Gollust v. Mendell

Supreme Court of the United States
501 U.S. 115, 1991 U.S. LEXIS 3321, 115 L. Ed. 2d 109 (1991)

ELI5:

Rule of Law:

A plaintiff who properly institutes an action under § 16(b) of the Securities Exchange Act of 1934 does not lose standing to prosecute the action if, during the litigation, their stock in the issuer is converted into stock of the issuer's new parent corporation through a merger, provided the plaintiff maintains a continuing financial interest in the outcome of the litigation.

Facts:

Ira L. Mendell owned common stock in Viacom International, Inc. (International).
A group of petitioners, including Gollust, operated as a single beneficial owner of more than ten percent of International's common stock.
Between July and October 1986, the petitioners engaged in short-swing trading of International's stock, realizing profits of approximately $11 million.
Mendell made a demand upon International to sue the petitioners to recover these profits, but the corporation failed to do so within the required 60 days.
After Mendell filed his lawsuit, International was acquired by a shell corporation and became a wholly-owned subsidiary of a new parent company, Viacom, Inc.
As a result of this merger, Mendell's shares in International were exchanged for a combination of cash and stock in the new parent, Viacom, Inc.

Procedural Posture:

Ira L. Mendell sued Gollust and others under § 16(b) in the U.S. District Court for the Southern District of New York.
After a merger involving the issuer company, the petitioners moved for summary judgment, arguing Mendell had lost standing.
The District Court granted summary judgment for the petitioners, holding that Mendell lost standing because he no longer owned securities of the original issuer.
Mendell, as the appellant, appealed to the U.S. Court of Appeals for the Second Circuit.
A divided panel of the Court of Appeals reversed the District Court's decision, holding that Mendell retained standing to pursue the claim.
The petitioners, Gollust et al., successfully petitioned the U.S. Supreme Court for a writ of certiorari.

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Issue:

Does a plaintiff who properly institutes a lawsuit under § 16(b) of the Securities Exchange Act of 1934 lose standing to continue the action if, due to a merger, their stock in the issuer is converted into stock of the issuer's new parent company?

Opinions:

Majority - Justice Souter

No. A plaintiff who owned a security of the issuer at the time of instituting a § 16(b) action may continue to prosecute the action after a merger so long as the plaintiff maintains a continuing financial interest in the outcome. The text of § 16(b) requires only that the plaintiff be an 'owner of any security of the issuer' at the time the suit is 'instituted.' While the statute does not contain an explicit continuous ownership requirement, both Article III of the Constitution and the statutory purpose of incentivizing enforcement require the plaintiff to maintain a 'personal stake' in the outcome throughout the litigation. In this case, Mendell's ownership of stock in International's new parent, Viacom, whose sole asset is International, provides a sufficient indirect financial interest. Any recovery by International would increase its value, thereby increasing the value of its parent, Viacom, and consequently the value of Mendell's stock. This attenuated interest is no less sufficient than that of a bondholder, who also has standing, and it satisfies the requirement for continued prosecution of the action.

Analysis:

This decision clarifies the standing requirements for § 16(b) actions in the context of corporate mergers, preventing defendants from using corporate restructuring as a tool to moot shareholder suits. The Court establishes a flexible standard that looks beyond formal ownership of the 'issuer's' security to the economic reality of the plaintiff's stake. By requiring a 'continuing financial interest' rather than continuous ownership of the original stock, the ruling preserves the private enforcement mechanism central to § 16(b) while adhering to the constitutional 'case-or-controversy' requirement of Article III. This precedent ensures that corporate insiders cannot easily escape liability for short-swing trading through strategic mergers.

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