Corporations – Reclassification of Securities as a Purchase Under Section 16 (B) of the Securities and Exchange Act
Plaintiff, a minority stockholder in the Old Town Corporation, brought action on behalf of the corporation to recover alleged “shortswing” profits made by defendants, who were officers, directors and large shareholders of Old Town, on the sale of 45.9 percent of the outstanding stock of the corporation. The corporation had, with the approval of 78 percent of the owners in interest, reclassified the 320,402 outstanding shares of $5 par common stock as 320,402 shares of $1 par common and 320,402 shares of 40¢ cumulative preferred stock of $7 par value. This reclassification was done for the frank purpose of increasing the market value and salability of defendants’ interest so that the defendants could sell their holdings. Within six months of the reclassification defendants sold both the new common stock and the preferred stock. Held, the reclassification was not a purchase so as to bring it within the scope of section 16(b) of the Securities and Exchange Act of 1934. Roberts v. Eaton, (2d Cir. 1954) 212 F. (2d) 82, cert. den. 348 U.S. 827, 75 S.Ct. 44 (1954).