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Keywords

liabilityequityappealsummary judgmentcorporationdeclaratory judgment

Related Cases

Chemical Fund, Inc. v. Xerox Corp., 377 F.2d 107

Facts

Chemical Fund, an investment company, held more than 10% of Xerox's convertible debentures but would only own 2.72% of Xerox's common stock upon conversion. In November 1963, after a claim for short-swing profits was asserted against it, Chemical Fund filed for a declaratory judgment. Xerox counterclaimed for profits from Chemical Fund's transactions. The district court granted summary judgment to Xerox, which Chemical Fund appealed.

Chemical Fund brought this suit against Xerox for declaratory judgment in the Western District of New York in November 1963 after it had filed certain forms with the Securities and Exchange Commission and a claim for short-swing profits had been asserted against it.

Issue

Is Chemical Fund liable for short-swing trading profits as a ‘beneficial owner of more than 10 per centum of any class of any equity security’ under section 16 of the Securities Exchange Act?

The principal issue on this appeal is whether Chemical Fund, the owner of more than ten percent of Xerox Convertible Debentures, is liable for short-swing trading profits as a ‘beneficial owner of more than 10 per centum of any class of any equity security’ within the meaning of section 16 of the Securities Exchange Act of 1934.

Rule

Under section 16 of the Securities Exchange Act, a corporation may recover profits from a beneficial owner of more than 10% of any class of equity security from purchases and sales of such securities within a six-month period.

The Securities Exchange Act provides in section 16 that a corporation to which it applies may recover profits realized by an officer, director, or ‘beneficial owner of more than 10 per centum of any class of any equity security’ of the corporation from purchases and sales of such equity securities within any period of less than six months.

Analysis

The court analyzed whether Chemical Fund's ownership of convertible debentures constituted beneficial ownership of more than 10% of any class of equity security. It concluded that the relevant measure was the percentage of common stock Chemical Fund would own upon conversion of the debentures, which was only 2.72%. Therefore, the court determined that Chemical Fund did not meet the threshold for liability under section 16.

Thus the question is: are the Debentures by themselves a ‘class of any equity security,’ or does the class consist of the common stock augmented, as to any beneficial holder in question, by the number of shares into which the Debentures it owns are convertible? We think that the Debentures are not a class by themselves; the total percentage of common stock which a holder would own following a hypothetical conversion of the Debentures it holds is the test of liability under section 16(b).

Conclusion

The court reversed the district court's judgment and directed that summary judgment be entered in favor of Chemical Fund, dismissing Xerox's counterclaim.

Accordingly, we reverse the judgment of the district court and direct that summary judgment be entered in favor of Chemical Fund on its complaint and that the counterclaim of Xerox be dismissed.

Who won?

Chemical Fund prevailed in the case because the court found it was not liable for short-swing profits, as it did not beneficially own more than 10% of any class of equity security.

Chemical Fund appeals from the dismissal of its complaint for declaratory judgment and from the judgment in favor of Xerox on the counterclaim.

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