

mation and to maintain investor confidence in honest, com-

petitive securities markets. As this Court has emphasized:

“ “the only method Congress deemed effective to curb the

evils of insider trading was a flat rule taking the profits out of

a Class of transactions in which the possibility of abuse was

thought to be intolerably great.’” Kern, 411 U.S. at 592

(quoting Reliance Elec. Co. v. Emerson Elec. Co., 404 U.S.

418, 422 (1972)) (emphasis added); see also Gollust v. Men-

dell, __ —-U.S. __, 111 S.Ct. 2173, 2178 (1991) (citing

Reliance’s “flat rule” language).

Sweeping coverage, strict liability, ease of administration

and reduction of difficulties in proof are essential to the

achievement of congressional goals:

In order to achieve its goals, Congress chose a

relatively arbitrary rule capable of easy administra-

tion. The objective standard of section 16(b)

imposes strict liability upon substantially all trans-

actions occurring within the statutory time period,

regardless of the intent of the insider or the exis-

tence of actual speculation. This approach maxi-

mized the ability of the rule to eradicate speculative

abuses by reducing difficulties in proof. Such arbi-

trary and sweeping coverage was deemed necessary

to insure the optimum prophylactic effect.

Reliance, 404 U.S. at 422 (quoting Bershad v. McDonough,

428 F.2d 693, 696 (7th Cir. 1970)) (emphasis added).

Accordingly, the statute presumes that insiders, including

more-than 10% shareholders, have access to nonpublic infor-

mation that will be used in trading in the company’s stock.

See Foremost-McKesson, 423 U.S. at 243, 251; Reliance,

404 U.S. at 422. Liability arises “whether fair or unfair”!° and

regardless of the insider’s “clean heart,”!! honorable

motive,'2 “good faith,”'3 or lack of scienter,'4 and even

though the insider did not in fact engage in any actual spec-

ulative abuse whatsoever.!>

Section 16(b) deliberately adopts an approach that is

fundamentally different from that employed under section

10(b) and other areas of federal securities regulation. Market

manipulation and actual abuse of inside information are not

elements of a section 16(b) “violation.” Case-by-case, trans-

action-by-transaction determinations were eschewed in favor

of a flat rule that would (i) be easy to understand and apply,

(ii) eliminate difficulties of proof, and (iii) maximize investor

confidence. Although this approach might work hardships in

10 F.g., Blau v. Lamb, 363 F.2d 507, 515 (2d Cir. 1966) (footnote

omitted), cert. denied, 385 U.S. 1002 (1967); Oliff v. Exchange Int’!

Corp., 669 F.2d 1162, 1165-66 (7th Cir. 1980), cert. denied sub nom. Sax

v. Oliff, 450 U.S. 915 (1981).

1! E.g., Allis-Chalmers Mfg. Co. v. Gulf & W. Indus., Inc., 527 F.2d

335, 357 (7th Cir. 1975), cert. denied, 423 U.S. 1078 & 424 U.S. 928

(1976).

12 E.g., Oliff v. Exchange Int’! Corp., 449 F.Supp. 1277, 1288 (N.D.

Ill. 1978), aff'd, 669 F.2d 1162 (7th Cir. 1980), cert. denied sub nom. Sax

v. Oliff, 450 U.S. 915 (1981); Rothenberg v. United Brands Co.,

[1977-1978 Transfer Binder] Fed.Sec.L.Rep. (CCH) { 96,045, at 91,690

n.1 (S.D.N.Y. May 11, 1977), aff’d mem., 513 F.2d 1295 (2d Cir. 1977);

Schur v. Salzman, 365 F.Supp. 725, 728 (S.D.N.Y. 1973).

13 E.g., Western Auto Supply Co. v. Gamble-Skogmo, Inc., 348 F.2d

736, 741 (8th Cir. 1965); Lane Bryant, Inc. v. Hatleigh Corp., 517 F.Supp.

1196, 1198 (S.D.N.Y. 1981).

14 F.g., Rothenberg, {1977-1978 Transfer Binder] Fed. Sec. L. Rep.

{ 96,045, at 91,690 n.1.

1S E.g., Gund v. First Fla. Banks, Inc., 726 F.2d 682, 684-87 (11th

Cir. 1984); National Medical Enterprises, Inc. v. Small, 680 F.2d 83, 84

(9th Cir. 1982); Oliff, 669 F.2d at 1165, 1167-68.

particular cases, Congress accepted this fact as a sacrifice

necessary to having a general rule.'®

For those who fail to observe the plain requirements of

the statute, the remedy is relatively mild. There is no declara-

tion of wrongdoing. The insider keeps its initial investment,

Surrendering only short-swing profits made within a six-

month period. Moreover, section 16 grants the Securities and

Exchange Commission broad power to ameliorate any unwar-

ranted harshness by exempting transactions deemed to fall

outside the purposes of the statute. See 15 U.S.C. § 78p(b).

THE COURT OF APPEALS CORRECTLY CONCLUDED

THAT THIS CASE FALLS OUTSIDE THE EXCEPTION

DEFINED IN KERN COUNTY

Mesa asserts that the “facts of this case are overwhelmingly,

indeed strikingly, parallei to those of Kern County” (Pet. at 12),

and that the Court of Appeals ignored and misapplied Kem. In

truth, the Ninth Circuit faithfully followed standards enunciated by

this Court in Kern and embraced in the section 16(b) cases ever

since.

The Court of Appeals articulated its holding as follows:

“We reverse because we have concluded that an exchange of

common stock for a negotiable debt security pursuant to a

tender offer is a ‘sale’ within section 16(b).” (Pet. at 7a;

emphasis added.)'’ That ruling was dictated by a record that

‘© In explaining the necessity of such a rule to Congress, Thomas

Corcoran, one of the principal drafters of the 1934 Act, stated: “You have

to have a general rule. In particular transactions it might work a hardship,

but those transactions that are a hardship represent the sacrifice to the

necessity of having a general rule.” Hearings on Stock Exchange Prac-

tices before the Senate Committee on Banking and Currency, 73d Cong.,

2d Sess. 6557-58 (1934).

'7 In the same vein, the Court of Appeals posed the question for

decision in terms of Unocal’s contention “that the ‘unorthodox transaction

defense’ to an action brought pursuant to § 16(b) is not applicable to a

self-tender offer in which a beneficial owner exchanges his common

(Continued on following page)

conclusively showed that (i) a calculated business decision was

made by Mesa to cash out its equity investment by exchanging its

stock for notes, (ii) this transaction was part of a tender offer

offered to other Unocal shareholders, and (iii) Mesa actively

negotiated the terms of the transaction. As the Court of Appeals

observed, “[t]he Mesa Defendants had ‘the choice of participating

in the tender offer or holding onto their stock’ ” (Pet. at 24a), and

“the nature of the Mesa Defendants’ investment was changed”

(Pet. at 34a) as a result of Mesa’s decision to exchange stock for

notes with fixed payments and interest rates.

In analyzing these core facts the Ninth Circuit applied long-

settled standards derived from Kern,'® from the history and pur-

pose of section 16(b),'? from the 16(b) cases dealing with changes

in the form of a continuing equity investment,2° and from 16(b)

cases pertaining to tender offers, including sales by unsuccessful

tender offerors.2! Notwithstanding Mesa’s claims to the contrary,

the Court of Appeals manifestly did not hold that Mesa’s sale must

be subjected to the statute simply because it was not forced

pursuant to a merger.

A. The Facts In This Case Are Decisively Different From

Those In Kern County.

In Kern, Occidental’s shares were forcibly converted into

shares of a successor company in a defensive merger negotiated

(Continued from previous page)

stock for negotiable debt securities issued as a result of a recapitalization

of the issuer.” (Pet. at 19a.)

18 The Court of Appeals reviewed Kern in detail. (/d. at 22a-24a.)

Among other things, the Ninth Circuit cited and relied upon Kern's

statement that traditional cash-for-stock transactions are clearly within the

purview of § 16(b) (Pet. at 23a) and the fact that Kern characterized as

“critical” the fact that Occidental’s stock was involuntary in the sense that

it was required pursuant to a merger. (/d. at 24a.)

19 The Court of Appeals reviewed the history and purpose of

§ 16(b), particularly as described by this Court in Kern and Reliance. (Id.

at 19a-2la.)

20 Id. at 33a-34a.

21 Jd. at 30a-32a.

entirely by others. 411 U.S. at 585-87. Not only did Occiden-

tal have no control over the merger/forced conversion, it was

literally impossible for Occidental to continue to hold its

stock. The stock was automatically converted by the terms of

a merger agreement to which Occidental was not a party, and

in which Occidental had no voice. Occidental’s only other

choice was to sell on the open market in advance of the

merger, which itself would have been a section 16(b) sale.

Thus, in stark contrast to Mesa, which could have continued

holding Unocal shares for more than six months, Occidental

would be subject to section 16(b) liability through no voli-

tional act of its own.??

The fact that the stock conversion was “required” in the

absolute sense was “critical” to this Court’s decision to

exempt the transaction from the statute:

The critical fact is that the exchange took place and

was required pursuant to a merger between Old

Kern and Tenneco. . . . Occidental obviously did not

participate in or control the negotiations or the

agreement between Old Kern and Tenneco. Once

agreement between those two companies crystal-

lized, the course of subsequent events was out of

Occidental’s hands.

Id. at $99 (emphasis added).

22 Mesa attempts to finesse this critical distinction by pointing out

that the option Occidental obtained from Tenneco was a volitional act, but

as this Court stated in Kern, “the mere execution of an option is not

generally regarded as a ‘sale’ " for purposes of § 16(b), 411 U.S. at 601

(citations omitted), and the Occidental/Tenneco transaction did not pre-

sent a cogent reason for altering that rule. /d. at 601-02. Furthermore, the

date for the exercise of the option in Kern was set to occur more than six

months from the granting of the option, a period (as noted by this Court

in Kern) that is assumed to dissipate whatever trading advantage might be

imputed to the insider. /d. at 603. In sharp contrast, all of the transactions

at issue in this case — from the initial purchase by Mesa of Unocal! stock

to Mesa’s exchange of that equity for senior notes, to Mesa’s ultimate

conversion of those notes to cash — occurred within the six months

proscnibed by the statute.

In summarizing its holding, Kern made clear that the

decision was predicated on both the absence of potential for

speculative abuse23 and involuntariness:

We do not suggest that an exchange of stock pur-

suant tO a merger may never result in § 16(b)

liability. But the involuntary nature of Occidental’s

exchange, when coupled with absence of the possi-

bility of speculative abuse of inside information,

convinces us that § 16(b) should not apply to trans-

actions such as this one.

Id. at 600 (emphasis added).?4

In contrast, the Court of Appeals noted that,

“{ujnlike the plight of the hapless beneficial owner

in Kern County, the record conclusively shows that

the Mesa Defendants voluntarily exchanged their

common stock for negotiable debt securities. The

exchange in the matter sub judice was not the

23 Although not necessary to this Court’s decision on this petition, it

should be mentioned that the seventy-third Congress, which passed the

1934 Act, would almost certainly have regarded Mesa’s activities as a

species of speculative abuse. Among other things, Mesa’s activities

included parking arrangements with convicted securities felons that were

designed to make it appear that Mesa had successfully avoided § 16{b)

(and that also resulted in the violation of other SEC regulations pertaining

to net capital requirements). See Reliance, 404 U.S. at 428-29 nn. 2 & 3

(Douglas, J., dissenting) (reviewing the legislative history of § 16(b) and

noting Congress’ concerns with the “pooling” arrangements then preva-

lent that facilitated stock price manipulation).

24 As the preeminent treatise on § 16(b) noted in summarizing the

case law on this point:

A few opinions refer only to access to inside information (or

a potential for speculative abuse) as the appropriate tou-

chstone, yet the vast majority of the cases correctly conclude

that under Kern County both factors, involuntariness and no

access to inside information, must exist before an unorthodox

transaction can escape from being a Statutory purchase or

sale. This is consistent with — no, mandated by - Kern... .

Amold S. Jacobs, Section 16 of the Securities Exchange Act § 3.04[5){a],

at 3-107 to 3-108 (1989) (footnotes omitted and emphasis added) [here-

inafter, “Jacobs’’}.

inexorable consequence of corporate machinations 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 negotiated a result that Mr. Pickens charac-

terized as a victory for his side.”

(Pet. at 27a.) Kern also emphasized that Occidental’s exchange of

stock in “Old Kern” for stock in Tenneco was far removed from

the “traditional cash-for-stock transactions” that were “clearly

within the purview of § 16(b).” Kern, 411 U.S. at 593. Occidental

did not exchange its stock for cash or notes, and the nature of its

ongoing investment did not change. Stock in the predecessor

company was converted into stock of a successor company, /.é.,

from one form of equity to another form of equity. /d. at 586.

As the Court of Appeals noted, Mesa’s situation bears no

resemblance to the facts that were controlling in Kern. (Pet. at

24a-27a.) Among other things:

(1) Mesa’s stock was not forcibly or automatically con-

verted.25

(2) Far from having its long-term investment interrupted by

unanticipated events beyond its control, Mesa specifically antici-

pated and planned for the prospect of selling stock within six

months of the purchase.

(3) Mesa unquestionably could have held its shares,2© and

had complete control over whether and when its shares would be

sold.??

(4) Mesa exchanged its stock for senior notes with fixed

payments and interest rates2® that were immediately converted to

cash,?? not for stock representing a different form of the same

equity investment.3°

25 Pet. at 24a-27a.

26 Id. at 24a.

27 Id. at 1la-12a, 24a-27a, 34a.

28 Id. at 10a, 34a.

29 Id. at 12a.

30 Id. at 33a-34a.

(S) Mesa sold its stock pursuant to a settlement agree-

ment between Mesa and Unocal;*! the sale was not required

by the terms of an agreement between third parties.

(6) The only agreement requiring the sale of Mesa’s

stock was actively and skillfully negotiated by Mesa.

(7) Mesa wielded substantial bargaining power in the

negotiations it initiated with Unocal,** and Mesa used its

leverage to extract substantial concessions from Unocal.*

(8) After considering a variety of alternatives available

to it,4> Mesa made a shrewdly calculated business decision to

exchange its stock for Unocal notes.*°

B. Mesa Misstates The Court Of Appeals’ Holding And

Rationale.

Ignoring these fundamental distinctions from Kern, the

petition asserts that the Ninth Circuit: “den[ied] the rationale

of Kern County”;37 “circumscribed Kern as merely a ‘fact-

specific’ case” ;38 “dismissed a frequently cited statememt in

Kern because this Court ‘did not cite any authority to support

[it]’ ";39 “confin[ed] Kern to mergers”;*° and “conclud{ed]

that ‘involuntariness’ (as narrowly defined by it) was neces-

sary.”4! Thus, according to Mesa, the Ninth Circuit’s decision

“turns the clock back to pre-Kern days and adds substantial

confusion to § 16(b) law.” (Pet. at 27.)

31 Jd. at 1la-12a.

32 Td. at 1la-12a, 25a-27a, 34a.

33 Id. at 25a-26a.

34 Id. at 26a.

35 Jd. at 24a-27a, 34a.

36 Id. at 34a.

37 Id. at 7 n.10.

38 Id.

39 Id.

40 Id. at 26.

41 Td.

None of these claims can be supported. The central

premise of Mesa’s argument - i.e., the repeated claim that the

Court of Appeals held that the unorthodox transaction excep-

tion can only be applied when stock is involuntarily converted

in a merger — is simply wrong.

Nowhere did the Ninth Circuit purport to limit or confine

Kern to mergers. On the contrary, the opinion clearly

acknowledges that Kern is not so iimited. Among other

things, the Court of Appeals expressly stated that “[t]he

majority of the transactions which have been considered

‘unorthodox’ within the narrow exception announced in Kern

County involve exchanges of stock pursuant to a merger.”

(Pet. at 29a; emphasis added.) Nor did the court hold that the

unorthodox transaction exception could only be applied to

involuntary transactions. What the Court of Appeals did state

is that “[cJourts following Kern County have recognized that

involuntariness is an important factor in determining”

whether a transaction can escape the provisions of section

16(b). (Pet. at 27a; emphasis added.) No one — not even Mesa

— can quarrel with that proposition.

C. The Court of Appeals Did Not Ignore Footnote 24

From Kern County.

Mesa’s contention that the Ninth Circuit dismissed as

“irrelevant” the list of transactions set forth in Kern's foot-

note 24 (Pet. at 7 n.10, 16) is also incorrect. The Court of

Appeals carefully analyzed footnote 24 in response to Mesa’s

unfortunate mischaracterization of that passage. As the Ninth

Circuit recognized, footnote 24 does not purport to specify

transactions that are to be exempted from section 16(b) under

the Kern analysis. It merely lists transactions that lower

courts had previously referred to via the “term” “unorthodox”

for purposes of “inclusion” and “exclusion.”

In its entirety, the text to which Kern’s footnote 24 is

appended reads as follows:

Although 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

wrestled with the question of inclusion or exclusion

of certain “unorthodox” transactions.

411 U.S. at 593 (emphasis added). And fcotnote 24 itself

merely states:

The term, see 2 L. Loss, Securities Regulation 1069

(2d ed. 1961), has been applied to stock conver-

sions, exchanges pursuant to mergers and other cor-

porate reorganizations, stock reclassifications and

dealings in options, rights, and warrants.

Id. at 593 n.24 (emphasis added).

The fact that Kern did not intend all transactions listed in

footnote 24 to be exempted from the statute was further

underscored by the statement that, under this Court’s holding,

even “exchanges pursuant to mergers” may fall outside the

exception if they do not meet the articulated standards:

We do not suggest that an exchange of stock pur-

Suant tO a merger may never result in § 16(b)

liability. But the involuntary nature of Occidental’s

exchange, 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.

Id. at 600.

In response to Mesa’s attempt to convert footnote 24 into

a list of transactions that must be exempted fiom section

16(b) under Kern, the Court of Appeals noted that (i) footnote

24 was not part of Kern’s holding, (ii) footnote 24 merely

enumerated, without expressing approval, the types of trans-

actions that other courts had referred to as “unorthodox” and

(iii) because no authority was cited it was unclear whether

footnote 24 referred to decisions construing section 16(b).

(Pet. at 32a-33a.) Thus, rather than “dismissing” footnote 24,

the Ninth Circuit analyzed the passage and correctly con-

cluded that Mesa’s characterization of it was erroneous.

No court has ever held that Kern creates a section 16(b)

exemption for all transactions referred to in that footnote. If

the Court of Appeals had accepted Mesa’s argument, the

Ninth Circuit’s opinion surely would have introduced confu-

sion into section 16(b) jurisprudence.

THE COURT OF APPEALS’ DECISION DOES NOT CON-

FLICT WITH THE ANALYTICAL APPROACH

EMPLOYED BY THIS COURT OR THE SECOND CIR-

CUIT.

The petition argues that the decision of the Court of Appeals

“contravenes the analytical approach” adopted by this Court in

Reves v. Ernst & Young, 494 U.S. 56 (1990) and Marine Bank vy.

Weaver, 455 U.S. 551 (1982), and by the Second Circuit in Blau v.

Lamb, 363 F.2d 507 (2d Cir. 1966), cert. denied, 385 U.S. 1002

(1967); Mendell v. Gollust, 909 F.2d 724 (2d Cir. 1990), aff'd, ___

U.S. __, 111 S. Ct. 2173 (1991); CRA Realty Corp. v. Crotty, 878

F.2d 562 (2d Cir. 1989) and International Controls Corp. v. Vesco,

490 F.2d 1334 (2d Cir.), ceri. denied, 417 U.S. 932 (1974). (Pet. at

11-12.)

The short answer to this argument is that Kern and its progeny

establish the appropriate analytical approach with respect to the

unorthodox transaction exception. None of the cases cited by Mesa

involves the unorthodox transaction exception. None conflicts with

the analytical approach adopted by the Court of Appeals.42

42 The petition’s citation of snippets from concurring and dissenting

opinions in Reves v. Ernst & Young, 494 U.S. 56 (1990), is wholly

unavailing. Reves held that demand notes should be included in (not

excluded from) the “note” category of securities defined in § 3(a)(10) of

the 1934 Act. Neither of the fragments abstracted from the concurring

and/or dissenting opinions has any meaningful connection to this case.

Marine Bank v. Weaver, 455 U.S. 551 (1982), held that a certificate

of deposit was not a security for purposes of § 10(b) of the 1934 Act -

primarily because “the holders of bank certificates are abundantly pro-

tected under the federal banking laws.” /d. at 559.

Mendel! v. Gollust, 909 F.2d 724 (2d Cir. 1990), aff'd, 111 S.Ct.

2173 (1991), broadened the class of shareholders who have standing to

sue under § 16(b). In adopting an expansive construction of the statute

that was later affirmed by this Court, the Second Circuit pointedly

observed that “[w]hen the statute permits interpretation the section tradi-

tionally has been read broadly in view of its remedial purposes.” 909 F.2d

at 728.

(Continued on following page)

While it is true that the context clause of the 1934 Act

(§ 3(a)) qualifies the Act’s statutory definitions with the

phrase “unless the context otherwise requires,” the context in

which this case arises has been thoroughly examined in the

decisions applying the unorthodox transaction exception. As

is demonstrated herein, those decisions (including the deci-

sions of this Court and the Second Circuit) fully support both

the approach and the ruling of the Ninth Circuit here.

IV.

THERE IS NO CONFLICT AMONG THE CIRCUITS;

MESA’S ARGUMENTS UNQUESTIONABLY WOULD

HAVE MET THE SAME FATE HAD SUIT BEEN FILED

ELSEWHERE

The petition cites two cases involving “recapitaliza-

tions,” and five decisions purportedly pertaining to

(Continued from previous page)

CRA Realty Corp. v. Crotty, 878 F.2d 562 (2d Cir. 1989), dealt with

the thorny and esoteric question of who is a corporate officer. The court

held that it is the duties of the employee, rather than the label affixed to

his position, that determines whether he is an officer. Whether his duties

afforded access to inside information was deemed a relevant factor in the

“functional” analysis of corporate duties.

International Controls Corp. v. Vesco, 490 F.2d 1334 (2d Cir.), cert.

denied, 417 U.S. 932 (1974), expanded the construction of “sale” for

purposes of § 10(b). Although the court’s construction was broader than

an earlier interpretation of that term in the context of § 16(b), the reason

for the minor disparity was the fact that, in contrast to § 16(b), § 10(b)

protects the corporation’s creditors. /d. at 1344-46, 1346 n.15. The

decision was based on a peculiarity of § 10(b). It has nothing to do with

the unorthodox transaction exception or the proper construction of

§ 16(b).

Blau v. Lamb, 363 F.2d 507 (2d Cir. 1966), cert. denied, 385 U.S.

1002 (1967), was decided seven years before Kern. It provides no insight

into the analytical approach that is appropriate in this case.

involuntariness, as being in conflict with the Ninth Circuit's

decision not to exempt Mesa’s sale from section 16(b). (Pet.

at 18, 20-25.) On that basis, Mesa posits “sharp conflicts”

between the Ninth Circuit and the Second, Fourth, Sixth and

Eighth Circuits. An examination of the cases Mesa cites

quickly demonstrates the absence of any such conflict.

A. Mesa’s Reliance On The “Recapitalization” Cases

Is Misplaced.

Although Mesa argues that its participation in Unocal’s

tender offer must be viewed as a “recapitalization,” and that

recapitalizations are “squarely within the listing enumerated

in Kern’s footnote 24” (Pet. at 16), footnote 24 does not even

list “recapitalizations” among the transactions that purpor-

tedly are to be exempted from section 16(b). Nevertheless,

Mesa attempts to bootstrap the misconceived “footnote 24”

argument it presented to the Court of Appeals into a conflict

with the Second Circuit. There is no such conflict.

Mesa did not continue its equity investment. After mak-

ing a “voluntary business decision” to negotiate an agreement

with Unocal (Pet. at 10a), Mesa exchanged Unocal common

stock for secured notes in a tender offer extended by Unocal.

(Pet. at 10a.) Mesa changed the nature of its investment by

liquidating common stock subject to the risks of the stock

market in exchange for debt instruments with a significantly

higher current value and fixed payments and interest rates.

(Pet. at 33a-34a.) Mesa completed its cash-out by converting

the notes it received in the tender offer to cash immediately

upon receipt. (Pet. at 12a.)

Exchanges pursuant to tender offers — specifically includ-

ing “self-tenders” by the issuer — are never exempted from

section 16(b).43 Despite Mesa’s claim that the Ninth Circuit's

43 After surveying the § 16(b) cases, Jacobs’ encyclopedic treatise

on § 16(b) notes: “A tender offer is a purchase by the tender offeror and a

sale by the tendering stockholder, even if the tender offeror

(Continued on following page)

decision conflicts with the law of the Second Circuit, the

Second Circuit has made clear that this universal rule applies

irrespective of whether the exchange can be characterized as a

“recapitalization.” See, e.g., Blau v. Lehman, 286 F.2d 786,

788-89, 792 (2d Cir. 1960), aff’d, 368 U.S. 403 (1962).

Similarly, the post-Kern decisions of the district courts within

the Second Circuit have refused to exempt tender offers from

section 16(b). See, e.g., T-Bar Inc. v. Chatterjee, 693 F.Supp.

1 (S.D.N.Y. 1988) (self-tender); Lane Bryant, Inc. v. Hatleigh

Corp., 517 F.Supp. 1196 (S.D.N.Y. 1981); Tyco Laboratories,

Inc. v. Cutler-Hammer Inc., 490 F.Supp. 1 (S.D.N.Y. 1980).

In addition, no case has ever held that an exchange of

equity securities for debt instruments“ can be exempted from

section 16(b), again, irrespective of whether such an

exchange might be characterized as a “recapitalization.”

Moreover, since 1966, Securities and Exchange Commission

Rule 16b-9, 17 C.F.R. § 240.16b-9 (“Exemption from section

16(b) of transactions involving the conversion of equity secu-

rities”) has exempted certain transactions in which one equity

security is exchanged for a substantially equivalent equity

security. There is no exemption for the conversion of an

equity security into a debt instrument.

The basic rationale for exempting certain exchanges of

essentially equivalent equity securities was articulated by the

Second Circuit in Blau v. Lamb: “in a conversion or

reclassification . . . that which the insider surrenders and that

which he receives are simply different forms of the same

participation in his issuer.” 363 F.2d at 523. Thus, even if

Mesa’s “exchange” had not occurred pursuant to a tender

Offer, it would fall well outside of the scope of both the

(Continued from previous page)

is the issuer [i.e., Unocal]. The conclusion remains unchanged if the

tendering shareholder [i.e., Mesa] is a defeated competing offeror tender-

ing to the victorious tender offeror.” Jacobs, § 3.04(3], at 3-94 (foomotes

omitted and emphasis added).

44 Convertible debt securities (not involved here) are considered

equity securities for purposes of § 16(b), however.

Second Circuit’s rationale for exempting certain equity con-

versions or reclassifications and the SEC’s exemption of

certain equity conversions in Rule 16b-9.

Curiously, the first recapitalization case cited by Mesa,

Rothenberg v. United Brands Co., [1977-78 Transfer Binder]

Fed. Sec. L. Rep. (CCH) ¥ 96,045 (S.D.N.Y. May 11, 1977),

aff'd mem., 573 F.2d 1295 (2d Cir. 1977), is, as the Court of

Appeals correctly pointed out, directly contrary to Mesa’s

position.*> Rothenberg stands for the well-settled proposition

“that a recapitalization which results in a change in the nature

of a beneficial owner’s investment and market risk” is subject

to section 16(b). (Pet. at 33a.)

Roberts v. Eaton, 212 F.2d 82 (2d Cir.), cert. denied, 348

U.S. 827 (1954), the other Second Circuit recapitalization

case cited in the petition, involved a reclassification of com-

mon stock. Like Rothenberg, Roberts involved a stock

reclassification that effected no change in the nature of the

investment or the risk associated with it. In sharp contrast to

Mesa’s decision to exchange equity ownership for senior

notes, the insider in Roberts merely received a different form

of the same equity participation in the issuer. Thus, Roberts

(which was decided before Kern) does not create any conflict

regarding the proper application of Kern to this case.

B. Mesa’s Reliance On The Involuntariness Cases Is

Misplaced.

The ostensible conflict with the Second, Fourth, Sixth

and Eighth Circuits regarding the necessity and meaning of

involuntariness is also illusory. First and foremost, the Court

of Appeals did not hold that involuntariness is a necessary

element of the unorthodox transaction exception, or that the

unorthodox transaction exception is limited to forced mergers.

(See pp. 15-16, supra.) Confronted with a record that

45 Moreover, Rothenberg is not an opinion of the Second Circuit. It

is an unpublished (except by CCH in the Federal Securities Law Repor-

ter) district court decision that was affirmed without opinion.

conclusively demonstrates that Mesa changed the fundamen-

tal nature of its investment by virtue of its own calculated

business decision to participate in Unocal’s tender offer, the

Court of Appeals concluded that the unorthodox transaction

exception was inapplicable. The Ninth Circuit’s decision liter-

ally cannot create any conflict regarding the necessity of

involuntariness. Moreover, even if the Court of Appeals had

limited the unorthodox transaction exception to involuntary

conversions, there would still be no conflict.

The petition cites three appellate decisions in support of

Mesa’s claim that the circuits are in conflict over whether

involuntariness is a necessary element under Kern: 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); and Gold v. Sloan,

486 F.2d 340 (4th Cir. 1973), cert. denied sub nom. Gold v.

Scurlock, 419 U.S. 873 (1974).

Ferraiolo and Petteys are pre-Kern cases dealing with the

conversion of one equity security into another equity security

at the apparent behest of the issuer to improve liquidity. In

neither case did the fundamental nature of the holder’s invest-

ment change. Neither case has any meaningful connection

with the Court of Appeals’ decision. Neither held that invol-

untariness is not a necessary element under Kern.

In addition to citing Ferraiolo and Petteys as holding that

involuntariness is not a necessary element of the unorthodox

transaction exception, Mesa cites those cases for the proposi-

tion that “economically coerced” transactions are involuntary.

(Pet. at 24-25.) Ferraiolo and Petteys discuss economic coer-

cion — not “involuntariness” under Kern - and they have been

46 Footnoting Ferraiolo and Petteys, the leading treatise on § 16(b)

liability explains: “Some old conversion cases adopted a less stringent

standard — the transaction was voluntary if the defendant could have

avoided liability without serious economic detriment — a standard which

(Continued on following page)

are inapposite because they are stock conversion/reclassifica-

tion cases in which the insider (i) continued to hold the same

basic equity investment in the issuer, (ii) did not participate in

a tender offer, and (iii) did not negotiate the deal pursuant to

which its stock was exchanged.

No post-Kern decision has adopted any form of an “eco-

nomic coercion test.” Economic coercion arguments have

been resoundingly rejected by the section 16(b) cases,47 and,

(Continued from previous page)

more recent decisions have rejected.” Jacobs, § 3.04[5][a] at 3-111

(foomotes omitted and emphasis added).

In fact the Eighth Circuit, even before Kern, eschewed an oppor-

tunity to interpret Petteys as holding that “economic coercion” brings a

transaction outside the strict liability of § 16(b). See Western Auto Supply

Co. v. Gamble-Skogmo, Inc., 348 F.2d 736 (8th Cir. 1965). There the

court held that a sale that was forced pursuant to a government antitrust

decree was nevertheless a § 16(b) violation. While there is no case

squarely on point in the Sixth Circuit, the little authority there is in no

way Suggests that that circuit would reach any contrary conclusion on the

facts presented here. See Champion Home Builders Co. v. Jeffress, 490

F.2d 611, 619 (6th Cir.), (“The record does not show that Jeffress was

forced to sell his Champion stock. To the contrary, the record indicates

that Jeffress wanted to sell to realize cash... .”), cert. denied sub nom.

Jeffress v. Kramer, 416 U.S. 986 (1974).

47 E.g., Heublein, Inc. v. General Cinema Corp., 722 F.2d 29, 31 (2d

Cir. 1983), (involuntariness under § 16(b) requires complete inability to

control terms, conditions and timing of transaction), cert. denied, 465

U.S. 1066 (1984); American Standard, Inc. v. Crane Co., 510 F.2d 1043,

1054 (2d Cir. 1974) (involuntariness requires “utter inability . . . to

control the course of events”), cert. denied, 421 U.S. 1000 (1975); Oliff,

669 F.2d at 1167-68 (sale to avoid 205% tax penalty not involuntary);

Western Auto Supply Co., 348 F.2d at 742, (sale pursuant to antitrust

consent decree not involuniary); Sprague Electric Co. v. Mostek Corp.,

488 F.Supp. 842, 844-46 (N.D. Tex. 1980) (sale required by stockholders’

agreement not involuntary); Makofsky v. Ultra Dynamics Corp., 383

F.Supp. 631, 638-43 (S.D.N.Y. 1974) (sale to raise cash to avoid default-

ing on contractual obligations not involuntary). See generally Jacobs,

(Continued on following page)

as the Court of Appeals noted, any such standard would run

directly contrary to the policies underlying the statute. (Pet. at

28a-29a.)48

The only issue in Gold, the sole case cited as revealing a

“conflict” with the Fourth Circuit, was whether an exchange

of stock pursuant to a merger constituted a purchase for

purposes of section 16(b):

The only issue in the cases is whether the exchange

by the defendants of their ARC stock for Sus-

quehanna stock pursuant to the merger constituted a

“purchase” within the terms of the Act as of the

effective date of the merger so as to establish a

Starting date for measuring the six-month period

between purchase and sale of stock by the several

defendants.

486 F.2d at 342. Moreover, the Fourth Circuit did not men-

tion, analyze or rule upon the issue of involuntariness.*9

(Continued from previous page)

§ 3.04[(S][a], 3-111 (“An unorthodox transaction is involuntary as to an

insider if he has an utter inability to control the terms, condition, or

timing of the transaction.”) (footnote omitted).

48 The prospect of case-by-case determination of an infinite variety

of unfortunate circumstances that “coerced” corporate insiders to sell their

stock is exactly what § 16(b) was designed to avoid. Among other things,

the statute expressly provides that profit is to be disgorged “irrespective

of any intention on the part of” the insider. 15 U.S.C. § 78p(b).

49 In Bunker Ramo-Eltra Corp. v. Fairchild Industries, 639 F.Supp.

409, 417 (D. Md. 1986), a district court in the Fourth Circuit underscored

the invalidity of Mesa’s citation of Gold as creating a conflict with the

Court of Appeals’ decision in this case:

The Supreme Court found in Kern County that Occiden-

tal’s involuntary exchange of stock pursuant to a merger was

an unorthodox transaction. The court stated that once a sale

and purchase of stock is determined to be an unorthodox

transaction, then the question of whether there is actual

insider information and resulting insider abuse should be

considered.

(Continued on following page)

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

Cir. 1971), was the appellate decision affirmed in Kern. It

does not (and could not) create any conflict regarding the

proper application of Kern, because it does not interpret or

apply this Court’s decision. In any event, Abrams clearly was

based on the fact that Occidental “did not arrange” the trans-

action and was “forced” to participate in it. /d. at 162.

Like Abrams, American Standard, Inc. v. Crane Co., 519

F.2d 1043 (2d Cir. 1974), cert. denied, 421 U.S. 1000 (1975),

involved an automatic, nonvolitional sale required by the

terms of a merger negotiated by others. Jd. at 1054-56. The

court expressly relied on the “nonvolitional” character of the

exchange (id. at 1056) and on what the opinion described as

Kern’s emphasis on “the utter inability of the unsuccessful

party to control the course of events.” Jd. at 1054.

Unlike the defendants in American Standard and Abrams

(i.e., Kern), Mesa was not faced with a merger or other form

of forced conversion. Unlike the defendants in American

Standard and Abrams, Mesa actively negotiated the settle-

ment agreement pursuant to which its Unocal stock was sold

and had the option of not selling at all. (Pet. at 24a-27a.)

Mesa had a variety of alternatives short of fighting to the

end. Mesa could have simply held its stock without making a

further tender offer.°° Mesa also could have negotiated a sale

(whether to Unocal or otherwise) that would become effective

after expiration of the six-month period prescribed by section

(Continued from previous page)

Defendants’ reliance upon Gold v. Sloan, 486 F.2d 340

(4th Cir. 1973), cert. denied, 419 U.S. 873, 95 S.Ct. 134, 42

L.Ed.2d 112 (1974), to show that the transaction in this case

was an unorthodox transaction is misplaced since in Gold,

there was an exchange of stock pursuant to a merger not a

cash transaction as in this case.

5° If Mesa had held its stock for the “investment purpose” stated in

its initial Schedule 13D filed with the SEC, it could have reaped a profit

of approximately $532,000,000 through December 1989.

16(b). Moreover, Mesa’s alternative of continuing the take-

over effort was far from abstract. Drexel Burnham Lambert

(Mesa’s investment banker) had already raised $3 billion for

this purpose. (Pet. at 25a.) Faced with this array of options,

Mesa chose to cash out of the investment at an $83,000,000

after-tax profit. (Pet. at 26a-27a.)

C. Mesa’s Claim That The Result In This Case Would

Have Been Different In The Second Circuit Is Without

Merit.

This case plainly would not have been decided differ-

ently had it been filed within the Second Circuit. As demon-

Strated above, Abrams, American Standard, Roberts and

Rothenberg not only provide no support for Mesa’s contrary

claim, their reasoning refutes Mesa’s argument. Moreover,

other decisions of the Second Circuit demonstrate that this

case would have been decided no differently had the action

been filed in that jurisdiction. In Perine v. William Norton &

Co., 509 F.2d 114 (2d Cir. 1974) (decided before this Court’s

decision in Foremost-McKesson, Inc. v. Provident Securities

Co., 423 U.S. 232 (1976)), for example, an underwriter

which, pursuant to a firm-commitment underwriting became a

more-than 10% shareholder of the issuer, and which then sold

those shares pursuant to the underwriting, argued that liability

under section 16(b) should not apply because it had no access

to inside information. The Second Circuit made short work of

this contention:

Without the possibility of its having had prior

access to inside information, [appellant] argues, the

distribution did not present the potential for abuse

that is inherent in short-term transactions by

insiders. See Kern County Land Co. v. Occidental

Petroleum Corp., supra, 411 U.S. at 594-595.

Were it not for the plain language of § 16(b)

and the established policy in favor of mechanical

application of that language, see Reliance Electric

Co. v. Emerson Electric Co., supra, (appellant’s]

argument might be persuasive. But § 16(b) provides

in sweeping and unequivocal terms that “any profit

realized by [such beneficial owner] from any pur-

chase and sale . . . of any equity security of such

issuer . . . within any period of less than six

months ... shall . . . be recoverable by the issuer,

irrespective of any intention on the part of such

beneficial owner . . . in entering into such transac-

tion . . . (emphasis supplied).

Perine, 509 F.2d at 117-18 (emphasis in original).>!

In applying Kern and the unorthodox transaction excep-

tion, the Second Circuit requires involuntariness in the abso-

lute sense that was decisive in Kern — not merely facts

indicating that the insider had no access to inside information:

We believe that Judge Conner’s decision below

accurately states and applies the law of both the

Supreme Court case, Kern County Land Co. v. Occi-

dental Petroleum Corp., 411 U.S. 582, 93 S.Ct.

1736, 36 L.Ed.2d 503 (1973), and this circuit's

decision in American Standard, Inc. v. Crane Co.,

510 F.2d 1043 (2d Cir. 1974), cert. denied, 421 U.S.

1000, 95 S.Ct. 2397, 44 L.Ed.2d 667 (1975), and we

find his well reasoned opinion persuasive. . . . We

read Judge Conner’s opinion to mean that in the

class of cases of which the present case is represen-

tative, where (1) an atmosphere of suspicion, if not

hostility, characterizes relations between the two

corporations, (2) the exchange of shares is “invol-

untary” in that it is effectuated pursuant to a

51 The court also emphasized Reliance and Kern’s repeated refer-

ences to the prophylactic presumptions that Congress mandated and that

have been featured in § 16(b) jurisprudence:

Making administration of the statutory scheme simple, Con-

gress adopted a prophylactic measure which permits recovery

by the corporation of the profits from a class of insider

transactions in which “the possibility of abuse was believed

{by Congress] to be intolerably great”, i.e., purchases and

sales by an insider within six months, Reliance Electric Co.,

supra, 404 U.S. at 422, “without proof of actual abuse of

insider information, and without proof of intent to profit on

the basis of such information”, Kern, 411 U.S. at 595.”

Perine, 509 F.2d at 117.

merger over which the investing corporation exer-

cised no control or influence, and (3) there is no

likelihood of access to material inside information,

§ 16(b), the “paradigmatic strict liability statute,” is

inappropriate and will not apply.

Heublein, Inc. v. General Cinema Corp., 722 F.2d 29, 31 (2d

Cir. 1983) (first emphasis in the original), cert. denied, 465

U.S. 1006 (1984).

Three district court cases decided within the Second

Circuit have rejected Mesa’s argument that Kern exempts

transactions in which an unsuccessful tender offeror sells its

stock within six months of a purchase while contending that it

had no access to inside information. T-Bar Inc. v. Chatterjee,

693 F.Supp. 1 (S.D.N.Y. 1988); Lane Bryant, Inc. v. Hatleigh

Corp., 517 F.Supp. 1196 (S.D.N.Y. 1981); Tyco Laboratories,

Inc. v. Cutler-Hammer, Inc., 490 F.Supp. 1 (S.D.N.Y. 1980).

Each of these cases was decided on the basis of Kern and the

law of the Second Circuit. Each was cited and relied upon in

the decision of the Court of Appeals. (Pet. at 30a-31a.)

THERE IS NO REASON TO CREATE ANY SPECIAL

SECTION 16(b) EXEMPTION FOR DEFEATED TEN-

DER OFFERORS AND “GREENMAILERS.”

The courts applying Kern have repeaiedly and uniformly

rejected the “defeated tender offeror” argument advanced by

Mesa. As Jacobs notes: “Because a contest for control was

Kern County’s factual origin, defeated contestants who sold

otherwise than through such a merger have attempted to argue

that Kern County also governs their sale, and therefore their

sale is unorthodox. These arguments have proved unavailing.”

Jacobs, § 3.04[S][d], at 3-145 (emphasis added). In addition

to the decisions within the Second Circuit, the other circuit

courts confronted with claims of unorthodoxy in the defeated

tender offeror situation (based in substantial part upon asser-

tions of hostility and consequent lack of access to inside

information) have all conciuded that the Kern exception did

not apply. See, e.g., Super Stores Inc. v. Reiner, 737 F.2d 962

(11th Cir. 1984); Texas Int’l Airlines v. National Airlines,

Inc., 714 F.2d 533 (Sth Cir. 1983), cert. denied, 465 U.S. 1052

(1984).

Since 1934, the SEC has had express authority to create

exceptions to the statute’s literal terms if in the opinion of the

Commission the class of transactions is “not comprehended

within the purpose of” section 16(b). 15 U.S.C. § 78p(b). Not

Surprisingly, neither the Commission nor Congress has sought

to disturb the courts’ consistent application of section 16(b)

to volitional sales by unsuccessful tender offerors.

After a statute has been construed “by a consistent course

of decision by other federal judges and agencies, it acquires a

meaning that should be as clear as if the judicial gloss had

been drafted by Congress itself.” Shearson/American Express

Inc. v. McMahon, 482 U.S. 220, 268 (1987) (Stevens, J.,

concurring in part and dissenting in part). The interpretation

of a statute by the agency charged with administering it is

entitled to considerable deference. See, e.g., Griggs v. Duke

Power Co., 401 U.S. 424, 433-34 (1971); Udall v. Tallman,

380 U.S. 1, 16 (1965). Such deference extends to an agency’s

decision not to act, Heckler v. Chaney, 470 U.S. 821, 834

(1985), and is especially appropriate when Congress has

declined to alter an administrative construction. Red Lion

Broadcasting v. FCC, 395 U.S. 367, 381 (1969).

Entirely apart from questions of judicial deference and

upsetting settled expectations, there is no principled reason

why a hostile tender offeror should be exempted from the

Statute. This is particularly true when all others, many of

whom are in an equally plausible position to argue economic

coercion and lack of access to inside information, are subject

to this bright-line, prophylactic rule of strict liability.

Section 16(b) was directed at (among other things) short-

swing profits made by those who “manipulate the market

price of their corporation’s shares by causing the corporation

to inaugurate and follow financial policies calculated to pro-

duce sudden fluctuations in that price.” Arrow Distribution

Corp. v. Baumgartner, 783 F.2d 1274, 1277-78 (Sth Cir.

1986); accord Blau v. Lamb, 363 F.2d 507, 514-15 (2d Cir.

1966), cert. denied, 385 U.S. 1002 (1967). The greenmail

profits garnered via this sort of market manipulation by hos-

tile tender offerors should not be removed from the sweeping

coverage mandated by Congress.

CONCLUSION

For all of the foregoing reasons, the petition for a writ of

certiorari should be denied.

DATED: April 24, 1992 Respectfully submitted,

/s/ Darryl Snider

DARRYL SNIDER

DarRYL SNIDER*

Rosert P. VARIAN

Daniel. J. Tyuxopy, Jr.

Bropeck, PHLEGER &

HARRISON

444 S. Flower Street

Los Angeles, CA 90017

Telephone: (213) 489-4060

JASMINA A. THEODORE

Unocat CORPORATION

1201 West Fifth Street

Los Angeles, CA 90017

Telephone: (213) 977-7600

Attorneys for Respondent

Unocal Corporation

WituiamM LeRACH*

Patrick COUGLIN

MicserGc Weiss BERSHAD

SpectHRig & LERACH

225 Broadway, Suite 2000

San Diego, CA 92102

Telephone: (619) 231-1058

Attorneys for Respondent

David Colan

*Counsel of Record

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