Foremost-McKesson, Inc. v. Provident Sec. Company

Supreme Court of the United States · 1976 · Corporations

423 U.S. 232 (1976)

Updated August 22, 2026

CorporationsSecurities RegulationInsider TradingSection 16(b)beneficial owner10% ownershort-swing profitspurchase-sale sequence

Facts

Provident agreed to sell assets to Foremost and received Foremost convertible subordinated debentures as part of the consideration. As of October 20, Provident's debenture holdings were immediately convertible into more than 10% of Foremost's outstanding common stock, making Provident a beneficial owner within § 16. Provident then entered into an underwriting agreement to sell a $25 million debenture and, before the closing, distributed other debentures to its stockholders so that its remaining holdings were convertible into less than 10% of Foremost stock. Because Provident had acquired and disposed of the securities within six months, it sought a declaration that § 16(b) did not apply.

Issue

When a person purchases securities and that very purchase causes his holdings to exceed the 10% threshold, is he a beneficial owner "at the time of the purchase" within the meaning of § 16(b)'s exemptive provision? More specifically, does § 16(b) require disgorgement in a purchase-sale sequence where the trader was not a beneficial owner before making the purchase that created beneficial-owner status?

Rule

Under § 16(b), in a purchase-sale sequence, a beneficial owner must account for short-swing profits only if he was a beneficial owner before the purchase. A person is not a beneficial owner "at the time of the purchase" when the purchase itself is what first makes him a more-than-10% beneficial owner.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Seattle, Nora Benton owned 9.4% of the registered common stock of Cascadia Robotics, a public issuer. On February 1, she bought another 1.2%, which pushed her holdings above 10%, and on April 15 she sold the shares she had just bought at a profit.

Is Nora liable to the issuer under § 16(b) for the April 15 profit?

Explanation. The majority held that, in a purchase-sale sequence, § 16(b) reaches a beneficial owner only if beneficial-owner status existed before the purchase. A purchase that itself creates more-than-10% ownership does not make the buyer a beneficial owner 'at the time of the purchase' for this purpose. Because Nora became a 10% owner only by making the February 1 purchase, the exemptive provision bars liability for this purchase-sale sequence.