## Facts

- A Cudahy Company shareholder brought a derivative action under § 16(b) of the Securities Exchange Act of 1934 to recover alleged short-swing profits from Bernard P. McDonough.
- On March 15–16, 1967, Bernard and Alma McDonough each bought 141,363 shares of Cudahy common stock at $6.75 per share (a combined stake exceeding 10%).
- After the purchases, McDonough became a Cudahy director and Chairman; two associates were also elected to the board.
- On July 20, 1967, the McDonoughs and United States Smelting, Refining & Mining Co. executed an “option agreement” giving Smelting the right to acquire 272,000 shares at $9 per share, exercisable on or before October 1, 1967.
- At execution, Smelting paid $350,000 (creditable to the price if exercised; retained by the McDonoughs if not), the shares were placed in escrow, and Smelting received an irrevocable proxy to vote the shares until October 1, 1967.
- Within days, McDonough and another director resigned, and Smelting nominees were placed on Cudahy’s board, shifting corporate control to Smelting.
- Smelting later exercised the option on September 22, 1967 and closed on September 27, 1967 by paying the remaining price.
- The district court granted summary judgment for the shareholder, ordering disgorgement of $612,000 as short-swing profits; McDonough appealed.

## Issues

1. Whether the July 20, 1967 “option” transaction and related arrangements constituted a “sale” of the underlying Cudahy shares for § 16(b) purposes, and if so, on what date the sale occurred.
2. Whether McDonough’s March 1967 purchase and the effective sale occurred within less than six months while he was a statutory insider, requiring disgorgement under § 16(b).

## Decision

- The Seventh Circuit affirmed summary judgment for the shareholder.
- The court treated the July 20, 1967 arrangements as a present “sale” of the underlying 272,000 shares for § 16(b) purposes, notwithstanding the “option” label.
- The operative sale date was July 20, 1967, when the agreements were executed and beneficial ownership incidents shifted to Smelting.
- Because the March purchase and July 20 sale occurred within less than six months and McDonough was a more-than-10% owner and director, § 16(b) imposed liability to disgorge the profits.

## Legal Principles

- Section 16(b) imposes strict liability requiring insiders to disgorge profits from any purchase and sale (or sale and purchase) of the issuer’s equity securities within a period of less than six months, irrespective of intent.
- In determining whether a “sale” occurred under § 16(b), courts look to the substance and economic effect of the transaction rather than its form or label.
- For option-related arrangements, the § 16(b) analysis centers on the purchase or sale of the underlying shares when the transaction effectively transfers beneficial ownership attributes (e.g., control, voting power, and meaningful economic commitment), not merely on the option as a separate instrument.
- When beneficial ownership and control shift before formal closing, § 16(b)’s timing can run from the earlier effective transfer rather than the later mechanical consummation.

## Conclusion

The court held that the insider’s “option” transaction functioned as a sale on the execution date because it transferred key incidents of ownership and control, creating a purchase-and-sale pair within six months and requiring disgorgement of short-swing profits under § 16(b).


Bershad v. McDonough, 428 F.2d 693 (7th Cir. 1970)