## Facts

- Occidental Petroleum Corporation sought to acquire control of Kern County Land Company (“Old Kern”) and, through a tender offer, acquired more than 10% of Old Kern’s outstanding shares, making Occidental a statutory insider under § 16(b) of the Securities Exchange Act of 1934.
- Old Kern resisted the takeover by arranging a defensive merger with Tenneco, Inc., under which Old Kern shareholders would receive Tenneco common stock on a share-for-share basis.
- Occidental opposed the merger and did not initiate or control it; once approved, the merger required all Old Kern shareholders, including Occidental, to exchange Old Kern shares for Tenneco shares.
- Because Occidental did not want to remain a minority shareholder in Tenneco, and Tenneco did not want Occidental as a minority shareholder, the companies negotiated a binding option agreement.
- The option obligated Occidental to sell to Tenneco all Tenneco shares Occidental would receive in the merger, with exercise set for a date more than six months after Occidental’s tender offer expired.
- After the merger closed, Occidental’s Old Kern shares were converted into Tenneco shares, and Occidental sold those Tenneco shares to Tenneco under the option, realizing approximately $19 million in profit.
- New Kern (the successor entity created in the merger structure) sued to recover the profit as short-swing profits under § 16(b).

## Issues

1. Whether the merger exchange of Old Kern shares for Tenneco shares constituted a “sale” by a statutory insider within the meaning of § 16(b).
2. Whether Occidental’s binding option arrangement (and subsequent disposition of the Tenneco shares received in the merger) constituted a “sale” triggering § 16(b) disgorgement.
3. Whether § 16(b) applies mechanically to any matching purchase-and-sale sequence, or instead depends on whether the transaction type presents a realistic opportunity for insider speculative abuse.

## Decision

- The Supreme Court affirmed the judgment for Occidental.
- The Court held that the merger-related exchange was not a § 16(b) “sale” because, from Occidental’s standpoint, it was effectively involuntary and did not present a practical chance for speculative abuse tied to insider status.
- The Court held that the option agreement was not a § 16(b) “sale” because it was not a vehicle for speculative abuse and did not rest on an informational advantage regarding Tenneco.
- Occidental’s profits were not recoverable by the issuer under § 16(b).

## Legal Principles

- Section 16(b) is a prophylactic rule aimed at preventing insiders from using nonpublic information to obtain short-swing profits; its coverage turns on whether the transaction is of a type susceptible to the speculative abuse the statute targets.
- Not every exchange or disposition that can be described in transactional form as a purchase and sale is treated as a § 16(b) “purchase” or “sale”; courts may exclude transactions that do not present a realistic opportunity for insider abuse.
- A stock-for-stock exchange compelled by a merger not engineered by the insider, and affecting all shareholders equally, may fall outside § 16(b) when it does not involve discretionary, insider-driven trading.
- An option to dispose of shares received in such a transaction is not necessarily a § 16(b) “sale” where the arrangement reflects non-speculative, mutual business aims and the insider lacks an informational advantage about the counterparty’s stock.

## Conclusion

The Court refused to apply § 16(b) to an involuntary merger exchange and a related option-based disposition where the transactions did not present the speculative abuse § 16(b) was designed to prevent, and therefore no disgorgement was required.


Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582 (1973)