Gould v. Ruefenacht,
471 U.S. 701 (1985)

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U.S. Supreme Court

Gould v. Ruefenacht, 471 U.S. 701 (1985)

Gould v. Ruefenacht

No. 84-165

Argued March 26, 1985

Decided May 28, 1985

471 U.S. 701


Respondent Ruefenacht (hereinafter respondent) purchased 50% of the stock of a company whose president previously had owned all of the stock. Respondent allegedly purchased the stock in reliance on financial documents and oral representations made by various individuals, including petitioner Gould, the company's corporate counsel. Part of the consideration for the deal was respondent's promise that he would participate in the company's management, which he did, but his actions were at all times subject to the president's veto. Respondent subsequently began to doubt the accuracy of some of the representations that had been made to him. He ultimately filed suit in Federal District Court, alleging violations of, inter alia, the Securities Act of 1933 and the Securities Exchange Act of 1934. The court granted summary judgment for the defendants, holding that the stock respondent purchased was not a "security" within the meaning of the Acts, and that the "sale of business" doctrine prevented application of the Acts. The Court of Appeals reversed.

Held: The stock purchased by respondent is a "security" within the meaning of the Acts, and the "sale of business" doctrine does not apply. Landreth Timber Co. v. Landreth, ante, p. 471 U. S. 681. Pp. 471 U. S. 704-706.

(a) Where an instrument bears the label "stock" and possesses all of the characteristics typically associated with stock, a court is not required to look beyond the character of the instrument to the economic substance of the transaction to determine whether the stock is a "security" within the meaning of the Acts. The instruments involved here were called "stock," and possessed all of the characteristics that are usually associated with traditional stock. P. 471 U. S. 704.

(b) There are sound policy reasons for rejecting the "sale of business" doctrine as a rule of decision in cases involving the sale of traditional stock in a closely held corporation. The doctrine's application depends primarily on whether control has passed to the purchaser, which may not be determined simply by ascertaining what percentage of the company's stock has been purchased. Acquisition of more than 50% of a company's stock may or may not effect a transfer of operational control, while in some instances de facto operational control may be obtained by the acquisition of less than 50%. Such seemingly inconsistent results stem from

Page 471 U. S. 702

the fact that actual control may also depend on other variable. Therefore, the Acts' applicability to a sale of stock such as that involved here would rarely be certain at the time of the transaction. Application of the doctrine also would lead to arbitrary distinctions between transactions covered by the Acts and those that are not. Pp. 471 U. S. 704-706.

737 F.2d 320, affirmed.

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, ante, p. 471 U. S. 697.

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