Reliance Electric Co. v. Emerson Electric Co.

404 U.S. 418 (1972)

Facts:

  • EE purchased 13.2% of the shares in Dodge in order to take over Dodge.
  • However Dodge’s shareholders then merged with RE, thus rendering EE’s purchase relatively useless, since they would be owning shares in their own competitor and not for takeover purposes.
  • EE decided to sell those shares, but would be selling at a substantial profit.
    • Under rule 16b, any shareholder with 10% or more of the shares outstanding in a company must forfeit the profit of any sale of stock to the parent company if the sale occurs six months after the date of purchase.
    • EE’s lawyers suggested a sale that would get EE to under 10% ownership (9.9%).
    • Then, EE would sell the remaining 9.9% shares at a profit and not be in violation of the rule.

Issue:

Whether EE is liable under 16(b) to the extent that EE should forfeit profits for both sales.

Holding:

  • No.  It doesn’t matter whether EE split the transactions to avoid returning profits.
    • It doesn’t matter whether this was intentional or not.
    • The current reading of the statute doesn’t prohibit splitting.
    • A company that sells in multiple transactions may not have the intention of avoiding repaying profits and it’s bad policy to restrict the free sale of profits
    • The court stated the legislature can explicitly change this provision if it wishes.

Comments are closed.