Reliance Electric Company v. Emerson Electric Company

Supreme Court of the United States · 1972 · Corporations

404 U.S. 418 (1972)

Updated August 22, 2026

CorporationsSecurities RegulationSection 16(b)Insider TradingSecurities Exchange Act of 1934short-swing profits10% beneficial ownermechanical rule

Facts

Emerson acquired 13.2% of Dodge Manufacturing Co.'s outstanding common stock on June 16, 1967, at $63 per share during an unsuccessful takeover attempt. After Dodge shareholders approved a merger with Reliance, Emerson decided to dispose of enough shares to reduce its holdings below 10% and thereby avoid § 16(b) liability on the remainder. On August 28, Emerson sold 37,000 shares at $68 per share, reducing its holdings to 9.96%. On September 11, still within six months of purchase, Emerson sold its remaining Dodge shares to Dodge at $69 per share.

Issue

Under § 16(b), may a corporation recover profits from a second sale made within six months of purchase when the seller owned more than 10% at purchase, sold enough shares in a first sale to reduce its holdings below 10%, and then sold the remainder? More specifically, does a prearranged two-step disposition cause the second sale to be treated as occurring while the seller was still a 10% owner?

Rule

Section 16(b) applies to a 10% beneficial owner only when that owner was a more-than-10% owner both at the time of purchase and at the time of sale. The statute establishes an objective, mechanical rule; liability cannot be imposed merely because the investor structured transactions with the intent to avoid § 16(b), and independent sales are not aggregated into one sale based on proof of a pre-existing plan.

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

In Phoenix, Nora Bennett bought 12.4% of the outstanding common stock of Sonoran Circuit Systems, a registered issuer. Three months later, she sold enough shares in one market transaction to reduce her stake to 9.7%, and two weeks after that she sold all remaining shares at a profit.

May Sonoran Circuit Systems recover Nora's profit on the second sale under § 16(b)?

Explanation. Section 16(b) applies to a more-than-10% beneficial owner only if the person was a more-than-10% owner both at the time of purchase and at the time of sale. Once Nora's first sale reduced her holdings below 10%, the later sale falls outside the statute as applied to 10% owners, even though it occurred within six months and produced profit.