Note:
Hal Sanders, Securities Regulation—Section 16(b)—Ten-Percent Beneficial Ownership Must Exist Prior to Both a Purchase and Sale for Liability to Attach: Provident Securities Co. v. Foremost-McKesson, Inc., 506 F.2d 601 (9th Cir. 1974), cert. Granted, 95 S.Ct. 1117 (1975), 53 Texas L. Rev. 857 (1975).
 

Abstract:
Seeking to liquidate corporate assets to facilitate dissolution, Provident Securities Company reached an agreement with Foremost-McKesson, whereby Provident received $54,000,000 consisting of $4,250,000 in cash and the remainder in Foremost, six-percent, convertible subordinated debentures. Since the debentures were immediately convertible into common stock in an amount greater than ten percent of Foremost’s outstanding shares, Provident achieved “beneficial owner” status under section 16 of the Securities Exchange Act of 1934. Within two weeks, Provident sold $25,000,000 worth of the debentures to an underwriting group for $25,366,666. Shortly thereafter, Provident sought a declaratory judgment determining its nonliability to Foremost for short-swing profits under section 16(b). Foremost counter-claimed seeking recovery of the profit derived from a short-swing transaction by an insider. Relying primarily on the equities of the situation, the district court found section 16(b) inapplicable since the transaction presented no potential for abuse of inside information through speculation: Provident was an insider for only a short period of time, and Foremost did not claim actual use of inside information. Affirmed. In order for section 16(b) liability to attach, the insider must own more than ten percent of a class of securities prior to both the purchase and the sale. Because Provident met the ownership requirement only at the time of the sale to the underwriters and not prior to the time of the original purchase from Foremost, no liability could exist under section 16(b).