Foremost-McKesson, Inc. v. Provident Securities Company

423 U.S. 232 (1976)

Facts:

  • 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%.

Issue:

Whether the convertible debt instrument and subsequent immediate conversion triggered a 16b repayment of profits.

Holding:

  • 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.

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