## Facts

- Xerox had outstanding common stock and a separate issue of convertible debentures convertible into Xerox common stock.
- Chemical Fund, a mutual fund, owned Xerox common stock and Xerox convertible debentures and traded in both during 1962–1963.
- Chemical Fund reduced its common stock position and used proceeds to buy additional convertible debentures, resulting in ownership of more than 10% of the outstanding debenture issue by November 1963.
- Xerox called the debentures for redemption, leading to conversion into common stock.
- After conversion, Chemical Fund received 17,180.75 shares of common stock, representing about 2.72% of Xerox’s outstanding common stock; even full conversion would not have produced 10% ownership of common stock.
- Xerox asserted that Chemical Fund realized $153,972.43 in profit from purchases of debentures and sales of common stock within six months and sought recovery as short-swing profits under § 16(b).
- Chemical Fund filed a declaratory judgment action seeking a ruling of no § 16(b) liability; Xerox counterclaimed for the alleged short-swing profits.
- The district court granted summary judgment to Xerox for $153,972.43 (without interest) and dismissed Chemical Fund’s complaint; Chemical Fund appealed and Xerox cross-appealed seeking interest.

## Issues

1. Whether ownership of more than 10% of an issuer’s convertible debentures makes the holder a “beneficial owner of more than 10 per centum of any class of any equity security” under Exchange Act § 16(a) and § 16(b).
2. Whether convertible debentures constitute a “class of any equity security” for § 16 purposes, or whether the relevant class is the underlying common stock into which the debentures are convertible.
3. Whether Xerox could recover alleged short-swing profits (and interest) if Chemical Fund did not meet the statutory 10% beneficial ownership threshold.

## Decision

- The Second Circuit reversed the district court.
- The court held Chemical Fund was not a statutory 10% beneficial owner under § 16 because, even upon full conversion, it would have held only about 2.72% of Xerox common stock.
- The court directed entry of summary judgment for Chemical Fund and dismissal of Xerox’s § 16(b) counterclaim.
- Xerox’s cross-appeal for interest was moot because Xerox recovered nothing.

## Legal Principles

- For § 16(a)–(b), “more than 10 per centum of any class of any equity security” turns on ownership (actual or potential through conversion) of the relevant equity class, typically the issuer’s common stock.
- Convertible debentures, though convertible into equity, are not treated as a separate “class of equity security” for triggering § 16(b) based solely on percentage ownership of the debenture issue.
- A holder of convertible securities is not a § 16(b) 10% beneficial owner unless the holder’s conversion rights could result in ownership of more than 10% of the outstanding shares of the underlying registered equity class.
- Statutory construction of § 16(b) is guided by its purpose to deter short-swing trading by persons whose ownership position implies insider access or influence; the 10% threshold functions as a proxy for that status.

## Conclusion

The Second Circuit concluded that owning more than 10% of an issuer’s convertible debentures does not, by itself, trigger § 16(b) short-swing profit liability when the holder’s maximum equity position upon conversion would remain below 10% of the issuer’s common stock.


Chemical Fund, Inc. v. Xerox Corp., 377 F.2d 107 (2d Cir. 1967)