## Facts

- Mesa-affiliated entities, through a limited partnership, acquired approximately 13.6% of Unocal’s common stock during a hostile takeover attempt.
- Unocal announced a defensive self-tender allowing shareholders to exchange Unocal common stock for nonconvertible Unocal debt securities at a premium, but excluded Mesa from participating.
- After litigation over the exclusion, Mesa and Unocal negotiated a settlement.
- Under the settlement, Mesa agreed to abandon its takeover attempt and was permitted to exchange substantial Unocal stock holdings (including shares held less than six months) for the same type of Unocal nonconvertible debt securities.
- Unocal and shareholder David Colan filed derivative § 16(b) actions seeking disgorgement of alleged short-swing profits, alleging the exchange constituted a “sale” within six months of Mesa’s purchases.
- The district court granted summary judgment for Mesa, treating the exchange as an “unorthodox transaction” outside § 16(b).

## Issues

1. Whether a 10% beneficial owner’s exchange of issuer common stock for negotiable, nonconvertible issuer debt securities pursuant to a self-tender settlement constitutes a “sale” under § 16(b) of the Securities Exchange Act of 1934.
2. Whether summary judgment was improperly granted by treating the transaction as exempt under the “unorthodox transaction” doctrine and by resolving contested matters at the summary-judgment stage.

## Decision

- The Ninth Circuit reversed the summary judgment for Mesa and rejected the view that the exchange was exempt as an “unorthodox transaction.”
- The court held that exchanging common stock for negotiable, nonconvertible debt securities in response to a self-tender offer is a “sale” for § 16(b) purposes.
- The court distinguished situations where § 16(b) may not apply because the insider’s participation is essentially compelled and the risk of speculative abuse is minimal.
- The case was remanded for further proceedings, including determination of any recoverable short-swing profits.

## Legal Principles

- Section 16(b) is a strict, prophylactic remedy aimed at preventing insiders from realizing short-swing trading profits; liability turns on objective purchase-and-sale matching within six months, not intent.
- For § 16(b), a “sale” can include an exchange of securities when the insider disposes of equity and receives a distinct, marketable instrument of value, such as negotiable, nonconvertible debt.
- The “unorthodox transaction” doctrine is narrow; it generally applies only where the transaction is effectively involuntary and structured so that the possibility of insider speculative abuse is negligible.
- A negotiated, strategic settlement exchange in a takeover-defense context does not, by itself, remove a transaction from § 16(b)’s coverage.

## Conclusion

The Ninth Circuit held that Mesa’s settlement-based exchange of Unocal common stock for negotiable, nonconvertible Unocal debt securities constituted a § 16(b) “sale,” reversed summary judgment for Mesa, and remanded for further proceedings on potential disgorgement of short-swing profits.


Colan v. Mesa Petroleum Co., 941 F.2d 933 (9th Cir. 1991)