RELIANCE ELECTRIC CO. v. EMERSON ELECTRIC CO.
Legal provision: Securities Act of 1933, the Securities and Exchange Act of 1934, or the Williams Act
Argument of Albert E. Jenner, Jr.
Chief Justice Warren E. Burger: -- 79, Mr. Jenner you may proceed whenever you are ready.
Mr. Albert E. Jenner, Jr.: Thank you Mr. Chief Justice, may it please the Court.
I apologize, I seem to suffered a cold overnight and I may have a little problem with my voice.
I was concluding yesterday, I was reciting the facts applicable here regarding primarily upon the question of whether, not only whether the Emerson had inside information but whether it was humanly possible for Emerson to obtain inside information, let alone abuse the inside information if they have obtained any.
I reached the point in which I had stated to the Court.
This appears in my record.
That when Emerson made a counter merger offer to meet Reliance’s and Dodge’s merger offer.
Emerson then launched into a proxy contest to solicit proxies to double purpose.
For the purpose of defeating the proposed merger of Dodge into Reliance at the special circle this meeting that had been called and also to obtain proxies for the purpose of obtaining a special meeting to require the Dodge Board of Directors to submit to Dodge, stockholders the counter-merger offer of Emerson which Emerson claimed was a superior offer by way of merger for the shareholders of Dodge as against the Reliance offer.
In the meantime, as all of you will realize regardless of this case, these proceeding served the benefit of the shareholders of Dodge very much because the tender offer at $18.25 above the market.
Reliance’s, Dodge’s proposed merger, at still a higher figure in the way of shares, I remember that as convertible shares.
And that Emerson coming back with another proposed merger of Dodge in to Emerson, that is still a higher figure.
The market price for the Dodge shares has kept going up and up and up.
This had nothing to do with an inside information but as this is typical many times and most of the time of tender offers that the market price of shares of the target company tends to rise very materially.
First, because the tender offer is always at a higher price than the market at the time it is -- the tender offer is submitted otherwise, it would not be effective.
And the counter-merger by way of it -- to defeat a tender offer, likewise raises this price of stock because the merger proposal is always at a still figure or it would be not be attractive.
It appeared to Mr. McRoberts, the general counsel of Emerson, at this point, that is at the point that Emerson began to solicit proxies to defeat the merger of Dodge into Reliance and to bring about consideration by shareholders of the Emerson offer of merger of Dodge into Emerson.
Unknown Speaker: In point of time Mr. Jenner, that was after the acquisition was --
Mr. Albert E. Jenner, Jr.: Yes.
The tender offer shares were purchased on the 16th of June, so this came after that point.
You are right with that Mr. Justice.
Mr. McRoberts then wrote the letter that my Brother Mulligan complains about, I think what that somewhat (Inaudible).
And that appears commencing at page 36 of the record.
And what was Mr. McRoberts’ concern about?
He was concerned about first this, that under the cases that had been decided up to that time, Stella and others.
That if the merger of Dodge into Reliance was approved at the special shareholders meeting called for the 22nd of August, that the receipt by Emerson of the conferrable preferred shares of Reliance, the surviving company in exchange for the 155,000 shares of Dodge that Emerson had acquired by way of the tender offer on June 16th.
We constitute a sale.
And if constituting a sale would under the cases then bring Emerson within at that point, 16(b), and it would require Emerson then to pay to Reliance, the difference in value gained over the price paid for the tender offer shares which was $63.00 a share and the value of the convertible preferred received in the merger of Dodge into Emerson.
And he so says, as Your Honors will note, in his letter of opinion.
Now it is true that in his letter of opinion where he cautioned Emerson about this fact that they were going to -- that they had the danger of being involuntarily held to have made a sale of the tender offer shares by virtue of the fact that the merger of Dodge into Reliance had come about by approval of the shareholders.
And then subsequent approval of the Board of Directors because under the Indiana statute, the approval of the shareholders of a merger does not consummate that merger.
The Board of Directors must under the Indiana statute approve it and then it becomes consummated.
So he said, in his letter of opinion, this constitutes a danger and -- you should begin to prepare yourself to see if you can avoid that had a cosmic result where the Time company has been preventing you from obtaining information, preventing you reaching its shareholders and doing everything it can to lock you out and to cut off all communication.
Still you are running to the ironical situation because of this mechanical simplistic statute that you may be involuntarily come within it and you will notice that at page 36, he does recite those circumstances.
But he did anticipate also the possibility, Your Honors, as my Brother Mulligan had said to Your Honors yesterday that perhaps they could sell if they wish or desire or needed to sale the tender offer shares acquired in the future.
But there was at that time, if Your Honors please, no, they had been no negotiations with Reliance on that score.
Reliance was resisting us and Dodge was resisting us.
There had been no offer to purchase.
There had been -- we have not undertaken a negotiator sale.
Counsel Wesmick (ph) Roberts was advising his client, you are in danger.
And Mr. Chief Justice, when you asked Mr. Mulligan yesterday what was the only way?
What was the way you could -- that Emerson, you are out of this situation and Mr. Mulligan responded to you, well all they had to do was wait until six months or six months and one day from the tender offer purchase date, June 16th, 1967.
But that was not so because Mr. Mulligan overlooks the fact which Mr. McRoberts did appreciate and that is the danger that when the Dodge – Reliance merger should it be approved by the shareholders and then by the Board of Directors that that would constitute a sale.
And Mr. McRoberts’ judgment will happen to be right on that score because the Newmark case came down.
Not long after that in which the Second Circuit so held.
Now Mr. --
Unknown Speaker: Wait, why would you say -- let me get back with the General, that the danger was that when Reliance and Dodge consummated the merger that that in respect of Emerson’s purchase for purposes of 16 (b), would constitute a sale?
Mr. Albert E. Jenner, Jr.: Yes sir, under the -- and in the Newmark case in the Second quarter -- the Court so held and that was --
Unknown Speaker: That was involuntary even if (Voice Overlap)
Mr. Albert E. Jenner, Jr.: Involuntary.
Unknown Speaker: Involuntary sale.
Any over -- beyond 10% shareholder involved in a merger is going to get some profit collected from it.
Mr. Albert E. Jenner, Jr.: Yes Your Honor.
Unless as some of the cases held and as pointed out by Mr. Justice Stewart as a Sixth Circuit Judge, the securities received were -- should be the substantial equivalent of the security surrendered, that is in price and in terms and in effect, if they are they are the substantial equivalent then the Courts held --
Justice William J. Brennan: But they are not the substantial equivalent if the price increases if they -- as Dodge price --
Mr. Albert E. Jenner, Jr.: Yes, you had first, Mr. Justice Brennan, you had first of great difference in price.
Justice William J. Brennan: What was that difference made?
They realized some $900,000.00 of profits, is that reflected increase?
Mr. Albert E. Jenner, Jr.: Well, the difference is -- first we offered $63.00, that was $18.25 above the market and then the Dodge -- Reliance securities were estimated to be at a value of around $76.00 to $80.00 a share.
And the Emerson management touted that they had even higher figure.
I do not mean to use the word touted in any -- depreciatingly fashioned.
But there was a difference in value and more important if Your Honor pleases, the shares to be received in the merger of Dodge into Reliance were convertible preferred shares.
So at that would give Emerson another option it would write on the preferred until -- if the market would be -- of the common came offered would be propitious for it to exercise that option.
So it was pretty clear that what Emerson would receive had it gone through and waited till beyond the consummation of the merger would necessarily come within what the cases were then holding and which Newmark -- in the Second Circuit Newmark did subsequently hold.
So at that point, the man that is one of Emersons receiving this opinion of its counsel became concerned naturally.
They still thought they had the chance of defeating the merger.
And being successful on the proxy side, so that is what I have -- but the point I want to emphasize is.
It is unlike Mr. Mulligan’s representation to Your Honors yesterday.
He used the word scheme that on the advise of its counsel, the management of Emerson’s scheme to try and avoid the harsh results of 16 (b) by reducing by one sale, the percentage of its shares in Dodge from 13.2 to 9.96.
Now, if the advise of counsel, reading the authorities, subsequent confirmed in his urge constitutes a scheme in the sense that it is invidious and odious, where we are going with that.
But it was advise of counsel and if Section 16 (b) is to construed by this Court that if -- because counsel advises the client of a problem and suggests a possible solution of it that that is a plan or scheme for which the client is to be punished, then I respectfully suggest to Your Honors that lawyers in this country will have some pause into giving advise to clients.
Now, you will notice that Mr. McRoberts’ advise to his client, that sell off enough of your shares to get down below the 10% and then you may undertake of the 9.6% remainder provided as he says in his opinion that two steps are not legally tied together.
And both the District Court and the Court of Appeals did find that the two sales were not legally tied together.
That is they were separate and distinct sales.
The first sale of the 3.2% was to Goldman Sachs separately negotiated at no time up to that point had there been any talk with Reliance whatsoever about its possibly purchasing shares.
Unknown Speaker: Well, Mr. Jenner you talked about ways out of this -- after all we are talking about whether you are to make the profit or not.
I mean you did not -- all you had to do was sell and you could get your money back.
Mr. Albert E. Jenner, Jr.: We could get our money back if Your Honor pleases.
Unknown Speaker: (Voice Overlap)
Mr. Albert E. Jenner, Jr.: Yes.
We need to get the money (Voice Overlap)
Unknown Speaker: (Voice Overlap) is that whether you should profit by your efforts to take over another company.
Mr. Albert E. Jenner, Jr.: Well, Mr. Justice.
Unknown Speaker: I mean, I know that is the American tradition but I mean that is the issue, is it not?
Whether you should make the profit or not.
Mr. Albert E. Jenner, Jr.: I do not --
Unknown Speaker: Not whether you are going to take along.
Mr. Albert E. Jenner, Jr.: I do not conceive of that if Your Honor pleases, it is true that if Section -- if the exemption provision of 16 (b) applies here that the difference between what we paid and what we received less whatever expenses there were which were substantial would represent a profit, that is so.
But the issue is does that come within 16(b)?
Unknown Speaker: Oh, I understand.
I understand that.
But you are not locked into the company.
Mr. Albert E. Jenner, Jr.: I beg your pardon?
Unknown Speaker: There is no question of your being locked into the company and having to face a possible loss, when you could -- when you could have gotten out anyhow.
Mr. Albert E. Jenner, Jr.: No, we could not get out anytime if Your Honor pleases because we were faced with the merger of Dodge into Reliance.
Unknown Speaker: You mean you -- do you think, if you put your stock on the market the way -- if immediately after this letter of counsel, he had -- if you are here to decide and then load your stock, could you have done it?
Mr. Albert E. Jenner, Jr.: Immediately after the letter, yes.
Yes if Your Honor pleases but if we had unloaded it in the sense that we had sold all of it at one time without first getting down below the 10% which we say the statute permits and contemplates --
Unknown Speaker: If you could not have kept the profit.
Mr. Albert E. Jenner, Jr.: We could not.
Unknown Speaker: That is right.
Mr. Albert E. Jenner, Jr.: Under the harsh provision of 16 (b).
Justice Potter Stewart: Mr. Jenner.
Mr. Albert E. Jenner, Jr.: Yes Justice Stewart.
Justice Potter Stewart: May I interrupt to ask a couple of questions to be sure I have this straight in my mind, is there any question -- but that the sale of the 37,000 shares in late August of 1967 to Goldman Sachs was a subject to the impact of 16 (b) and was recoverable by Reliance.
Mr. Albert E. Jenner, Jr.: Mr. Justice, that is not an issue open any longer on the part of Emerson in this case.
That is, that on the record in this case and the decision of the Eighth Circuit, there was no cross appeal from that decision of the Court.
It is so that the profit made on the first is payable to Reliance.
Unknown Speaker: By reason of 16 (b) that there may by reason of 16 (b).
Mr. Albert E. Jenner, Jr.: -- that there may by reason of 16 (b).
Unknown Speaker: 16 (b) and then it also follows I guess that the -- no questions before us with respect to the acquisition of the Reliance shares in the -- on June 16th any 1967, being of a kind and of a nature that falls under 16 (b).
I am referring to the point might raised by the amicus brief.
Mr. Albert E. Jenner, Jr.: Your Honor, I think you said Reliance, you meant, I think you meant the Dodge show (Inaudible)
Unknown Speaker: I did, I did (Voice Overlap)
Mr. Albert E. Jenner, Jr.: Yes.
If you are correct on that.
Unknown Speaker: Because there is one school of thought that if you will know that says that you have to be at 10% owner in order for your purchase of shares to come under Section 16 (b).
Mr. Albert E. Jenner, Jr.: Your Honor is referring to the first purchase issue upon what is there in the amicus curia, I believe and on this record as far as Emerson is concerned, that issue was not open either.
I have my personal views on the subject matter and that issue has not yet come before this Court.
And I assume what will someday, I must -- I do wish to say to all of Your Honors that I am also counsel for Golf and Western (ph) in Chicago and in case before Judge Parsons, in which that issue is presented and well, I assume reach this Court someday on full briefing.
Unknown Speaker: In the amicus (Voice Overlap)
Mr. Albert E. Jenner, Jr.: The amicus brief --
Unknown Speaker: (Voice Overlap) to be sure we do not decide that, this case.
Mr. Albert E. Jenner, Jr.: I think all parties feel that way.
That this Court on a very limited briefing on these amicus briefs will not have the full judgment on help of counsel.
But we can conceive then --
Mr. Albert E. Jenner, Jr.: And if Your Honors do determine and I ask Your Honors, determine to go into that issue then we would very much wish -- all parties would wish the opportunity to brief that question for Your Honors.
Unknown Speaker: But in this case we can proceed on the hypothesis.
Mr. Albert E. Jenner, Jr.: Yes.
Unknown Speaker: That the sale comes under -- the purchase, there were some purchase comes under 16 (b) without deciding it.
That might be (Voice Overlap) appeal.
Mr. Albert E. Jenner, Jr.: That is correct Your Honor.
Unknown Speaker: Right.
Justice Harry A. Blackmun: Mr. Jenner, let me ask you one diversionary question, if Emerson is right here at least it has the ability, does it not to manipulate and I do not mean that in the derogatory sense to choose which shares it will sell in order to get under the 10% limit.
And thereby it can choose those with respect to which it has a lesser profit, is it not?
Mr. Albert E. Jenner, Jr.: Mr. Justice Blackmun, there are situations in which that is possible but not here because the purchase on the tender offer was of all 155,000 shares, whatever that exact number is the same day.
So there is no step of opportunity presented here.
Unknown Speaker: And the same price was -- per shares?
Mr. Albert E. Jenner, Jr.: Sixty-three dollars on every share.
Unknown Speaker: (Voice Overlap).
On the facts of this case that is true but it --
Mr. Albert E. Jenner, Jr.: On a hypothetical, yes Your Honor.
There is some dispute in the cases.
That as you acquire say a hundred shares the first of the month, a hundred shares at the end of the month or along in that area, may you choose if you still have the certificates that you have not turned in all the certificates to get one certificate, may you sell off the first hundred at the end of six months even though at that time the remaining shares that you have exceed, the 10% --
Unknown Speaker: Well, with that kind of a problem would run into in the tax field on (Voice Overlap)
Mr. Albert E. Jenner, Jr.: Absolutely.
The majority view is that you -- if you match certificates even though you have otherwise 10% or more that the sale of the want -- of the certificate that is more than six months old does not involved you in 10 (b).
Chief Justice Warren E. Burger: Mr. Jenner.
Mr. Albert E. Jenner, Jr.: Yes Mr. Chief Justice.
Chief Justice Warren E. Burger: Let me make this a little more difficult perhaps by picking up the point you had touched on about using -- I think different brokers and that sort of thing.
Suppose instead of having these separated by a number of days, the first sale had been at nine o’clock in the morning, if that is when the exchange opens, and then the second sale had been at three in the afternoon if that is when it closes.
Would your case, would your arguments, would your points be any different?
Mr. Albert E. Jenner, Jr.: If Your Honor pleases, I thought somebody last night that somebody would ask that question and I had determined it to answer it in this way of I may.
I have a problem, first problem is there is a rule that Courts do not deal in fractions of a day.
And if that rule should be applied, so that the Court would say the fact that you sold a hundred shares in the morning and a hundred shares in the afternoon, we cannot recognize because we do not recognize fractions of the day.
Then, I would have to say that the odds are that we would -- that would come with the -- all sales would come within 16 (b).
On the other hand, it is my view and I urge it upon Your Honors that since that Congress said that if at the time of a sale, you are not a 10% or more shareholder that Congress contemplated even though Courts do not contemplate fractions of the day, that Congress contemplate that if you got yourself down below 10% then your second sale or any number of sales subsequently the same day would not come within 16 (b).
And may I suggest to Your Honor please, that is issue in this case.
What did Congress intend when it said, and I will read through the section, this subsection shall not be construed, not be construed by any Court to cover any transaction where such beneficial owner, that is an owner of 10% or more was not, was not such, that is the holder of 10% or more both at the time of the purchase and sale.
Time of purchase and sale or the sale and purchase of the security involved.
Now, that is what Congress said and I respectfully submit to Your Honors that what both the SEC in this case and what my Brother Mulligan is urging upon Your Honors is to rewrite the exemption provision of 16 (b) as Congress ruled it.
It is an artificial, for the whole 16 (b) is artificial.
I do not rail against this section.
I agree with the purposes that Congress had mind but Mr. Mulligan and the SEC are inclined to overlook this.
What does this section say for the purpose of preventing the unfair use of information which may, which may have been obtained by such beneficial owner?
But beneficial owner is described in 16 (a) as being merely an owner of 10% or more, information which may have been obtained by such beneficial owner by reason of his relationship to the issuer.
That is plain simple common English and that is what Congress intended.
Chief Justice Warren E. Burger: What you are saying is that Congress did the razor cutting here and did it deliberately in a razor -- in a situation that called for razor -- .
Mr. Albert E. Jenner, Jr.: Very much so.
And Your Honor and when you wrote the opinion for the Court in the Second Circuit, in the --
Chief Justice Warren E. Burger: Blau.
Mr. Albert E. Jenner, Jr.: Blau.
That is precisely what you said and when Mr. Justice Stewart wrote the opinion for the Sixth Circuit in the -- Farrelio (ph) case, he also said it.
And now may I turn to a very recent case decided and written by one of the unanimous Court by Chief Judge Finley.
Now I close my argument by referring to that case, it is so recent.
That is not yet in the report.
Unknown Speaker: That is cited at?
Mr. Albert E. Jenner, Jr.: It is cited in the reply brief of Mr. Mulligan.
When we filed our brief that case was not there.
This is as parallel a case.
When we were in law school, we talked about the Cow (ph) cases.
So this is a Cow (ph) case.
This involved Kern County Land Company and Occidental Petroleum. Occidental Petroleum started out negotiating for a merger of Kern County Land into Occidental petroleum.
Just as Emerson negotiated with Dodge to -- for a gentleman’s agreement merger of Dodge into Emerson.
That failed as did the Emerson situation.
When the negations failed Occidental made a tender offer to the shareholders of Kern County Land.
At 20 dollars the above the market, ours was 18 above the market, Kern reacted just as Dodge reacted.
Kern went to Tenneco and arranged a defensive merger of Kern into Tenneco -- the mechanism was to organize a new company and merge both Companies in to the new company.
But the effect was the same.
This person stocked up in value, as to the stock went in value here in Dodge.
Now also Kern resisted, just as Dodge resisted to all kinds of injunction suits and the sort of thing that we had a hearing, which I was so unsuccessful in the Northern District of Indiana.
Successful only on one if I got to stockholder's list.
And defeated in an injunction but the defensive merger came along then that was in exchange of shares, that is convertible preferred for the shares of Kern County land.
Now, how did Occidental meet this problem as judge, Chief Judge Finley says there was the danger of the merger going through and then Occidental under the cases this Court had decided, that is the Second Circuit that that would have constituted a sale by Occidental of the shares of Kern County Land it had obtained on this tender offer.
Now the way they sought to solve the problem instead of as I -- because the figures were so greater, millions and millions of dollars involved.
Their counsel resorted to an option.
That is an option to the new Kern County Land, new company land coming in to existence to purchase the tender offer shares, one day after the six month period and that was attacked as they device scheme says my Brother Mulligan.
And Chief Judge Finley for a unanimous Court holds otherwise and follows and refers directly to both your opinion Chief Justice Burger and yours as well Justice Stewart as justifying the right to use a solid option provision to avoid not evade but to avoid the harshness of 16 (b).
So the case is very parallel to this and Chief Judge Finley said this.
Some decisions of this Court reflect at least in the dictum, they believe that this principle should be applied across the board even to situations that Congress scarcely considered the high water mark of this rather simplistic approach was the statement in Park & Tilford Inc. versus Schulte, skipping the citation the case of the sale of common stock within six months of an economically compelled conversion of long held preferred in Decoma (ph).
Unknown Speaker: That was Judge Clark’s opinion (Voice Overlap).
Mr. Albert E. Jenner, Jr.: Yes it was.
Of the late Judge Clark, right.
Defendants did not own the common stock in question before they exercised their option to convert.
They did afterward therefore they acquired the stock within the meaning of the Act.
That was what Chief Judge Finley says, it is a simplistic approach.
However, that mechanistic view did not long persist even in our own Court.
See Roberts versus Seetan (ph), certiorari denied.
Then he says a revolt against it elsewhere was begun by the opinion of Judge Stewart as he then was in Ferraiolo versus Newman, citing it which was later followed by the Ninth Circuit in Blau versus Max Factor which was so.
The problem was then given thorough consideration in the Blau case and then by this Court in the Blau case that versus the Lehman brothers.
And so --
Unknown Speaker: What is the effect -- citation of that opinion that you have just been reading from?
Mr. Albert E. Jenner, Jr.: 3.3 federal supplement.
Unknown Speaker: Is that it?
You have got Abrams against Occidental Petroleum.
Mr. Albert E. Jenner, Jr.: Abrams versus Occidental Petroleum.
3.3 federal supplement-- .
Unknown Speaker: (Inaudible)
You are reading from the opinion by Judge Finley?
Mr. Albert E. Jenner, Jr.: This is -- I have -- all I have is the CCH advance sheet, Number 93238.
Unknown Speaker: We have the case number in the Second Circuit in this brief.
Mr. Albert E. Jenner, Jr.: Oh! That is very good.
Unknown Speaker: But we do not have a federal second citation.
Mr. Albert E. Jenner, Jr.: Not yet Your Honor.
May well be upheld -- and the District Court citation, it is at page 6 of the reply brief of my Brother Mulligan.
They conclude if Your Honor pleases, Your Honors please.
This is a harsh statute in its result, it has the obvious flair of duty in effect.
But it should not be applied beyond what Congress intended be applied and you are being urged by the SEC counsel, by Mr. Mulligan to extend it, to restrict it by construction in the face of expressed wording of the Congress that this shall not be construed to extent beyond particular limits.
And so with the statute that this is artificial and mechanistic as this one, to be applied in this results then I suggest to you the most, it is to the right of those who would be affected by the statute to work out, if it is possible an honorable means of avoiding the harsh results of the statute.
Chief Justice Warren E. Burger: You mean, are you saying that a mechanistic statute may have a mechanistic response?
Mr. Albert E. Jenner, Jr.: I think I am if Your Honor pleases.
As long as that response is honorable and I would respectfully submit this was a fully honorable response and reaches equity.
Chief Justice Warren E. Burger: Thank you Mr. Jenner.
You see I think the time is all --
Mr. Albert E. Jenner, Jr.: I think so Your Honor.
Chief Justice Warren E. Burger: -- consumed here.
Thank you gentlemen.
The case is submitted.