Landreth Timber Co. v. Landreth, 471 U.S. 681 (1985)
U.S. Supreme CourtLandreth Timber Co. v. Landreth, 471 U.S. 681 (1985)
Landreth Timber Co. v. Landreth
Argued March 26, 1985
Decided May 28, 1985
471 U.S. 681
Respondents father and sons, who owned all of the common stock of a lumber business that they operated, offered their stock for sale through brokers. The company's sawmill was subsequently damaged by fire, but potential purchasers were told that the mill would be rebuilt and modernized. Thereafter, a stock purchase agreement for all of the stock was executed, and ultimately petitioner company was formed by the purchasers. Respondent father agreed to stay on as a consultant for some time to help with the daily operations of the mill. After the acquisition was completed, the mill did not live up to the purchasers' expectations. Eventually, petitioner sold the mill at a loss and went into receivership. Petitioner then filed suit in Federal District Court for rescission of the sale of stock and damages, alleging that respondents had violated the registration provisions of the Securities Act of 1933 (1933 Act) and the antifraud provisions of the Securities Exchange Act of 1934 (1934 Act). The court granted summary judgment for respondents, holding that, under the "sale of business" doctrine, the stock could not be considered a "security" for purposes of the Acts because managerial control of the business had passed into the hands of the purchasers, who bought 100% of the stock. The court concluded that the transaction thus was a commercial venture, rather than a typical investment. The Court of Appeals affirmed.
Held: The stock at issue here is a "security" within the definition of the Acts, United Housing Foundation, Inc. v. Forman, 421 U. S. 837, distinguished, and the "sale of business" doctrine does not apply. Pp. 471 U. S. 685-697.
(a) Section 2(1) of the 1933 Act and § 3(a)(10) of the 1934 Act define a "security" as including "stock" and other listed types of instruments. Although the fact that instruments bear the label "stock" is not of itself sufficient to invoke the Acts' coverage, when an instrument is both called "stock" and bears stock's usual characteristics as identified in Forman, supra, a purchaser justifiably may assume that the federal securities laws apply. The stock involved here possesses all of the characteristics traditionally associated with common stock. Moreover, reading the securities laws to apply to the sale of stock at issue here comports with Congress' remedial purpose in enacting the legislation to protect investors. Pp. 471 U. S. 685-688.
(b) When an instrument is labeled "stock" and possesses all of the traditional characteristics of stock, a court is not required to look to the economic substance of the transaction to determine whether the stock is a "security" within the meaning of the Acts. A contrary rule is not supported by this Court's prior decisions involving unusual instruments not easily characterized as "securities." Nor were the Acts intended, as asserted by respondents, to cover only "passive investors," and not privately negotiated transactions involving the transfer of control to "entrepreneurs." Pp. 471 U. S. 688-692.
(c) An instrument bearing both the name and all of the usual characteristics of stock presents the clearest case for coverage by the plain language of the definition. "Stock" is distinguishable from most if not all of the other listed categories, and may be viewed as being in a category by itself for purposes of interpreting the Acts' definition of "security." Pp. 471 U. S. 693-694.
(d) Application of the "sale of business" doctrine depends on whether control has passed to the purchaser. Even though the transfer of 100% of a corporation's stock normally transfers control, the purchasers here had no intention of running the sawmill themselves. Moreover, if the doctrine were applied here, it would also have to be applied to cases in which less than 100% of a company's stock was sold, thus inevitably leading to difficult questions of line-drawing. As explained in Gould v. Ruefenacht, post, p. 471 U. S. 701, coverage by the Acts would in most cases be unknown and unknowable to the parties at the time the stock was sold. Such uncertainties attending the applicability of the Acts would be intolerable. Pp. 471 U. S. 694-697.
731 F.2d 1348, reversed.
POWELL, J., delivered the opinion of the Court, in which BURGER, C.J., and BRENNAN, WHITE, MARSHALL, BLACKMUN, REHNQUIST, and O'CONNOR, JJ., joined. STEVENS, J., filed a dissenting opinion, post, p. 471 U. S. 697.