## Facts

- Provident Securities Co., a personal holding company planning liquidation, sold assets to Foremost-McKesson, Inc.
- As part of the consideration, Foremost-McKesson issued Provident convertible debentures.
- If converted, the debentures would make Provident a beneficial owner of more than 10% of Foremost-McKesson’s outstanding common stock.
- Within six months after receiving the debentures, Provident sold one debenture to underwriters for more than face value, realizing a profit.
- Provident distributed cash and debentures to its shareholders and then dissolved.
- Foremost-McKesson claimed the profit was recoverable by the issuer under § 16(b) of the Securities Exchange Act of 1934 as short-swing profit by a more-than-10% beneficial owner.
- Provident sought a declaratory judgment that it was not liable under § 16(b).

## Issues

1. In a purchase-sale sequence, does § 16(b) impose liability when the transaction that constitutes the “purchase” is also the transaction that first makes the trader a more-than-10% beneficial owner?
2. Does § 16(b)’s exemption for transactions where the beneficial owner “was not such both at the time of the purchase and sale” require 10% status to exist before the purchase in a purchase-sale sequence?

## Decision

- The Supreme Court affirmed the judgment for Provident.
- The Court held that in a purchase-sale sequence, § 16(b) applies only if the defendant was a more-than-10% beneficial owner before the purchase.
- Because Provident became a more-than-10% beneficial owner only by acquiring the debentures, the subsequent sale within six months was exempt from § 16(b) liability.

## Legal Principles

- Section 16(b) authorizes issuer recovery of short-swing profits from officers, directors, and more-than-10% beneficial owners, but contains an exemption when the person was not a beneficial owner both at the time of the purchase and the sale.
- In a purchase-sale sequence, “at the time of the purchase” means immediately before the purchase; the trader must already have 10% beneficial-owner status prior to the purchase to be liable.
- The exemption reflects Congress’s focus on deterring short-swing trading based on information presumptively available only after insider status exists; strict liability under § 16(b) should not be extended beyond the statute’s text and clear legislative intent.

## Conclusion

The Court construed § 16(b) to exclude short-swing liability where the defendant’s purchase itself first created more-than-10% beneficial-owner status, holding that liability requires 10% status to exist before the purchase in a purchase-sale sequence.


Foremost-McKesson, Inc. v. Provident Sec. Co., 423 U.S. 232 (1976)