Landreth Timber Co. v. Landreth

471 U.S. 681, 1985

Facts:

  • A father and son sold all of their stock, which was worth 85% of the total outstanding shares of their timber company.
    1. 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.”
    1. 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.

Issue:

  • Whether the shares sold are a security.

Holding:

  • Yes, appeals decision reversed. Buyers may retract the sale.

Reasoning:

  • The court reviews relevant stock characteristics:
    1. The right to receive dividends.
    2. Negotiability.
    3. The ability to be pledged or hypothecated
    4. Voting rights in proportion to the number of shares owned
    5. Ability to appreciate in value.
  • The sale of business rule does not apply here.
    1. 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.”

Comments:

  • Think also from an econ perspective. Is there fungibility or is there an ability to select the instrument based on personal preference?

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