Opposition Brief — Kern County Land Co. v. Occidental Petroleum Corp.

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INDEX

IY I i iitromeritneraniarasnnsnciacieenanentsnenibinnentnalonhne

I I iid cae dernctintsetnimiirtncuninnibclnnainbunbiionies

Reasons for Denying the Writ .....0..020020.2.22.2.:cccccceeceeeeeeeee-

MIPININIIRINS, EB UIOEI ciccciteeencssecireccnavvcsncsiidbcerencceaneess

A. Occidental’s Attempt to Arrange a Merger

ee iaoica ce isncdeslaccatechenmcedebelinidenieinnanninstenn

B. Aftermath of Tenneco’s Offer; The Option

PII scilssieiisticlnnesasccirasieisinsllinsisjuatielbviioniepsicnmcnaniinnis

Efforts to Obtain a Rule “16b-11” from the

ICR ER SE ce ee

The Plan of Merger (the “Plan”) .....0.000000.......

Shareholder Approval .................::ceceesseseeeeeeeees

a

Sey

Acceleration of the Merger Closing

G. Disposition of the Tenneco Stock

Argument

I. Whether the Long-Term Option in This Case

Was a Genuine Option and Therefore Not a

“Sale” Under §16(b) Is Not a Question Which

Merits Review

A. The Case was Correctly Decided in Accord-

ance with Accepted Law

B. There is No “Factual Identity” here with

Bershad v. McDonough ..............

C. The “Escape Hatch” Does Not Exist

ii

Il. Whether a “Merger” in a Particular Case Should

Give Rise to § 16(b) Liability Is Not a Question

Which Warrants Review

A. The Case was Correctly Decided in Accord-

ance with Accepted Law .

B. Petitioner’s “Policy” Arguments Run Coun-

ter to Policies Adopted By Congress Sub-

sequent to the Events at Issue Herein ............

C. There is No Question of Sufficient Recurrence

or Breadth to Warrant Review

D. No Judicial “Exemption” From § 16(b) was

Granted

Conclusion

TABLE OF AUTHORITIES

Cases

Alloys Unlimited, Inc. v. Gilbert, 319 F. _— 617

(S.D.N.Y. 1970)

American Standard, Inc. v. Crane Co., 1971 CCH Fed.

Sec. L. Rep. ] 93,237 (S.D.N.Y. Oct. 33, 1971) ..........

Auto Drive-Away Co. of Hialeah, Inc. v. ICC, 360 F.2d

GAG COA B LOGE) sieiisnnnasin scenes sSetiintenongpsicnnccnitvsantinneannevcannn

Bassick Manufacturing Co. v. Adams Grease Gun Co.,

54 F.2d 285 (CA 2 1931), cert. dismissed, 286 U.S.

RT CUI) aienseinseneicsiniccsevseiiinsrpcssinimnanicscntemsiioirtitcie

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

PAGE

cert. denied, 400 U.S. 992 (1971) ...........- 4, 14, 15, 16, 17, 25

Bershad v. McDonough, 300 F. Supp. 1051 (N.D. Il.

1969), aff'd, 428 F.2d 693 (CA 7 1970), cert. denied,

400 U.S. 992 (1971)

16

PAGE

Blau v. Hodgkinson, 100 F. Supp. 361 (S.D.N.Y. 1951) 23

Blau v. Lamb, 363 F.2d 507 (CA 2 1966), cert. denied,

SOB US. LODE (1OGT) ocacceceececnnnvecencnnineeceeorenee 21, 22, 23, 25, 29

Blau v. Lehman, 368 U.S. 403 (1962) .............---.eceeseeeeeees 3, 14

Blau v. Max Factor & Co., 342 F.2d 304 (CA 9), cert.

denied, 382 U.S. 892 (1965) .............. .19, 22, 29

Blau v. Ogsbury, 210 F.2d 423 (CA 2 1954) .................... 13, 22

Blau v. Oppenheim, 250 F. Supp. 881 (S.D.N.Y. 1966) 23

Booth v. Varian Associates, 334 F.2d 1 (CA 1 1964),

cert. denied, 379 U.S. 961 (1965) ...... 19, 23

Falco v. Donner Foundation, Inc., 208 F.2d 600 (CA

2 1953) .. 2713, 22

Ferraiolo v. Newman, 259 F.2d 342 (CA 6 1958), cert.

denied, 359 U.S. 927 (1959) ..... _ 22, 23

Fistel vy. Christman, 135 F. Supp. 880 (S.D.N.Y.

I So iceessecnincitrinessinccnsanciisieenancninisintivanmmenaienindlainainain 23

General Talking Pictures Corp. v. Western Electric

Ca, BR, BTR TTD aricceeenssitsecesniaconssisitenniasaninctninies 19

Gold v. Scurlock, 324 F. Supp. 1211 (K.D. Va. 1971) ... 23

Heli-Coil Corp. v. Webster, 352 F.2d 156 (CA 3 1965) 23

Jones v. Zurich General Accident & Liability Insur-

ance Co., 121 F.2d 761 (CA 2 1941) 16

Klingman v. National Indemnity Co., 317 F.2d 850

CEER, F BIID cetesiinennhineseoninsabieblaninecsltannntantoncanicnnamnatiotncionsivnn 18

Lawn v. United States, 355 U.S. 339 (1958) ..............----+ 16

Lynam ¥. Livingston, 276 F. Supp. 104 (D. Del. 1967) — 23

McClellan v. Carland, 217 U.S. 268 (1910) ................... 16

Mack vy. Mishkin, 172 F. Supp. 885 (S.D.N.Y. 1969) 25

Mitchell v. Dooley Bros. Inc., 286 F.2d 40 (CA 1 1960),

cert. denied, 366 U.S. 911 (1961) ~.00.... eee 18

iv

PAGE

NLRB v. Waterman Steamship Corp., 309 U.S. 206

(1940) 19

Newmark v. RKO General, Inc., 425 F.2d 348 (CA 2),

cert. denied, 40 U.S. 854 (1970) ......... om 22, 23, 29

Park & Tilford, Inc. v. Schulte, 160 F.2d 984 (CA 2),

cert. dented, 332 U.S. 761 (1947) ...........ge.essssesesees 13, 23, 35

Perlman v. Timberlake, 172 F. Supp. 246 (S.D.N.Y.

1959) 23

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

denied, 385 U.S. 1006 (1967) .. ah, 28, 29

Reliance Electric Co. v. Emerson Electric Co., No.

70-79, 404 U.S. —— (Jan. 11, 1972) ........ 3, 4, 14, 20, 21, 29

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

BS TF Ee CD ncnsicsciinis sin csscarssitbrcticiniinsenenietninin 19, 22, 23

Shaw v. Dreyfus, 172 F.2d 140 (CA 2), cert. denied,

BE ioc PE AY teenies tee oreineiccnicentanens 13, 22

Silverman vy. Landa, 306 F.2d 422 (CA 2 1962) .......... 13, 15,

18, 19, 21

Silverman v. Landa, 200 F. Supp. 193 (S.D.N.Y. 1961),

eh, BI FOG OS COC. S LIU) isn isieissiscsnsssnssnniciens 15

Smolowe v. Delendo Corp., 136 F.2d 231 (CA 2), cert.

denied, 320 U.S. 751 (1943) 22

Steinberg v. Sharpe, 95 F. Supp. 32 (S.D.N.Y. 1950)

aff'd, 190 F.2d 82 (CA 2 1951) 19

Stella v. Graham-Paige Motors Corp., 232 F.2d 299

(CA 2), cert. denied, 352 U.S. 831 (1956) .................. 13

United States v. Johnston, 268 U.S. 220 (1925) ............ 19

SEE ALTORL PEIL ST OT AT

_

Statutes and Rules:

PAGE

California Corporations Code (West 1955):

§ 2226 .. 17

PN icicle tear casera 17

§ 3003... paler ese cha ce dccnn cee eketiacacneneila = 4

+ i a 12

§ 4107 . . 12

§ 4123 12

11 Federal Register (1946) .............. 13

Securities Exchange Act, 15 U.S.C. §§ 78m (d), (e),

78n (d), (e), (£) 26

Miscellaneous:

Brief for Appellees, Abrams v. Occidental Petroleum

Corp., 450 F.2d 157 (CA 2 1971) (Aug. 16, 1971) ... 2,3

Comment, Securities Regulation—Exchange of Stock

Pursuant to Merger is Sale by an Insider Under

Section 16(b) of the Securities Exchange Act of

1934, 84 Harv. L. Rev. 1012 (1971) - 23

211 CommerciaL & FrnanciaL CHRONICLE, June 1,1970 21

Cook & Feldman, Insider Trading Under the Securi-

ties Exchange Act, 66 Harv. L. Rev. 385 (1953) ........ ' 13

W. J. Erreman, C. A. Dick & D. K. Erreman, THE

Stock Marker (4th ed. 1966) 18

Harlan, Manning the Dikes, 13 Recorp or N.Y.C.B.A.

541 (1958) ..... 19

Hayes & Taussig, Tactics of Cash Takeover Bids, 45

Harv. Bus. Rev. 135 (1967) .. 28

vi

PAGE

Hearings on H.R. 144175 & S. 510 Before the House

Committee on Interstate and Foreign Commerce,

90th Cong., 2d Sess. (1968) ,..26, 27, 28

Hearings on S. 510 Before the Sub-Committee on

Securities, Committee on Banking and Currency,

90th Cong., Ist Sess. (1967) 28

H. R. Rep. No. 1711, 90th Cong., 2d Sess. (1968) -......... 26

Note, Defensive Tactics Employed by Incumbent

Management in Contesting Tender Offers, 21 Stan.

L. Rev. 1104 (1969) 28

Note, Stock Exchanges Pursuant to Corporate Con-

solidation: A §16(b) “Purchase or Sale”? 117 U.

Pa. L. Rev. 1034 (1969) 23

O’Hanlon, Goodrich’s Four Ply Defense, Fortune,

July 1969 28

Rukeyser, Getting Tough with Tenders, Fortune,

Aug. 1967 26

Schmults & Kelly, Cash Take-Over Bids—Defense

Tactics, 23 Bus. Law 115 (1967) 28

SEC, Report on Put anp Cay Options (1961) ............ 18

S. Rep. No. 550, 90th Cong., Ist Sess. (1967) -............... 26

D. Vaucun, Survey or INVESTMENTS (1967) ..............---- 18

—_—_

IN THE

Supreme Court of the United States

OCTOBER TERM, 1971

No. 71-1059

&

>

|

———

Kern County Lanp Company,

Petitioner,

v.

OccipENTAL PETROLEUM CORPORATION,

Respondent.

i

BRIEF FOR RESPONDENT IN OPPOSITION

Occidental Petroleum Corporation (“Occidental”) sub-

mits this memorandum in opposition to the petition filed

by “New Kern” for review of a decision by the Court of Ap-

peals for the Second Circuit in regard to certain events in-

volving the parties, petitioner’s predecessor (“Kern”) and

its present corporate parent (“Tenneco”) under § 16(b) of

the Securities Exchange Act of 1934 (15 U.S.C. 78p(b))

(the “Act”).*®

Questions Presented

1. Whether, on the facts of this case, the grant of a long-

term option, which could not and did not result in a sale

within six months, was a short-term “sale” of securities

subject to the option under § 16(b).

* References herein by page number are in the form set forth in

| the petition.

2

2. Whether, on the facts of this case, the forced trans-

formation of stock by a “defensive merger” engineered by

petitioner’s predecessor and its parent must be imputed

to respondent as its “sale” under § 16(b), when such trans-

formation involved no opportunity for abuse of “inside”

information.

Proceedings Below

This case is one of four actions, including three share-

holder actions, which were consolidated for discovery, 44

F.R.D. 543 (S.D.N.Y. 1968), in which all parties partici-

pated. Each plaintiff moved for summary judgment. The

district court granted petitioner’s motion and dismissed the

three shareholder actions as moot (24C); no appeal was

taken by those parties.

On respondent’s appeal the Court of Appeals for the

Second Circuit, in an ‘opinion by Chief Judge Iriendly,

unanimously reversed and directed dismissal of the com-

plaint in accordance with respondent’s explicit request on

brief and at argument. The panel, which included a former

general counsel of the Securities and Exchange Comnis-

sion, also unanimously denied petitioner’s application for

rehearing. The full active membership of the Second Cir-

cuit denied petitioner’s application for rehearing and for re-

hearing in banc by a vote of eight to one.

Petitioner’s current contention that factual development

of this case was “limited”, and thus that the court below

dismissed it prematurely, came only after the uncontested

facts yielded a result unsatisfactory to it. In the opening

of its appellate brief petitioner told the court:

[E]ntry of summary judgment came after this liti-

gation had been pending some three years and after

extensive discovery had been had, .. .?

aBrief for Appellees at 2-3, Abrams v. Occidental Petroleum

Corp., 450 F.2d 157 (CA 2 1971) (Aug. 16, 1971).

ONT LL OE ENE IN PE aE NL NED, LOE

aa—___,_,_,,

3

‘and at two points carefully listed the pretrial discovery

taken,” pressing the position that the case was ripe for

decision, until the Court of Appeals ruled. (17A)

Reasons for Denying the Writ

Contrary to petitioner’s contention, this case does not

present any broad issue of law. The decision required only

the application of principles announced in Blau v. Lehman,

368 U.S. 403 (1962), again recently endorsed in Reliance

Electric Co. v. Emerson Electric Co., No. 70-79, 404 U.S.—

(Jan. 11, 1972), and followed in the Second Circuit and else-

where, to the particular facts here. That application was

entirely correct.

The court below, following a well established test, held

that the forced transformation of a defeated bidder’s shares

into those of another corporation in a merger wholly within

the control of others is not a “sale” by such bidder, and

no §16(b) liability follows, provided that the transactions

do not permit the abuse of inside information. The test,

which petitioner concedes to be the correct one, requires a

careful examination of the facts and the sequence and tim-

ing of events. It has been and must hereafter be applied on

a case-by-case basis. A decision on the facts of this case

cannot resolve future merger cases, “defensive” or other-

wise. In addition, as set forth infra, more sophisticated

“defensive” techniques, creating no § 16(b) questions, would

appear to’ have overshadowed the “defensive” merger.

The rare occasion where a hostile management will procure

and rush through a merger within six months, as was done

here, does not merit plenary consideration. Even in such

unusual situations, the result urged by petitioner would

allow such managements to destroy the “delicate balance”

b/d. at 3, 20.

4

in tender offer contests which Congress, in passing legisla-

tion after the events herein, took care to preserve.

Similarly, the Court of Appeals’ holding that the mere

grant of an option, economically bona fide, is not a § 16(b)

“sale” accords with an unbroken line of prior decisions.

The grantor of an option has no power to effect any sale,

but rather leaves his investment at risk in the issuer’s secu-

rities. A sale occurs only when and if the optionee exer-

cises, and here no sale was made within the statutory

period. There is no conflict here with the Seventh Circuit’s

decision in Bershad v. McDonough, 428 F.2d 693 (CA 7

1970), cert. denied, 400 U. S. 992 (1971), meticulously

analyzed in Judge Friendly’s opinion, where the “option”

was a sham. Both courts, on summary judgment, applied

the same principles to different facts with different results.

The contention that this part of the decision opens an

“escape hatch” from § 16(b) is based upon inaccurate state-

ments as to the mechanics of and risks inhering in the grant

of a long-term option, which can assure no profit of any

kind but rather encumbers its grantor. It is, as shown

herein, an “escape hatch” only from nonexistent liability.

The Second Circuit has given fair warning that spurious

“options” will allow an insider no escape.

Petitioner’s primary ground for review is apparently

that a profit (long-term) was made. The question is not

whether a profit was made but whether §16(b) applies.

Reliance Electric Co. v. Emerson Electric Co., supra. The

Court of Appeals, applying accepted principles, reached

the only proper result on the facts by denying windfall re-

covery to the petitioner, where neither the purpose nor the

mechanics of §16(b) had any application, and the court

below was not therefore pressed to a result which would

have been “repugnant” to its “sense of equity” (13A).

There is no need for review.

c The Williams Act Amendments to the Act, see p. 26 infra.

rete - . —_

PEE LY HER LD CIOL A> UN BOLI IM TIME PENA

| ‘

Counterstatement of Facts

Petitioner’s statement omits so many facts relevant to

the propriety of review that it is necessary to submit this

counterstatement.

A. Occidental’s attempt to arrange

a merger with Kern.

In late March of 1967 Occidental discussed a possible

Kern merger with Lehman Brothers, Occidental’s invest-

ment banker, which viewed it as beneficial for both com-

panies (722a). After unsuccessful attempts in April 1967 to

schedule a meeting with Kern (550a; 762a), Occidental on

May 8 released the terms of a public tender offer to Dow

Jones for publication over the “broad tape”, followed the

next day by newspaper publication (76a).

Occidental offered to purchase up to 500,000 shares of

Kern stock for $83.50 per share plus $1.50 commission to

transmitting brokers. The offer was unconditional ahd ir-

revocable until June 8, 1967, requiring Occidental to accept

all tenders, however few (450a, Ex. a; 759a-760a). Occiden-

tal reserved the right to purchase, in order of receipt, some

or all shares tendered beyond 500,000 and the right to ex-

tend the offer on public notice (id.). The offering price of

$83.50 was approximately $20—or 30%—above the prior

closing market price (635g) of Kern Stock (763a) and was -

set with Lehman Brothers’ guidance, based upon published

data (723a-724a). Within 214 days after announcement

tenders exceeded 500,000 shares, and on the third day an

irrevocable extension for an additional 500,000 Kern shares

was made (767a; 1061a).

On the day of the offer Kern’s board of directors met

specially and determined to “use every legitimate means to

6

frustrate Hammer’s ambition to take over your Company

[Kern]” (782a). Kern wrote to its shareholders on May

10, urging them not to tender, stating, inter alia, that it had

“in hand ... a number of offers to discuss merger possibili-

ties . . . that could result in tax-free exchanges” -(782a-

785a), which statement was then untrue. Kern had no

other offers (805a; 901a; 772a; 724a; 655a; 645a). Upon the

extension of the offer it telegraphed, and thereafter again

wrote to each shareholder, urging defeat of the offer.

(785a; 768a).

Despite Kern’s active resistance (1062a; 769a) Qoeitten-

tal sought to discuss a consensual merger. Occidental sub-

mitted two merger proposals, each on a “negotiable” basis,

but Kern refused to discuss them (644a-645a; 658a; 769a).

Late on May 19 Kern announced that its board had voted

to accept a Tenneco merger offer® and told Occidental to

“read about in in the newspapers.” (770a).

The news release (787a-788a) revealed that the Tenneco

offer, accepted “unanimously,” was a tax-free, share-for-

share exchange of Kern stock for a proposed $5.50 Tenneco

convertible preference stock with a liquidation value of

$100, a cumulative dividend of $5.50 per share and callable

in ten years at $110. Lehman Brothers advised that the

Tenneco proposal was worth $105 per share (745a), or 23%

above Occidental’s own offer; Occidental made public this

valuation by announcement to its shareholders dated May

19 (710a, Ex. D at D7-D8).

Tenneco was first contacted by Kern on May 10 or 11

when Kern’s Chairman (Montgomery) asked Tenneco’s

late Chairman (Symonds) to come up with an offer to

d President of Occidental.

e Although the Tenneco-Kern transaction was styled as an ex-

change of stock for assets, see note o and p. 11 infra, the term

“merger” is used here for shorthand purposes.

PELL SE LEE ITIL, SOE POLIO LOGE LE LLL EI

7

‘ eounter Occidental (726a-727a; 772a; 805a). Tenneco in-

sisted upon studying Kern’s records (725a) and on May 11

commenced a detailed examination, working from an office

within Kern. No earlier than May 16, 1967 Tenneco and

Kern met “for a general discussion of the framework within

which Tenneco might make an offer,” subject to further in-

spection (727a-728a). Tenneco had access to inside infor-

mation, and its offer was based thereon (726a-728a). Occi-

dental was isolated throughout (728a; 772a-773a).

B. Aftermath of Tenneco’s Offer;

the Option Agreement.

The May 19 announcement of the Kern-Tenneco agree-

ment put an end to Occidental’s bid, which after May 19

drew only a few shares on scattered dates through June 5

(771a). It was clear to Occidental that, even if it waged a

costly and bitter proxy fight, it was not likely to stop the

proposed Tenneco-Kern merger (729a).f Occidental and

Tenneco met in late May and attempted to cope with the

prospect, viewed unfavorably by both (729a, 730a), that

Occidental, having sought to acquire Kern, would ultimately

become a minority shareholder of Tenneco. They considered

the possible sale of Occidental’s Kern shares to Tenneco, but

believed this could not be done in view of the “possibility of

a 16B problem” (730a).

~ £ With a $75 million investment at stake, Occidental thereafter

made a demand upon Kern to examine its corporate records, was

repeatedly refused, and was forced to institute two state court ac-

tions in an attempt to secure an unqualified right equally available to

any shareholder under Cal. Corp. Code § 3003 (West 1955) (669a-

670a; 678a-68la; 849a-867a). Only after these proceedings were

instituted did Kern produce any records, which did not go beyond

that available to any shareholder (4A), and none related to the value

of the Tenneco offer (773a). What was made available to Occidental

is irrelevant; the question is whether the merger exchange allowed

Occidental to use it unfairly. See Point II infra.

8

At the suggestion of the late Mr. Symonds, Occidental,

along with its counsel, Pillsbury Madison & Sutro, met with

Tenneco® and its counsel, Cahill Gordon Sonnett Reindel &

Ohl, on June 1, 1967 at the latter’s New York office (731-

734a; 584a-585a). The parties entered into an agree-

ment whereby Occidental, both to comply with § 16(b) and

to qualify for capital gains treatment under the Internal

Revenue Code, if the shares were later sold (737a; 732a),

agreed not to dispose of its investment for at least more

than 6 months, and for up to 14 months, beyond June 8,

1967: (464a). For a period beginning after December 9,

1967 and up to July 31, 1968, depending upon when Tenneco

and Kern chose to close the merger, if they did, Tenneco

Corporation (Tenneco’s subsidiary) would have a trans-

ferable right to purchase not Occidental’s Kern shares

but the then nonexistent preference shares which might

come to Occidental if the merger were effected (462a-463a).

Occidental had no right to compel Tenneco or any trans-

feree to purchase such shares at any time. Tenneco would

pay for this “call” option, but if no merger occurred by

July 31, 1968 (14 months later) Occidental would return

the option “premium” paid (461a-465a).

From the meeting a call was made to Donaldson Lufkin

& Jenrette, Inc., a New York investment house with exper-

tise in the option market, to determine the current price of

a “call” on shares selling in the range of the Kern shares,

then trading in the mid-90’s. It advised that the premium

for a six-month call varied from $9 to $12 per share, depend-

ing upon the inclusion of conditions outside a standard call

g By Walter R. Davis, then Executive Vice President of Occi-

dental (555a).

h By the late Mr. Symonds. (Jd.)

i Because the tender offer was irrevocable until June 8, Occi-

dental might theoretically receive more tenders until that date.

9

contract (747a-748a; 556a-557a; 776a). Despite the extend-

ed holding period and refund provisions the premium was

placed low in the range suggested at $10. The stated option

price was $105, but the premium was to be creditable

against the stated price, making the effective exercise price

$95 per share (790a; 462a), which was not below current

market.

Both parties were unfamiliar with the technicalities of

§16(b) and relied upon their attorneys (73la-734a), who

agreed upon the option (743a-744a). The negotiators were

advised, as later was Kern, that the grant of an option to

Tenneco was not within~§16(b) (733a-734a; 737a-738a;

744a). The agreement was executed on June 2, 1967.

Tenneco also promised to postpone the listing and regis-

tration of the proposed Tenneco preference shares under

§12 of the Act until the option either was exercised or ex-

pired.* In mid-Juhe steps were taken to do so, and based

thereon Occidental moved to dismiss its actions for inspec-

tion of Kern’s records (510a-512a).

The option agreement was not conditioned explicitly or

implicitly upon Occidental’s either supporting or not oppos-

ing the proposed merger (750a-75la) and was executed

well after public release of the May 19 merger announce-

ment. The Kern proxy statement of June 16, preliminary

to the special shareholders’ meeting, set forth the sub-

stance of the option agreement and stated that Tenneco

Corporation “has not determined whether it will exercise

its option, . . . Depending on future investment market

conditions, Tenneco Corporation may sell the option or

j Based on this advice Kern and Tenneco set forth the terms of

the option in the proxy statement of June 16, 1967, but made no

suggestion that it might give rise to.a § 16(b) claim (736a-738a).

k This was to remove the proposed Tenneco shares from § 16(b)

and to avoid a claim that a double holding period was required and

is explained in the Court of Appeals’ decision (SA-6A n.6).

10 a

the Preference Stock covered by nd“eptions its present

intention is not to purchase such Preference Stock as an

investment.” (980a, Ex. I at 3).

Petitioner fails to indicate that Tenneco Corporation

never exercised its option. On August 16, before the

merger was effected, the option was sold by Tenneco Cor-

poration to Loeb, Rhoades & Co. for at least the price it

had paid Occidental (557a; 414a),' and the option was sub-

sequently transferred to the LR Fixed Invetment Trust

(247a; 265a; 414a).

C. Efforts to Obtain a Rule “16b-11” from the SEC

To deal with the problem that the Kern-Tenneco merger

might itself be alleged to be a § 16(b) “sale”, Occidental

proposed to ayyply to the SEC for a rule of general appli-

eation which would exempt a merger within six months

of acquisition by public tender offer from §16(b), (512a-

513a; 433a; 1067a), and Tenneco agreed to aid in

the application (570a-572a).™ Occidental also believed

it had received Tenneco’s assurance to delay the closing if

the administrative application were unsuccessful (777a-

779a; 735a-737a; 269a; 520a-522a); although Tenneco had

assured full cooperation to avoid acts which might trigger

1 The call was sold to qualify the merger for tax-free treatment

under an IRS ruling ( $574).

m The Pillsbury firm sent copies of the proposed rule and other

related material to petitioner’s counsel (433a). One letter recounted

the reaction of Phillip Loomis, Jr. of the SEC: “He was sympa-

thetic. He was most impressed by the fact that the only alternative

that Occidental had was to commence every kind of litigation it could

reasonably bring and attempt to forestall the consummation of the

~ Tenneco-Kern transaction for six months.” (57la) On the basis of

this communication petitioner apparently claims that Occidental had

decided to initiate litigation in the event of a failure of efforts at the

SEC (Petition at 8 n). Petitioner’s reference to litigation undertaken

to stop the merger omits to state that the closing of the —— took

place in violation of an injunction issued by a court of the State of

ASI (817a), also contrary to the Plan of Merger (456a at A-18,

A-21).

——7_ i

§ 16(b) liability (734a; 740a), this aspect of the agreement

was disputed and played no role in the decision below

(17A).

On July 12 the SEC declined “at the present time” to

publish a rule for comment. A revised rule was submitted,

but the SEC again declined to take any action with regard

to the application (1067a), expressing no view as to the

merits of this particular case."

D. The Plan of Merger (the “Plan” )

The Plan (456a, et seg.) was based upon the offer

approved on May 19 by Kern’s board and provided for the

transfer of Kern’s assets and business to “New Kern” and

a share-for-share exchange of Kern stock for the new Ten-

neco preference stock. Each new Tenneco share would pay

a fixed quarterly dividend of $1.375 accruing from issuance

(980a, at 2, B-1 to B-5) and after July 1, 1969 became con-

vertible into 3.6 shares of Tenneco common stock (id.).

Kern agreed to have this new stock distributed promptly to

its shareholders upon closing in exchange for their shares.

The Tenneco stock would be issued without being registered

under § 12 of the Act and until registered was not tradable

on a national securities exchange (794a; 476a).

The Plan was contingent upon shareholder approval at a

special meeting called for July 17 (980a), a favorable tax

ruling from the IRS, issuance of necessary permits, licenses

and authorizations from appropriate California authorities

and numerous material conditions. It provided for a clos-

ing between September 30 and December 31, 1967 or at

“such other time” as the parties might agree upon (456a at

A-16), and contained omnibus clauses under which the par-

ties could change the terms of the agreement and waive com-

pliance with its covenants and obligations (456a at A-23).

n Petitioner appears to contend for the first time that by proposing

a rule to the SEC, Occidental must be deemed to concede that a

merger is a “sale” (Petition at 7 n.). All such implications were

firmly rejected by the court below: “It is not contended that we

should draw any inference from this, and we do not do so.” (6a n. 7)

7) a

E. Shareholder Approval

Kern’s management had no concern about shareholder

approval of the Plan or any opposition by Occidental

(752a). It was constructed so that approval by a simple

majority of shares was required with no right to elect |

appraisal,° and the shareholders were voting on a 68% in-

crease in the value of their pre-tender offer holdings. At

the special meeting Occidental abstained (877a; 980a at 2).

The Plan was adopted by over 99% of all shares voted

(651a). A representative of Occidental appeared at the

meeting and read a letter explaining why Occidental had |

decided not to vote for the merger (458a-459a, as corrected, |

460a).

F. Acceleration of the Merger Closing

Kern and Tenneco moved to accelerate the closing in

advance of the dates set forth in the Plan and Proxy State-

ment. Occidental met with Tenneco to remind it of its

prior assurances and requested it to defer the closing but

was refused (739a-744a). Tenneco applied to the California

Commissioner of Corporations on August 8 for the requi-

site authorizations, which were granted over Occidental’s

objections on August 30 (1070a). Kern and Tenneco elected

to close on the same day (484a-486a). Concurrently, Kern

expressly assigned to New Kern all claims it had under the

Act (466a), which included the claims proposed to be made

against Occidental under § 16(b) (414a; 570a).

o Casting the transaction as an exchange of assets avoided the re-

quirement of a % vote and the right of appraisal which would be

= toa merger. Cal. Corp. Code §§ 3901, 4107, 4123 (West

1955).

p This had the effect of a “no” vote. See Cal. Corp. Code § 3901

(West 1955).

13

G. Disposition of the Tenneco Stock

Occidental did not surrender its Kern shares until Decem-

ber 11, 1967 (247a; 265a; 414a) when, more than six months

after Occidental’s most recent acquisition of Kern shares,

and even longer after the execution of the option, LR Fixed

Investment Trust exercised the option. Occidental ex-

changed its Kern shares for the new Tenneco preference

stock; delivered 886,623 optioned shares to the Trust; and

. was paid $95 per Tenneco share by the Trust as provided

in the option, amounting to $84,299,185 (id.).

POINT I

Whether the long-term option in this case was a

genuine option and therefore not a “sale” under.

§ 16(b) is not a question which merits review.

A. The case was correctly decided

in accordance with accepted law.

The court below merely adhered to the principle, followed

by all courts in applying § 16(b), that no “sale” occurs un-

less and until the “insider” acquires at least a right to sell

securities at a price certain. In submitting to a call option,

Occidental obtained no right to compel any sale, at any

time, or at any price, and thus made no “sale” under

§$16(b), and the statute has always been so interpreted.'

1 Silverman v. Landa, 306 F.2d 422 (CA 2 1962), affirming 200

F. Supp. 193 (S.D.N.Y. 1961), held that “a call-option is not a sale

of the underlying security;” 306 F.2d at 425, “the insider-optionor’s

position in the underlying security is not fixed when he sells the

option, but when the option is exercised,” id. at 424 n.4, since “any

change [in ownership] would occur at the pleasure of the optionee.”

Id. at 424; accord, Blau v. Ogsbury, 210 F.2d 426, 427 (CA 2 1954).

Precisely the same analysis had been set forth in Stella v. Graham-

Paige Motors Corp., 232 F.2d 299, 301 (CA 2), cert. denied, 352

U. S. 831 (1956); Falco v. Donner Foundation, Inc., 208 F.2d 600

(CA 2 1953); Shaw v. Dreyfus, 172 F.2d 140 (CA 2), cert. denied,

337 U. S. 907 (1949); Park & Tilford v. Schulte, 160 F.2d 984

(CA 2), cert. denied, 332 U. S. 761 (1947); and it accords with the

opinions issued by the General Counsel for the SEC, 11 Fed. Reg.

10968 (1946); see Cook & Feldman, Insider Trading Under the

Securities Exchange Act, 66 Harv. L. Rev. 385, 401-02 (1953).

4 i,

Judge Friendly’s opinion carefully distinguished between

the instant situation and one where an insider buys a

“put” and thus acquires a right to sell the securities at a

fixed price (16A). Even that different situation would pose

its own range of problems under § 16(b).

Section 16(b) may not be expanded beyond its express

limits to “impose its extraordinary liability” on transac-

tions other than purchases and sales of equity securities,

thereby changing “an interpretation of the Act unbroken

since its passage.” Blau v. Lehman, supra, 368 U.S. at 409,

413; Reliance Electric Co. v. Emerson Electric Co., swpra

(slip opinion at 9). The court below correctly declined to

expand § 16(b) to include an event which did not constitute,

and would not permit, a sale of equity securities within the

statutorily defined six-month period.

The same rule was applied here as in Bershad v. McDon-

ough, supra, upon which petitioner relies. In Bershad the

court held that “The commercial substance of the transac-

tion rather than its form must be considered.” 428 F.2d at

697. The court below undertook to “look through the form

of an option to the economic realities” to determine objec-

tively whether “in truth and fact a sale had occurred when

the ‘option’ was granted” (13A-14A). It concluded from

undisputed facts that the agreement here was no more than

an option and that there was “no basis” for holding other-

wise (13A-14A). The two cases turned on different facts,

undisputed in each instance.”

There was no “alternative holding” in Bershad that the

grant of an option is a “sale” as a matter of law. Gen-

eralized comment there on other possible abuses of options

created no “holding” in a case where the only issue was

whether the purportedly optioned stock had in fact been

sold. The court expressly removed itself from any contro-

versy about an expansion or narrowing of the statute,

a 15

stressing its intention solely to examine the substance of

the agreement, 428 F.2d at 697 n.5, just as the court below

did. Indeed, had the Bershad court held that the grant of

an option was a “sale” on a theory that the premium “ex-

tracted” profits from the subject stock, as petitioner claims

(Petition at 13), this would have been in direct conflict with

Siverman v. Landa, supra.2 But it had no cause to men-

tion that case because it did not so hold and did not have an

option before it.

B. There is no “factual identity” here

with Bershad v. McDonough.

In Bershad v. McDonough, supra, a controlling director

(and his wife) executed a purported short-term “option” |

on their recently purchased control block of Cudahy stock.

The insider transferred all of the incidents of ownership to

the purported “optionee” through, inter alia, the grant to

the “optionee” of an irrevocable proxy which conveyed

full corporate power, the resignations of the insider and

his associate from the board, and the placement of the

2 In Silverman v. Landa, supra, which like the case here involved

a long-term option, it was alleged/that the insider, by issuing one-

year calls and a put, had realized a profit by receipt of the 16.4%

premium on the calls sold and an 8.2% premium on the put sold.

Plaintiff argued that by the grant of the options, the insider had

immediately insulated 20.6% of his risk, roughly the equivalent of

immediately buying high and selling low within the range of the

“straddle”; and that, as an insider, he could foresee that the price of

the stock would remain stable during the term of the options and

would keep the entire premium as profit. Both the district and appel-

late courts rejected the argument and held that § 16(b) applies solely

to purchases and sales of equity securities,gand that because the

option was long-term, the contention that the insider could be held

to foresee the price of the stock beyond 6 months went impermissibly

beyond the presumption available under § 16(b), 306 F.2d at 425;

200 F. Supp. at 116. The case was urged as a conflict by the peti-

tioner in Bershad, and this Court denied review.

16

“optionee’s” five nominees thereon. Plaintiff alleged that

the transaction amounted to “more than” an option. Ber-

shad v. McDonough, 300 F. Supp. 1051, 1054 (N.D. Il. 1969).

The district court so held on his motion for summary judg-

ment, and the Seventh Circuit affirmed, stating:

The circumstances of the. transactions clearly in-

dicate that the stock was effectively transferred, for

all practical purposes, long befOre the exercise of the

option. 428 F.2d at 698.

Or, as the court below put it, “the stock had in fact been

sold” (15A).

Occidental transferred neither directorships nor control,

for, as petitioner concedes, it was a disfavored minority

shareholder and had neither. The option was not implicitly

or explicitly conditioned upon Occidental’s supporting or

acquiescing in the merger. Even giving consideration to its

impermissible proffers of matter not in the record,’ peti-

3 Petitioner’s assertion that Occidental later gave a proxy to its

own counsel, coupled with the statement that the absence of such evi-

dence in the record is attributable to incomplete discovery (Petition at

7n.), is disingenuous. There was obviously no need for discovery on

a matter of which petitioner’s counsel claims to have personal knowl-

edge. The matter was, moreover, the subject of pretrial deposition

at which counsel in all four cases attended and examined (Deposition

of Occidental by Walter R. Davis at 41, 79). Since both the district

and circuit court decisions in Bershad v. McDonough, supra, were

rendered during proceedings in the district court, and were cited in

petitioner’s briefs there, petitioner’s attempt on a petition for review

to introduce evidence after a deliberate bypass of an opportunity to

make a record on these assertions (including its muteness during all

the proceedings before the court below ruled) is clearly impermissible.

Lawn v. United States, 355 U.S. 339, 354 (1958); McClellan v. Carl-

and, 217 U.S. 268, 282-3 (1910); Jones v. Zurich Gen. Acc. & Liab.

Ins. Co., 121 F.2d 761, 764 (CA 2 1941); Bassick Mfg. Co. v. Adams

Grease Gun Co., 54 F.2d 285, 286 (CA 2 1931), cert. dismissed, 286

U,S. 567 (1932). Such material should properly be striken from the

petition. But it is not necessary here to rely upon procedural im-

propriety. Assuming, arguendo, the substance of the assertions at

face value, Occidental’s giving a proxy to its own counsel, revocable

LOTTE GET ATS EEG pee cs eke IPN a

—_—_

tioner’s attempt to remold this case to fit Bershad fails.

There the transactions passed effective ownership of the

stock immediately to the alleged “optionee” and served only

that function. Here petitioner stresses Occidental’s failure

to persist in pointless acts of opposition to the merger; the

only effective step Occidental could have taken was to out-

bid Tenneco’s richer offer. Its failure to do so, before or

after the option, does not convert the option into a sale.

Petitioner’s view would-require the prolongation of opposi-

tion only for charade. Even in attempting to avoid that

waste Occidental, unlike the Bershad defendant, did not

transfer any ownership rights to Tenneco.

In Bershad the court also found that the payment of

16.7% of the exercise price (14% of the option price) for a

10 week option was a “deterrent” to non-exercise. 428 F.2d

at 698. This substantially exceeded the 10.5% of exercise

price (9.5% of option price) premium here paid-for an

option that would run from 6 to 14 months at the will of

the optionee. The $10 premium here was based upon the

judgment of a qualified third person and permitted no in-

ference that it was a penalty for non-exercise. Once paid,

the $10 premium did not reduce the effective exercise price

($95) below current market and thus did not shift the

as a matter of law under Cal. Corp. Code §§ 2226, 2228 (West 1955),

only for the purpose of voting for a merger which it could not real.

istically prevent, together with whatever personal assurances Oc-

cidental’s outside counsel is said to have given Tenneco’s counsel,

obviously gave no right of any kind to Tenneco, and does not com-

pare to the facts in Bershad, where the controlling shareholder gave

17

an irrevocable proxy to the “optionee”, immediately effective and _ -

unlimited as to purpose, transferring effective ownership. Indeed,

petitioner, by its repeated failure to raise the issue in either the dis-

trict court or on appeal, implicitly so admits. Occidental did not vote

its shares in favor of the merger, and its vote was not needed. The

Second Circuit gave this new assertion the weight it deserved in deny-

ing the petition for rehearing, in which it was first raised, without

even requesting a response, and had previously indicated that how

Occidental might vote was inconsequential (12A n.13).

; oo

undertaking into a commitment to exercise. The premium

bought time, not equity. The difference between this and

the Bershad “option” followed a fortiori from the fact that

the premium, ordinarily always retained by the optionee,

would here be returned if there was no merger before July

31, 1968. Petitioner’s claims below were flatly contradicted

by both the objective economics of the option and its own

declaration to shareholders, while the option was outstand-

ing, that it was uncertain whether it would exercise it even

if the merger occurred (980a).*

If the point need be pressed further, in Bershad the

“option” itself was short-term, expiring in 10 weeks. Here,

as in Silverman v. Landa, supra, the option was long-term,

and in the instant case it could be exercised only long-term.

4. While conceding that the effective exercise price of the option

was not below market and that the premium was based on the

Donaldson opinion, petitioner for the first time in its petition for

rehearing asserted that the evidence on the reasonableness of the

premium was hearsay. Petitioner did not dispute that the advice

had been given, nor did it assert that it had any contrary evidence

but apparently sought remand so that it might procure an “expert”

who might second-guess the Donaldson opinion four years after

the fact. Petitioner’s failure to raise technical objections to this

evidence in the district court vitiated any such objections, Auto

Drive-Away Co. of Hialeah, Inc. v. ICC, 360 F.2d 446, 448-449 (CA

5 1966); Klingman v. Natl Ind. Co., 317 F.2d 850, 854 (CA 7

1963); Mitchell v. Dooley Bros. Inc., 286 F.2d 40 (CA 1 1960),

cert. denied, 366 U.S. 911 (1961), @ fortiori so in view of its con-

tinued silence in the appellate court (17A). And, of course, the

premium accords with the standards set forth in public sources. See

D. VauGHN, SurvEY oF INVESTMENTS 41 (1967) (“the cost of a

six month contract is approximately 12 percent of the market price

of the stock”); W. J. Erreman, C. A. Dice & D. K. ErreMan.

THE Stock Market 316-17 (4th ed. 1966) (“premiums paid by

buyers of a six-month calls amount to about 14 percent of the value

of the stock. The percentage premium on low-price stocks would

probably run somewhat above this, and the percentage premium on

high-priced stocks would probably run slightly below”); SEC,

Report ON Put Anp Catt Options 84, 85 (1961) (Six-month

calls were approximately 12 percent of the value of the stock; price

of one-year calls approximately 164.8% of the price of six-month

calls.) “The call agreement in the present case was from more than

6, to 14 months.

a 19

The claimant might properly assert in Bershad that exer-

cise was “inevitable”, for the insider could be held to know

that the stock prices in the short-term would ensure exer-

cise. But §16(b) does not permit a presumption that

Occidental could foresee that, when the option first be-

came exercisable more than six months later, the price of

the stock would then favor or even permit exercise, or

would otherwise render its grant profitable. Silverman v.

Landa, supra, 306 F.2d at 425; see Blau v. Max Factor &

Co., 342 F.2d 304, 308 (CA 9), cert. denied, 382 U.S. 892

(1965) ; Roberts v. Eaton, 212 F.2d 82, 85 (CA 2), cert. de-

med, 348 U.S. 827 (1954) ; Steinberg v. Sharpe, 95 F. Supp.

32, 34 (S.D.N.Y.), aff'd 190 F.2d 82 (CA 21951); cf. Booth

v. Varian Associates, 334 F.2d 1, 4 (CA 1 1964), cert. denied,

379 U.S. 961 (1965). Moreover, the option here was on

shares of Tenneco, not Kern,’ and the possibility of exer-

cise of, or profit or loss on, the option turned upon the

long-term market price of nonexistent securities of a com-

pany in which Occidental was not an insider and could not

be presumed to be under § 16(b).

The facts of this case and Bershad are wholly different,

and both cases turned on their facts. This Court does not

sit to review the application of accepted rules in particular

eases.© As Justice Harlan stated:

[D]ifferences between the Courts of Appeal in two

or more circuits will not be accepted as a conflict if

they can fairly be accounted for on the basis of varia-

tions in the factual situations among the cases in-

volved.’

5. Section 16(b) in terms requires a purchase and sale of the

securities of the same issuer.

6. United States v. Johnston, 268 U. S. 220, 227 (1925); NLRB

v. Waterman Steamship Corp., 309 U.S. 206, 208 (1940); General

(isn Pictures Corp. v. Western Elec. Co., 304 U.S. 175, 178

938).

7. Harlan, Manning the Dikes, 13 REecorp oF N.Y.C.B.A., 541,

552 (1958).

20

C. The “escape hatch” does not exist.

The claim that the decision below creates a new means

to “evade” §16(b) begs the question, for it assumes that

the mechanics of §16(b) are triggered by transactions

other than purchases and sales. See Reliance Electric Co.

v. Emerson Electric Co., supra (slip opinion at 5). Sham

“options” will be treated as sales (13A-14A) and create no

escape.

In the case of a long-term option, particularly one

exercisable only long term, the alleged “escape” is from a

liability that cannot exist under § 16(b)—even if it were

someday expanded by Congress to cover the grant of an

option. Petitioner’s obscure assertion that an insider can

‘buy stock and “reap a speculative short-swing profit upon

it” by submitting to an option (Petition at 15) necessarily

assumes that the insider can foresee that the premium will

exceed all future changes in market price adverse to the

insider’s position in the option during its term. If the

option is long-term then the assumption fails, because

§16(b) neither grants nor permits a presumption that an

insider can effectively predict market prices more than six

months ahead. Rather than an “escape,” the option consti-

tutes a prolonged encumbrance on his security position.

The option involved in this case would have no appeal for

one seeking a “sure-thing profit.” While Tenneco was even

less engaged than the usual optionee (it could reclaim the

premium merely by delaying the merger), Occidental was

required to bear all downside risks for more than 6 and

prospectively 14 months and was prevented from realizing

interim gains. Occidental’s retention of the Kern shares,

inflated in price by merger prospects, carried the unusual

risk of a 30% tumble to their pre-offer price if circum-

stances made the merger undesirable—even omitting con-

sideration of a general market decline. If a merger did

oceur within the 14-month period, Occidental would retain

only the premium, but whether it would profit or lose by

‘

pte 4

~ ies

APE M62 DIN Re SRE IE ES Bats 4

NN 21

exercise or nonexercise depended wholly upon the long-term

state of the market and the fortunes of Tenneco.? The Court

below took account of the grantor’s risks (14A, 16A), and

if it made any error, it was only in assuming that the Ten-

neco preference stock could drop merely to $75 per share

(14A). In fact, when the “bottom fell out of the market,”

as the court envisioned it might, (id.), that stock traded as

low as 6614.°

POINT II

Whether a “merger” in a particular case should

give rise to §16(b) liability is not a question which

warrants review.

A. The case was correctly decided

in accordance with accepted law.

Although petitioner would urge absolute liability for

Occidental solely because petitioner’s predecessor and

its parent were able to rush through a merger within six

months, it apparently concedes that the court below applied

the correct rule of law: Whether certain “unorthodox”

8. The petition inaccurately asserts that “nonexercise . . . would

have left Occidental with a nearly $9 million profit by reason of the

option price alone which profit should certainly be subject to recov-

ery.” (Petition at 16) If a merger did not take place or was delayed,

Occidental in fact would not be left with $9 million, because it would

forfeit the premium. Even if the merger occurred, Occidental would

have not merely the premium, but also the continuing risk of holding

the very shares petitioner claims to have been sold previously. In

addition, petitioner’s claim is that the premium paid should be recov-

erable regardless of whether there was a sale of equity securities, but

the statute explicitly otherwise requires, Silverman v. Landa, supra;

and this very different question is not even properly before the Court

as a “Question Presented.”

9. May 26, 1970. 211 Comm. & Fin. CHRonicte, June 1, 1970,

at 16. Petitioner seeks remand to develop evidence on “knowledge,

intent and motivation” (Petition at 15 n.), issues which this Court

and all others have expressly declared to be irrelevant under § 16(b).

Reliance Electric Co. v. Emerson Electric Co., (Slip Opinion at 7 &

n.4); see, ¢.g., Blau v. Lamb, 363 F.2d 507, 522 (CA 2 1966), cert.

denied, 352 U. S. 1002 (1967).

2 ie

transactions (mergers, conversions, and the like) are to be

deemed “purchases” or “sales” under §16(b) turns on

whether the transactions allowed “an insider to use inside

information unfairly,” Blau v. Lamb, supra, 363 F.2d at

516. That test has repeatedly been applied by the several

courts of appeals, and in each instance this Court has

denied review."' The application of that rule to a particu-

lar merger or other exchange is not a question which merits |

the Court’s consideration. |

Each such situation has turned on its own facts, and here

there was no chance for abuse of confidential information

in the merger exchange. Occidental had no prior relation-

ship to the issuer; before Tenneco made any offer Occiden-

tal was already committed; Occidental’s purchases were

made in the spotlight of a publicized tender offer available

to all shareholders; the exchange “in which all shareholders

were entitled, indeed were forced to participate” (10A), was

pro rata and was itself a maneuver employed to displace Oc-

cidental and controlied-by its adversaries. The court below

might well have refused to deem the Kern-Tenneco merger

a “sale” solely on the ground that under $16(b) a “pur-

chase” or “sale” should constitute an event occurring “by

one’s own act.” See Ferraiolo v. Newman, supra, 259 F.2d

at 344-45 n.2, n.3; Shaw v. Dreyfus, supra, 172 F.2d at 142.

Instead the court tested the transaction by the more rigor-

ous “possbility of abuse test” and found Occidental not to

10 Other types of abuses are not a concern of § 16(b) and come

within the purview of other laws, federal and state. Jd., at 521, 522

n.22; Blau v. Ogsbury, supra, 210 F.2d at 427; Falco v. Donner

Foundation, Inc., supra, 208 F.2d at 604; see Roberts v. Eaton,

supra, 212 F.2d at 85; Smolowe v. Delendo Corp., 136 F.2d 231, 235

(CA 2), cert. denied, 320 U.S. 751 (1943).

11 See e.g., Newmark v. RKO General, Inc., 425 F.2d 348 (CA

2), cert. denied, 400 U.S. 854 (1970); Blau v. Lamb, supra;

Petteys v. Butler, 367 F.2d 528 (CA 8 1966), cert. denied, 385 U.S.

1006 (1967); Blau v. Max Factor & Co., supra; Ferraiolo v. New-

man, 259 F.2d 342 (CA6 1958), cert. denied, 359 U.S. 927 (1959).

LEIS OLLIE SII ORS

23

be liable (10A-12A). The result here had been anticipated

and approved by critical commentators.”

The assertion that this is the first case in which the trans-

formation of shares in a merger has been held not to con-

stitute a “sale” has no consequence. Newmark v. RKO

General, Inc., supra, also decided by the court below, was

the only instance in which such a transformation had been

deemed a “sale”, and then only under circumstances which,

as the court below carefully noted, had no factual counter-

parts here (11A). The Newmark case explicitly contem-

plated that some mergers might be “sales” and others not,

425 F.2d at 351, and the cireuit judges who sat on the New-

mark panel concurred in the denial of rehearing here.

Petitioner would be more accurate if it stated that there

has never been a case decided under § 16(b) where an

“nnorthodox” transaction has been deemed to be a “pur-

chase” or a “sale” if the defendent had no realistic economic

alternative to, or had no control over, the claimed § 16(b)

violation.” Here the economic compulsion was more acute

than in the eases cited. The only escape for Occidental from

the alleged “sale” was to outhid Tenneco’s richer offer,

12 Comment, Securities Regulations—Exchange of Stock Pur-

suant to Merger is Sale by Insider under § 16(b) of the Securities

Exchange Act of 1934, 84 Harv. L. Rev. 1012, 1021-22 (1971);

Note, Stock Exchanges Pursuant to Corporate Consolidation: A

§ 16(b) “Purchase or Sale”?, 117 U. Pa. L. Rev. 1034, 1056-57

(1969).

13 See Park & Tilford, Inc. v. Schulte, supra, 160 F.2d at 987-8;

Ferraiolo v. Newman, supra, 259 F.2d at 346; Blau v. Lamb, supra,

363 F.2d at 518-20 n.15, n.16; Petteys v. Butler, supra, 367 F.2d at

530; Heli-Coil Corp. v. Webster, 352 F.2d 156 (CA 3 1965); (no

call for redemption); Gold v. Scurlock, 324 F. Supp. 1211 (E.D.

Va. 1971), appeal pendiny (principal stockholders and directors of

merging corporation); Lynam v. Livingston, 276 F. Supp. 104, 106

(D. Del. 1967); Fistel v. Christman, 135 F. Supp. 830 (S.D.N.Y.

1955) (controlling shareholder); Blau v. Hodgkinson, 100 F. Supp.

361 (S.D.N.Y. 1951) (option not to take stock on “purchase” side) ;

see also Booth v. Varian Associates. supra, 334 F.2d at 5: Roberts

v. Eaton, supra, 212 F.2d at 83-84; Blau v. Oppenheim, 250 F. Supp.

881, 885 (S.D.N.Y. 1966); Perlman v. Timberlake, 172 F. Supp.

246, 256 (S.D.N.Y. 1959); cf. Alloys Unlimited, Inc. vy. Gilbert, 319

F. Supp. 617, 619 (S.D.N.Y. 1970). -

=

and thereafter sold their holdings to persons making .

the counter offers."* .

- 26

F

Petitioner also omits to state that Congress received tes-

timony strongly urging that it was through such tender

offers that inefficient management could be challenged and

that shareholders realize gains on investments that had

remained greatly undervalued.” The committee reports

weighed the testimony concerning tender offers and con-

cluded that federal policy should avoid the creation of spe-

cial advantages for either bidder or target:

The committee has taken extreme care to avoid

tipping the delicate balance of regulation either in

favor of management or in favor of the person mak-

ing the takeover bid. *

In passing the Williams Act amendments ” subsequent

to the events-in this effse, Congress resolved the problems

surrounding cash tender offers by a balanced treatment of

disclosure and regulation. This is inconsistent with peti-

tioner’s approach, which would penalize: actual and chill

potential bidders by automatically gequiring them to return

P their shares at cost to the victor, in the form of a windfall

16 Hearings on H.R. 144175 & S. 510. Before the House Com-

mittee Intefstate and Foreign Commerce, 90th Cong., 2d Sess.,

at 22 (1968) (hereinafter “House Hearings”). Even the quotation

upon which petitioner relies bears no relationship to the use of inside

information. In addition, while we view the matter as of little im-

portance, petitioner’s quotation from an article appearing in Fortune

is similarly out of context. The sentence quoted lies at the end of a

paragraph expressing the view of the author that the Occidental-

Kern contest was an instance where it was possible for “everyone”,

including the shareholders,ultimately “to come out ahead.” Rukeyser,

Getting Tough with Tenders, Fortune, Aug. 1967 at 109.

17 S. Rep. No. 550, 90th Cong., Ist Sess. 3 (1967).

18 Id. at 3. Almost identical language is set forth in H. R. REP.

No. 1711, 90th’ Cong., 2d Sess. 4 (1968).

19 §§ t3(d),(e); 14(d),(e),(f) of the Act; 15 U.S.C. §§ 78m

(d),(e); 78n(d),(e),(f). »

ee ,

recovery, and thereby finance their own defeat. Since the

conventional rules of,§ 16(b) did not call for such a result

here, the court below did not have to reach this issue, but

noted the necessary effect of petitioner’s theory:

Indeed, if we considered the question here under dis-

cussion to be closer than we do, we would be serious-

ly concerned over the policy implications of ruling

in appellees’ favor. ... This would discourage the

making of such offers, which often operate to the

great benefit of stockholders of the target corpora-

tion, as appears to have been the case here. (12A,

13A)

Congress enacted §16(b) for the wholly*different and

particularly insidious problem of “in and out” trading on

inside information. Petitioner’s position would, at the least,

require defeated bidders to engage in wasteful opposition

solely to delay such mergers, and it merits no considera-

tion.” “e

C. There is no question of sufficient

recurrence or breadth to warrant review.

This case reflects conditions and responses that prevailed

during the merger activity of the mid-1960’s. Even then

the authors of the work which the then Chairman of the

SEC referred to as the most extensive study of takeover

20 Congress was aware of the existence of § 16(b) in considering

the “delicate balance.” Prompted by the testimony of the then

Chairman of the SEC quoted by petitioner (later clarified) and

some newspaper articles, Rep. Moss asked whether any profits made

by a defeated bidder were recoverable. The Chairman replied that

§ 10 covered actual attempts to manipulate but § 16(b) could not be

relied upon in such situations since: (1) the offeror may not be a

ten percent-owner “at the time of” the acquisition; (2) thé offeror’s

holdings may never reach ten percent; House Hearings 30; (3) a

merger may not be considered to be a “sale”; (4) it may not be

proper to match the purchase of securities acquired with those of a

different company resulting from the merger. House Hearings 75-76.

28

bids,” referred to a “defensive merger” as an “if all else

fails” event. Another study noted:

Realistically this is not a defense tactic, but

rather a form of orderly retreat, and one would ex-

pect that unless such a merger was being actively

considered prior to the tender offer, it would be

viewed by incumbent management only as a last,

albeit very effective, resort.”

More sophisticated “defensive” techniques have since come

into prominence,* and, with an apparent decline in ad-

versary take-over bids, there seems little reason to expect

any significant number of managements turning to the “last

resort” of the “defensive merger”. Fewer contests yet will

involve the rare instance presented here, where a merger

was procured and rushed through so hastily as to create

a question under §16(b).% Section 16(b) may apply in

some instances where defensive mergers occur and not in

others, but this presents no broad recurring question

which merits review by this Court, given the alertness of

the lower courts and the want of a conflict.

21 House Hearings 22.

22 Hayes & Taussig, Tactics of Cash Takeover Bids, 45 Harv.

Bus. Rev. 135(1967), reprinted in Hearings on S. 510 Before

the Subcommittee on Securities, Comm. on Banking and Currency,

90th Cong. Ist Sess. (1967), App. 2.

23 Schmults & Kelly, Cash Take-Over Bids—Defense Tactics, 23

Bus. Law 115.1967).

24 Such as changes in capital and voting structures; various means

of increasing the number of target shares, including acquisitions by

the target; dividend and accounting changes; antitrust litigation; and

so forth. See e.g., O’Hanlon, Goodrich’s Four Ply Defense, FoRTUNE,

July 1969 at 10. Note, Defensive Tactics Employed by Incumbent

Management in Contesting Tender Offers, 21 Stan. L. Rev. 1104,

1111-27 (1969).

25 Indeed the petitioner can cite only one other case in the 37

year history of the Act involving the problem of a defensive merger

under § 16(b), the opinion in which has been withdrawn, and even

that case differs significantly from this one. In American Standard,

Inc. v. Crane Co., 1971 CCH Fed. Sec. L. Rep. ] 93,237 (S.D.N.Y.

29

D. No judicial “exemption” from

§16(b) was granted.

Contrary to petitioner’s claim, the ruling below granted

no ad hoe exemption from $16(b). The transaction here

was not within the language or intendment of the Act. Inso-

far as petitioner’s claim raises the question whether courts

in unusual situations may construe the terms “purchase”

and “sale” under the accepted test, it would appear to have

been disposed of by this Court’s approval of the process by

which “courts have properly asked whether the particular

type of transaction involved is one that gives rise to specu-

lative abuse.” J?eliance Electric Co. v. Emerson Electrica

Co., supra (slip opinion at-7 n.4)_ Petitioner’s position

has been firmly rejected by the courts of appeals, review

has been denied in each instance,” and it clearly deserves

no further consideration.

Oct. 12, 1971) (withdrawn), the defendant’s accumulation of 10

percent of the issuer’s shares was accomplished in private market

purchases and its tender offer 4 months later was made after it

was explicitly informed that “agreement had been reached” on a

merger between the target company and another bidder. All of

Occidental’s purchases were pursuant \to a publicized tender offer

and extension thereof made before Kern had any offer of merger.

The differences need not compel a finding of liability in American

Standard; it is sufficient to note that they must be considered.

26 See Newmark v. RKO General, Inc., supra, 425 F.2d at 351;

Blau v. Max Factor & Co., supra, 342 F.2d at 307 n.5; Petteys

v. Butler, supra, 367 F.2d at 536; Blau v. Lamb, supra, 363 F.2d at

519. Petitioner stresses Mr. Justice Blackmun’s dissent in Petteys

v. Butler, supra, which would appear to have rested primarily on

adherence to the principle of stare decisis within his own circuit at

that time. 367 F.2d at 538-39.

30

CONCLUSION

The decision below was correct and is consistent with the

decisions of this Court and the courts of appeals. There is

no conflict; each case depends upon analysis of the impact

of its particular facts. The court below has been alive to

the need to penalize and prevent short-term use of “inside”

information, and its decision is in accord with the language

and purpose of the statute. There was thus no basis upon

which petitioner could extract windfall recovery from Occi-

dental by reason of acts for which it was directly and in-

directly responsible. The petition should be denied.

Respectfully submitted,

Wuitney Norta Seymour

Counsel for Respondent

One Battery Park Plaza

New York, New York 10004

Of Counsel

Louis Nizer

Pavut Martinson

Putuies, Nizer, BENJAMIN,

Kram & Bartow”

Bernuarpt K. WrusLE

Ernest J. Getro

Suapson THacHer & BartTLett

March 18, 1972