Kern County Land Co. v. Occidental Corp.

Kern County Land Co. v. Occidental Corp.  36 L. Ed. 2d 503

Insider Trading in Advance of Acquisitions

A purchase and sale of shares will not be considered a “sale” under Section: 16(b) of the Securities Exchange Act if there was no indication that there was an abuse of insider information.

Brief Fact Summary. Occidental Petroleum Corp., purchased over ten percent of a company in an attempt to acquire the company. After failing to acquire it, it made a deal with the newly acquired company, Petitioner Kern County Land Co., to sell back the shares after six months.

Facts:

·         Occidental Corp. made a tender offer to purchase shares of the company that preceded Petitioner company. It ended up with over 10% of the stock. The preceding company, in a defensive strategy to avoid Respondent’s takeover, sought another company to overbid Respondent. Another company, Tenneco, stepped forward, outbid Respondent and made Kern County out of the former company.

·         The shareholders received a share-for-share swap of the old company for Tenneco stock. To the dissatisfaction of both parties, the transaction made Respondent a minority shareholder in a competitor’s stock. Respondent then agreed to a binding option sell back the Tenneco shares to Tenneco after six months, and the deal netted Respondent $19 million.

·         Petitioner brought this action to recover the profit under Section: 16(b) which allows a company to capture from beneficial shareholders (shareholders owning over 10% of the total shares) any profits from a sale that occurs within six months of the purchase of the shares.

Issue: Whether Respondent’s binding option to sell back shares after a failed takeover bid after the statutory six months is a “sale” for purposes of Section: 16(b).

Held:

·         The United States Supreme Court held that the sale was not a sale under Section: 16(b) of the Securities Exchange Act because the Act, and this particular section, were designed to prevent insiders from using their access to nonpublic information to profit from quick sells of the company shares.

·         Previously, insiders – directors, officers, and large shareholders of corporations, could freely exploit their positions of trust by using confidential corporate information to their advantage in personal market endeavors.

·         To prevent such abuse, section 16(b) provides that any profit realized by an insider from any purchase and sale, or sale and purchase, of any equity security of his corporation, within a six-month period, must inure to the benefit of the corporation.

In this case there was no evidence that Respondent was using any insider information for its own profit; they were looking for a mutually agreeable solution to rid itself of a competitor’s shares. Therefore Section: 16(b) did not apply.