Corporations – Securities: Regulation – Parent Corporation as Insider Realizing Shortswing Profit

Parent corporation, owning a majority of the outstanding voting securities of its subsidiary, sold 120,000 shares of the subsidiary’s common stock. A substantial shortswing profit was realized on 4115 shares which had been purchased on the open market five months earlier. The sale, whereby the parent was to divest itself of control of its subsidiary, was made pursuant to an agreement between both companies and approved by a majority of the voting stock of each. Section 16 (b) of the Securities Exchange Act of 1934 provides that officers, directors and beneficial owners of more than ten percent of any class of equity securities shall be liable to the issuing corporation for any profit realized from the sale of its securities held for less than six months. Plaintiff brought a shareholder derivative action on behalf of the subsidiary against the parent under section 16 (b). On appeal from a judgment in favor of plaintiff, held, affirmed. The agreement between parent and subsidiary which induced the sale does not prevent recovery for the benefit of the subsidiary under section 16 (b). The clear language and purpose of the statute precludes an estoppel based upon instigation by or benefit to the subsidiary. Magida v. Continental Can Company, (2d Cir. 1956) 231 F. (2d) 843.