423 U.S. 232 (1976)
- Provident is a company seeking to liquidate its assets for the member-customers. Provident agreed to sell certain assets to Foremost for an exchange of cash and convertible debt, which would convert into Provident’s stock.
- The convertible debt instrument, if converted, would convert into a total amount that exceeded 10% ownership in the company, which would make Provident a beneficial owner of the company under 16b of SEC regulations.
- If a company purchases then resells within six months of purchase stock holdings that exceed 10% of the company’s value, the purchasing company must return all profits subsequent to purchase.
- Provident did not consider this possibility before converting and did so.
- However, Provident first acquired debt that was initially convertible into less than 10% of the stock. It was only after that the debt was convertible into more than 10%.
Whether the convertible debt instrument and subsequent immediate conversion triggered a 16b repayment of profits.
- No, the purchaser needs to be a “beneficial owner” both at the time of purchase and sale of the stock. This is an exemption to 16b.
- Provident first acquired debt that was initially convertible into less than 10% of the stock. It was only after that the debt was convertible into more than 10%.
- The exemption under 16b applies to the percentage holding right before the point of purchase. Thus, the 10% holding period began right when the debt was converted, not when the debt itself was purchased.