Respondent Ruefenacht (hereinafter respondent) purchased 50% of
the stock of a company whose president previously had owned all of
the stock. Respondent allegedly purchased the stock in reliance on
financial documents and oral representations made by various
individuals, including petitioner Gould, the company's corporate
counsel. Part of the consideration for the deal was respondent's
promise that he would participate in the company's management,
which he did, but his actions were at all times subject to the
president's veto. Respondent subsequently began to doubt the
accuracy of some of the representations that had been made to him.
He ultimately filed suit in Federal District Court, alleging
violations of,
inter alia, the Securities Act of 1933 and
the Securities Exchange Act of 1934. The court granted summary
judgment for the defendants, holding that the stock respondent
purchased was not a "security" within the meaning of the Acts, and
that the "sale of business" doctrine prevented application of the
Acts. The Court of Appeals reversed.
Held: The stock purchased by respondent is a "security"
within the meaning of the Acts, and the "sale of business" doctrine
does not apply.
Landreth Timber Co. v. Landreth, ante, p.
471 U. S. 681. Pp.
471 U. S.
704-706.
(a) Where an instrument bears the label "stock" and
possesses all of the characteristics typically associated with
stock, a court is not required to look beyond the character of the
instrument to the economic substance of the transaction to
determine whether the stock is a "security" within the meaning of
the Acts. The instruments involved here were called "stock," and
possessed all of the characteristics that are usually associated
with traditional stock. P.
471 U. S. 704.
(b) There are sound policy reasons for rejecting the "sale of
business" doctrine as a rule of decision in cases involving the
sale of traditional stock in a closely held corporation. The
doctrine's application depends primarily on whether control has
passed to the purchaser, which may not be determined simply by
ascertaining what percentage of the company's stock has been
purchased. Acquisition of more than 50% of a company's stock may or
may not effect a transfer of operational control, while in some
instances
de facto operational control may be obtained by
the acquisition of less than 50%. Such seemingly inconsistent
results stem from
Page 471 U. S. 702
the fact that actual control may also depend on other variable.
Therefore, the Acts' applicability to a sale of stock such as that
involved here would rarely be certain at the time of the
transaction. Application of the doctrine also would lead to
arbitrary distinctions between transactions covered by the Acts and
those that are not. Pp.
471 U. S.
704-706.
737 F.2d 320, affirmed.
POWELL, J., delivered the opinion of the Court, in which BURGER,
C.J., and BRENNAN, WHITE, MARSHALL, BLACKMUN, REHNQUIST, and
O'CONNOR, JJ., joined. STEVENS, J., filed a dissenting opinion,
ante, p.
471 U. S.
697.
JUSTICE POWELL delivered the opinion of the Court.
This case presents the question whether the sale of 50% of the
stock of a company is a securities transaction subject to the
antifraud provisions of the federal securities laws (the Acts).
I
In 1980, respondent Ruefenacht (hereafter respondent) purchased
2,500 shares of the stock of Continental Import & Export, Inc.,
an importer of wine and spirits, from Joachim Birkle. Birkle was
Continental's president, and had owned 100% of the company's stock
prior to the time of the sale. The 2,500 shares, for which
respondent paid $250,000, represented 50% of Continental's
outstanding stock.
According to respondent, he purchased the stock in reliance on
financial documents and oral representations made
Page 471 U. S. 703
by Birkle; Christopher O'Halloran, a certified public
accountant; and petitioner Gould, Continental's corporate counsel.
Part of the consideration for the deal was a promise by respondent
that he would participate in the firm's management. The record
reveals that he helped solicit contracts for the firm, participated
in some hiring decisions, signed a banking resolution so that he
could endorse corporate checks in Birkle's absence, and engaged in
other more minor pursuits. All the while, however, respondent
remained a full-time employee of another corporation, and his
actions on behalf of Continental were at all times subject to
Birkle's veto.
After respondent paid $120,000 of the stock's purchase price, he
began to doubt the accuracy of some of the representations made to
him by Birkle and others. Respondent subsequently filed this suit,
[
Footnote 1] alleging
violations of §§ 12(2) and 17(a) of the Securities Act of
1933 (1933 Act), 15 U.S.C. §§ 771(2), 77q. He also
alleged violations of § 10(b) of the Securities Exchange Act
of 1934 (1934 Act), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 CFR
§ 240.10b-5 (1984). The District Court granted summary
judgment for the defendants, concluding that the stock respondent
purchased was not a "security" within the meaning of §
3(a)(10) of the 1934 Act, 15 U.S.C. § 78c(a)(10), and §
2(1) of the 1933 Act, 15 U.S.C. § 77b(1). Finding that
respondent intended to manage Continental jointly with Birkle, the
court concluded that the sale of business doctrine prevented
application of the Acts.
The United States Court of Appeals for the Third Circuit
reversed.
Ruefenacht v. O'Halloran, 737 F.2d 320 (1984).
It ruled that the plain language of the Acts' definitions of
"security" included the stock at issue here, and it disagreed
with
Page 471 U. S. 704
the District Court's conclusion that the sale of business
doctrine must be applied in every case to determine whether an
instrument is a "security" within the meaning of the Acts. Because
the Courts of Appeals are divided over the applicability of the
sale of business doctrine to sales of stock arguably transferring
control of a closely held business, we granted certiorari. 469 U.S.
1016 (1984). For the reasons stated in our decision announced today
in
Landreth Timber Co. v. Landreth, ante, p.
471 U. S. 681, we
now affirm.
II
In
Landreth, we held that, where an instrument bears
the label "stock" and possesses all of the characteristics
typically associated with stock,
see United Housing Foundation,
Inc. v. Forman, 421 U. S. 837,
421 U. S. 851
(1975), a court will not be required to look beyond the character
of the instrument to the economic substance of the transaction to
determine whether the stock is a "security" within the meaning of
the Acts. The instruments respondent purchased were called "stock,"
and the District Court ruled that they possessed all of the
characteristics listed by
Forman that are usually
associated with traditional stock. App. 50a. As we noted in
Landreth, ante at
471 U. S. 687, the sale of stock in a corporation is
typical of the kind of transaction to which the Acts by their terms
apply. We conclude that the stock purchased by respondent is a
"security" within the meaning of the Acts, and that the sale of
business doctrine does not apply.
III
Aside from the language of the Acts and the characteristics of
the instruments, there are sound policy reasons for rejecting the
sale of business doctrine as a rule of decision in cases involving
the sale of traditional stock in a closely held corporation. As
petitioner acknowledges,
see Brief for Petitioner 27,
application of the doctrine depends primarily in each case on
whether control has passed to the purchaser.
Page 471 U. S. 705
See, e.g., Sutter v. Groen, 687 F.2d 197, 203 (CA7
1982);
King v. Winkler, 673 F.2d 342, 345 (CA11 1982);
Frederiksen v. Poloway, 637 F.2d 1147, 1148 (CA7),
cert. denied, 451 U.S. 1017 (1981). Control, in turn, may
not be determined simply by ascertaining what percentage of the
company's stock has been purchased. To be sure, in many cases,
acquisition of more than 50% of the voting stock of a corporation
effects a transfer of operational control. In other cases, however,
even the ownership of more than 50% may not result in effective
control. In still other cases,
de facto operational
control may be obtained by the acquisition of less than 50%. These
seemingly inconsistent results stem from the fact that actual
control may also depend on such variables as voting rights, veto
rights, or requirements for a supermajority vote on issues
pertinent to company management, such as may be required by state
law or the company's certificate of incorporation or its bylaws.
See Golden v. Garafalo, 678 F.2d 1139, 1146 (CA2 1982)
("In
economic reality,' considerably less than 100%, and often
less than 50%, of outstanding shares may be a controlling block
which, when sold to a single holder, effectively transfers the
power to manage the business"); King v. Winkler, supra, at
346 (application of the sale of business doctrine "is not [merely]
a function of numbers"). Whether control has passed with the stock
may also depend on how involved in management the purchaser intends
to be, see Landreth, ante at 471 U. S.
695-696. Therefore, under respondent's theory, the Acts'
applicability to a sale of stock such as that involved here would
rarely be certain at the time of the transaction. Accord,
Hazen, Taking Stock of Stock and the Sale of Closely Held
Corporations, 61 N.C.L.Rev. 393, 406 (1983). Rather, it would
depend on findings of fact made by a court -- often only after
extensive discovery and litigation.
Application of the sale of business doctrine also would lead to
arbitrary distinctions between transactions covered by the Acts and
those that are not. Because applicability of the
Page 471 U. S. 706
Acts would depend on factors other than the type and
characteristics of the instrument involved, a corporation's stock
could be determined to be a security as to the seller, but not as
to the purchaser, or as to some purchasers but not others.
[
Footnote 2] Likewise, if the
same purchaser bought small amounts of stock through several
different transactions, it is possible that the Acts would apply as
to some of the transactions, but not as to the one that gave him
"control."
See Ruefenacht v. O'Halloran, 737 F.2d at 335.
Such distinctions make little sense in view of the Acts' purpose to
protect investors. Moreover, the parties' inability to determine at
the time of the transaction whether the Acts apply neither serves
the Acts' protective purpose nor permits the purchaser to
compensate for the added risk of no protection when negotiating the
transaction.
IV
We conclude that the stock at issue here is a "security," and
that the sale of business doctrine does not apply. The judgment of
the United States Court of Appeals for the Third Circuit is
therefore
Affirmed.
[For dissenting opinion of JUSTICE STEVENS,
see ante,
p.
471 U. S.
697.]
[
Footnote 1]
The complaint named as defendants O'Halloran, Birkle, and
Continental, as well as petitioner Gould. Birkle and Continental
defaulted for failure to appear. O'Halloran is a respondent under
this Court's Rule 19.6 and filed a brief urging that the decision
of the Court of Appeals be reversed.
[
Footnote 2]
For example, although the sale of all of a corporation's stock
to a single buyer by a single seller would likely not constitute
the sale of a security under the sale of business doctrine as to
either party, the same sale to a single buyer by several sellers,
none of whom exercised control, would probably be considered to be
a securities transaction as to the sellers, but not as to the
buyer.
See Ruefenacht v. O'Halloran, 737 F.2d 320, 335,
and n. 36 (CA3 1984);
McGrath v. Zenith Radio Corp., 651
F.2d 458, 467-468, n. 5 (CA7),
cert. denied, 454 U.S. 835
(1981); Seldin, When Stock is Not a Security, 37 Bus. Law. 637, 679
(1982).
