Landreth Timber Co. v. Landreth
471 U.S. 681, 85 L. Ed. 2d 692, 1985 U.S. LEXIS 20 (1985)
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Rule of Law:
When an instrument is labeled 'stock' and possesses all the traditional characteristics of stock, it is a 'security' subject to the federal securities laws, regardless of the percentage of shares sold or whether the transaction results in a transfer of control over the business.
Facts:
- Respondents Ivan K. Landreth and his sons owned all the outstanding stock of a lumber business.
- The Landreth family offered their stock for sale through brokers.
- While the stock was for sale, the company's sawmill was heavily damaged by a fire.
- The Landreths continued to offer the stock, advising potential purchasers of the damage but representing that the mill would be completely rebuilt and modernized.
- Based on these representations, Samuel Dennis negotiated a stock purchase agreement to buy all the common stock in the lumber company.
- Dennis assigned the stock to Landreth Timber Co., a new corporation formed for the acquisition.
- After the purchase, the mill's performance did not meet expectations, rebuilding costs exceeded estimates, and new equipment was incompatible with existing machinery.
- The new company, Landreth Timber Co., eventually sold the mill at a loss and went into receivership.
Procedural Posture:
- Landreth Timber Co. (petitioner) filed suit against Ivan K. Landreth and his sons (respondents) in federal District Court.
- Respondents moved for summary judgment, arguing the transaction was not covered by the securities laws under the 'sale of business' doctrine.
- The District Court, a court of first instance, granted summary judgment for respondents, dismissing the complaint for want of federal jurisdiction.
- Petitioner appealed to the United States Court of Appeals for the Ninth Circuit, an intermediate appellate court.
- The Court of Appeals affirmed the District Court's ruling.
- The United States Supreme Court, the highest court, granted certiorari to resolve a split among the circuit courts.
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Issue:
Does the sale of 100% of a company's stock constitute a 'securities transaction' subject to the antifraud provisions of the federal securities laws, even when the transaction results in the purchaser gaining control of the business?
Opinions:
Majority - Justice Powell
Yes. The sale of all of the stock of a company is a securities transaction subject to the antifraud provisions of the federal securities laws. The plain language of the Securities Acts defines a 'security' to include 'stock.' When an instrument is both called 'stock' and possesses the significant characteristics typically associated with stock—such as voting rights, negotiability, and the potential for dividends and appreciation—it falls under the Acts' coverage. There is no need to apply the 'economic reality' test from SEC v. W. J. Howey Co., which was designed to determine if an unusual instrument is an 'investment contract,' not to re-evaluate instruments explicitly named in the statute. Rejecting the 'sale of business' doctrine provides a clear, predictable rule and avoids the uncertainty of determining whether 'control' has passed in every transaction.
Dissenting - Justice Stevens
No. The antifraud provisions of the federal securities laws should not apply to the privately negotiated sale of a controlling interest in a business. Congress's primary intent was to protect passive investors in public markets, not sophisticated parties in private transactions who can negotiate contractual warranties and access inside information. The definition of a 'security' is prefaced with the phrase 'unless the context otherwise requires,' which should apply here where the economic reality is the sale of a business, not an investment. The form of the transaction—stock sale versus asset sale—is often dictated by tax or liability concerns and should not determine the applicability of federal law.
Analysis:
This decision definitively rejects the 'sale of business' doctrine, which had been adopted by several circuit courts. By creating a bright-line rule, the Court provided clarity and predictability: if an instrument has the name and traditional characteristics of stock, it is a security. This holding expands the reach of federal securities laws to cover the sale of entire businesses when structured as stock transfers, thereby federalizing fraud claims that might otherwise be handled under state law. The decision simplifies the analysis for traditional stock but explicitly leaves open how other enumerated instruments, such as 'notes,' should be treated, distinguishing stock as a 'paradigm of a security' deserving of its own clear-cut analysis.
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