Plaintiff corporation, after receiving authority from the Corporation Commissioner of California, gave to its key employees including defendants ( who were officers of the corporation) options to purchase certain stock of the plaintiff. The plan originated with the president of the corporation and the agreement took place at a time when the stock was unlisted. At no time subsequent to the stock being listed on a stock exchange did the plaintiff advise defendants of the short swing-requirements that arose from listing. Plaintiff's purpose in granting the option was to retain the services of its key employees and to induce these employees to expend their best efforts in the corporation's interest. The president of the plaintiff corporation advised defendants that they should take up their options annually to achieve a tax advantage, and that they could get funds by selling the purchased stock. Defendants exercised their options and sold stock within a six month period, profiting thereby. At the demand of a stockholder (who was not such at the time of the agreement and who bought ten shares subsequent thereto) plaintiff brought suit to recover profits under section 16(b) of the Securities Exchange Act of 1934. Held, plaintiff cannot recover. The declared purpose of section 16(b) is to prevent the use of inside information. Since the corporation initiated and set up the entire plan and assured defendants of its validity, the corporation is now estopped from recovering profits made in pursuance of this agreement from the defendants who acted in good faith. Consolidated Engineering Corporation v. Nesbit, (D.C. Cal. 1951) 102 F. Supp. 112.
Edward D. Goldstein S. Ed.,
CORPORATIONS-SECURITIES EXCHANGE ACT OF 1934-EQUITABLE PRINCIPLES AS A BAR TO SHORT SWING RECOVERY UNDER SECTION 16(b),
Mich. L. Rev.
Available at: https://repository.law.umich.edu/mlr/vol51/iss1/11