Gollust v. Mendell

by David Hackett Souter

United States Supreme Court

501 U.S. 115

Gollust  v.  Mendell

No. 90-659  Argued: April 15, 1991. --- Decided: June 10, 1991

Syllabus

Section 16(b) of the Securities Exchange Act of 1934 imposes strict liability on "beneficial owner[s]" of more than 10% of a corporation's listed stock, and on the corporation's officers and directors, for any profits realized from any purchase and sale, or sale and purchase, of such stock occurring within a 6-month period. Such "insiders" are subject to suit "instituted . . . by the issuer, or by the owner of any security of the issuer" in the issuer's name and behalf. After respondent Mendell, an owner of common stock in Viacom International, Inc. (International), instituted a § 16(b) suit against petitioners, allegedly "beneficial owners" of International stock, International was acquired by a shell subsidiary of what is now called Viacom, Inc. (Viacom). International merged with the subsidiary, and became Viacom's wholly owned subsidiary and sole asset. Mendell received cash and stock in Viacom in exchange for his International stock. The District Court granted petitioners' motion for summary judgment on the ground that Mendell had lost standing to maintain the action because he no longer owned any International stock. The Court of Appeals reversed, holding that Mendell's continued prosecution of the action was not barred by the statute's language or existing case law and was fully consistent with the statutory objectives.

Held: Mendell has satisfied the statute's standing requirements. Pp. 121-128.

(a) Section 16(b) provides standing of signal breadth, expressly limited only by the conditions that the plaintiff be the "owner of [a] security" of the "issuer" at the time the suit is "instituted." Any "security"-including stock, notes, warrants, bonds, debentures, puts, and calls, 15 U.S.C. § 78c(a)(10)-will suffice to confer standing. There is no restriction in terms of the number or percentage of shares, or the value of any other security, that must be held. Nor is the security owner required to have had an interest in the issuer at the time of the short-swing trading. Although the security's "issuer" does not include parent or subsidiary corporations, 15 U.S.C. § 78c(a)(8), this requirement is determined at the time the § 16(b) action is "instituted." Congress intended to adopt the common understanding of the word "institute"-"inaugurate or commence; as to institute an action," Black's Law Dictionary 985-986 (3d ed. 1933)-which is confirmed by its use of the same word elsewhere to mean the commencement of an action, see, e.g.,8 U.S.C. § 1503(a). Pp. 121-124.

(b) A § 16(b) plaintiff must, however, throughout the period of his participation in the litigation, maintain some financial interest in the litigation's outcome, both for the sake of furthering the statute's remedial purposes by ensuring that enforcing parties maintain the incentive to litigate vigorously, and to avoid the serious constitutional question that would arise under Article III from a plaintiff's loss of all financial interest in the outcome of the litigation he had begun. But neither the statute nor its legislative history supports petitioners' argument that a plaintiff must continuously own a security of the issuer. Pp. 124-126.

(c) An adequate financial stake can be maintained when the plaintiff's interest in the issuer has been replaced by one in the issuer's new parent corporation. This is no less an interest than a bondholder's financial stake, which, although more attenuated, satisfies the initial standing requirement under the statute. Pp 126-127.

(d) Here, Mendell owned a security of the issuer at the time he instituted this § 16(b) action, and he continues to maintain a financial interest in the litigation's outcome by virtue of his Viacom stock. P. 127-128. 909 F.2d 724, (CA2 1990), affirmed.

SOUTER, J., delivered the opinion for a unanimous Court.

Edwin B. Mishkin, New York City, for petitioners.

Irving Malchman, New York City, for respondents.

James R. Doty, Houston, Tex., for the S.E.C., as amicus curiae, in support of respondents by special leave of Court.

Justice SOUTER delivered the opinion of the Court.

Notes