Foremost-McKesson, Inc. v. Provident Securities Company
423 U.S. 232 (1976)



PROCEDURE: Petitioner sought review of a decision from the United States Court of Appeals for the Ninth Circuit, which held that an anti-profiteering provision in the Securities Exchange Act of 1934,did not apply to a purchaser of securities that became a beneficial owner of more than 10 percent of a corporation as a result of the purchase.

FACTS: Provident (D) was a personal holding company. In 1968, it decided to liquidate its dissolve. Foremost (P) emerged as a potential purchaser and then negotiations began with D wanting cash and P wanting to exchange stock. Eventually a deal was reached for $4.25 million in cash and $49.75 million in convertible subordinated debentures. The agreement also allowed P to register the securities in the amount of $25 million to sell the debentures to the public. At the closing on October 15, 1992, P delivered to D the cash and a $40 million debenture. That was exchanged for two debentures of $25 million and $15 million. Another $2.5 million dollar debenture was delivered to an escrow agent and the balance of $7.25 million was delivered on October 20. These debentures were immediately converted into more than 10% of P's outstanding stock.

ISSUE: Is a beneficial owner accountable to the issuer for profits if it was not a beneficial owner before the purchase?

RULE:Where as part of purchase price of its assets, personal holding company contemplating liquidation received immediately convertible debentures, which if converted into buyer's common stock, would have made the holding company owner of more than 10% of issuer's outstanding common stock, and within six months it sold one of the debentures to a group of underwriters for cash in an amount exceeding its face value, the holding company was not required to disgorge any profit made on the sale to the issuer under the “short-swing” profits provision of Securities Exchange Act since it was not a beneficial owner “at the time of purchase.”

HOLDING: The Supreme Court, Mr. Justice Powell, held that in a six months' purchase-sale situation a beneficial owner is accountable to the issuer for any profit realized only if he was a beneficial owner “before the purchase,” he owned more than 10% Of the equity securities prior to purchase at issue, that since plaintiff did not own more than 10% Of defendant's equity securities prior to acquisition at issue it was not required to account to the issuer for any profit realized on resale within six months and that had Congress intended to impose liability in case of a purchase putting the investor's holdings above the 10% Level it could have done so expressly or by unmistakable inference.