## Facts

- Owners of a closely held Washington lumber company offered for sale all outstanding common stock through brokers.
- After a fire damaged the sawmill, prospective buyers were told the mill would be rebuilt and modernized and received representations about productivity, contracts, and profits.
- Purchasers investigated through an audit and mill inspection and negotiated an agreement to buy 100% of the company’s common stock; the seller agreed to remain as a consultant.
- The purchaser assigned the stock to an acquisition corporation, which later merged with the lumber company to form Landreth Timber Co.; the purchasers held most equity and other investors held a minority interest.
- The business performed poorly, rebuilding costs increased, equipment proved incompatible, and the mill was sold at a loss; the company entered receivership.
- The buyer sued the sellers seeking rescission and damages, alleging (1) failure to register the stock sale under the Securities Act of 1933 and (2) material misrepresentations and omissions under the Securities Exchange Act of 1934.

## Issues

1. Whether the sale of 100% of a closely held corporation’s stock to buyers who obtain control is a sale of a “security” covered by the federal securities laws.
2. Whether courts may exclude such transactions from the 1933 and 1934 Acts under a “sale of business” doctrine requiring an economic-substance inquiry into control and investor passivity.

## Decision

- The Supreme Court reversed and remanded.
- The Court held that the instruments sold were “stock” and therefore “securities” within the statutory definitions when they bear the usual characteristics of common stock.
- The Court rejected the “sale of business” doctrine as a basis to remove traditional stock transactions from federal securities-law coverage.
- The Court declined to apply the Howey “investment contract” test to determine whether traditional common stock is a security.

## Legal Principles

- An instrument labeled “stock” that possesses the traditional attributes of common stock is a “security” under the Securities Act of 1933 and the Securities Exchange Act of 1934.
- Traditional common-stock attributes include dividend rights tied to profits, negotiability, pledgeability, voting rights proportional to shares, and capacity to appreciate in value.
- The Howey test governs whether a nontraditional instrument is an “investment contract”; it is not the governing test for conventional stock.
- Federal securities-law coverage does not turn on whether the buyer acquires control, purchases 100% of the shares, or intends to actively manage the business.
- The “sale of business” doctrine is inconsistent with the statutory text and would inject uncertainty by requiring case-by-case reclassification of stock sales.

## Conclusion

The Court held that the sale of all shares of a company’s traditional common stock remains a securities transaction subject to the federal securities laws, even when the buyers obtain managerial control, and it rejected the sale-of-business doctrine as a limitation on the Acts’ coverage.


Landreth Timber Co. v. Landreth, 471 U.S. 681 (1985)