Landreth Timber Co. v. Landreth
471 U.S. 681, 1985
- A father and son sold all of their stock, which was worth 85% of the total outstanding shares of their timber company.
- The company was a closely held business org.
- Six other shareholders owned the remaining 15% of shares.
- The purchasers of the 85% purchased the shares and then called themselves the “Landreth Timber Company.”
- The company went bad and the purchasers’ shares became fairly useless.
- The purchasers sued under securities fraud law.
- The father and son claimed that they couldn’t do so because they argued what had been sold wasn’t a security, but was instead the sale of a business (the sale of business doctrine).
- The purchasers argued that this transaction should be retracted because the shares were sold without fully registering them under the 1933 securities act.
- Whether the shares sold are a security.
- Yes, appeals decision reversed. Buyers may retract the sale.
- The court reviews relevant stock characteristics:
- The right to receive dividends.
- The ability to be pledged or hypothecated
- Voting rights in proportion to the number of shares owned
- Ability to appreciate in value.
- The sale of business rule does not apply here.
- Purchasers had no plans to actually run the business. Many of the father and son’s workers stayed on and continued to run the mill.
- The court makes a new rule that a stock can’t be a security “unless the purchaser has entered into the transaction with the anticipation of earning profits derived from the efforts of others.”
- Think also from an econ perspective. Is there fungibility or is there an ability to select the instrument based on personal preference?