Landreth Timber Co. v. Landreth

Supreme Court of the United States · 1985 · Corporations

471 U.S. 681 (1985)

Updated August 1, 2026

Corporationssale of business doctrinefederal securities lawsstock as securitystocksecuritysale of businessForman

Facts

Respondents owned all of the outstanding stock of a lumber business and offered that stock for sale through brokers. After the sawmill was damaged by fire, the stock continued to be offered, and potential purchasers were told the mill would be rebuilt and modernized. Samuel Dennis negotiated to buy all of the company's common stock, assigned it to B & D Co., and after a merger petitioner Landreth Timber Co. resulted; Dennis and Bolten then held most of petitioner's equity. After the business performed poorly and was sold at a loss, petitioner sued alleging failure to register the stock and material misrepresentations in violation of the federal securities laws.

Issue

Whether the sale of all of the stock of a company is a securities transaction subject to the antifraud provisions of the federal securities laws. More specifically, the question was whether traditional stock ceases to be a "security" when 100% of the stock of a closely held corporation is sold as part of a business acquisition.

Rule

An instrument called stock that possesses the usual characteristics of common stock is a "security" within the meaning of the 1933 and 1934 Acts. The Howey economic reality test is designed to determine whether an instrument is an "investment contract," not whether traditional stock that plainly fits the statutory definition is a security, and the sale of business doctrine does not exclude such stock from the Acts' coverage.

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

In Portland, Oregon, Nora Kim agreed to buy 100% of the common shares of Cascade Ridge Components, a closely held manufacturer, from its three founders. The shares were labeled common stock and carried dividend rights tied to profits, proportional voting rights, negotiability, pledgeability, and the potential to appreciate in value. After closing, Nora alleged the founders had misstated the company’s largest customer contracts and sued under the federal antifraud provisions.

Are the shares most likely covered by the federal securities laws?

Explanation. The majority held that an instrument called stock that bears the usual characteristics of common stock falls within the statutory definition of a security. The Court rejected the sale-of-business doctrine for traditional stock, so the fact that 100% of the company was sold and control transferred does not remove the transaction from federal securities coverage.