Missouri Law Review Missouri Law Review
Volume 43
Issue 1
Winter 1978
Article 16
Winter 1978
Corporations--The Exercise of Warrants Constitutes a Purchase Corporations--The Exercise of Warrants Constitutes a Purchase
under Section 16(b)--Morales v. Mapco, Inc. under Section 16(b)--Morales v. Mapco, Inc.
Edward A. Chod
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Part of the Law Commons
Recommended Citation Recommended Citation
Edward A. Chod,
Corporations--The Exercise of Warrants Constitutes a Purchase under Section 16(b)--
Morales v. Mapco, Inc.
, 43 MO. L. REV. (1978)
Available at: https://scholarship.law.missouri.edu/mlr/vol43/iss1/16
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RECENT
CASES
CORPORATIONS-THE
EXERCISE
OF
WARRANTS
CONSTITUTES
A
PURCHASE
UNDER
SECTION
16(b)
Morales v.
Mapco,
Inc.
1
In
1964
Mapco,
Inc.
issued
warrants
each
of
which
was
to
be
con-
verted
automatically
into
one-half
share
of
Mapco
common
stock
on
April
1,
1972.
Alternatively,
one
warrant
plus
$9.00
could
be
exchanged
for
one
full
share
of
Mapco stock
prior
to
the expiration
date.
2
The
warrants
had
an
anti-dilution
clause
which
protected
the
warrant
holders
against
the
issuance
of
Mapco
common
stock
at
a
consideration
of
less
than
$18.00
per
share.
Ross,
the
financial
vice-president
of
Mapco,
acquired
3,616
warrants
and
held
them
for
more
than
six
months.
Ross
exercised
his
early
con-
version
right,
receiving
900
shares
of
common
stock
for
900
warrants,
3
and
sold
the
stock
through
the
New
York
Stock
Exchange.
All
necessary
forms
regarding
the transactions
were filed
with
the
Securities
Exchange
Commission.
4
A
shareholder's
derivative
action
was
brought
against
Ross
under
section
16(b)
of
the
Securities
Exchange
Act
of
1934-
to
1.
[1976-1977
Transfer
Binder]
FED.
SEC.
L.
REP.
(CCH)
95,704,
at
90,451
(10th
Cir.
1976).
2.
Mapco
was
listed
on the
New
York
Stock
Exchange;
warrants
were
bought
and
sold
in
the over-the-counter
market.
On February
28,
the date
of
the
first
transaction
in
question,
Mapco
common
closed
at
$41.00,
and
on
March
24
at
$43.25.
The
stock
reached
a
high
of
$52.25
on
June
20,
1972.
3.
Through
his
broker,
Ross
disposed
of
200
warrants
on
February
28,
1972;
100
warrants
on
February
29,
1972;
200
warrants on
March
6,
1972;
and
400
warrants
on
March
9, 1972.
Additionally,
in
March
Ross
sold
200
warrants
to a
third
person
and
by
the
payment
of
$9.00
per
warrant,
secured
2,516
shares
of
Mapco
common
stock
himself.
4.
Ross
filed
a
Form
4,
"Statement
of
Changes
in
Beneficial
Ownership
of
Securities,"
for
the
months
of
February
and
March,
1972.
These
forms
listed
the
security
as:
"Warrants:
Exercised
and
Sold ,as
Common,"
gave
the
transaction
date,
and
stated
the
"Amount
Sold
or
otherwise
disposed
of"
as
a
total
of
1,100.
5.
15
U.S.C.
§
78p(b)
(1970)
provides
in
part:
For
the
purpose
of
preventing
the
unfair
use
of
information
which
may
have
been obtained
by
such
beneficial
owner,
director,
or
officer
by
reason
of
his
relationship
to
the
issuer,
any
profit
realized
by
him from
any
purchase
and
sale,
or
any
sale
any
purchase,
of
any
equity
security
of
such
issuer
(other
than
an
exempted
security)
within
any
period
of
less
than
six
months...
shall
inure
to
and
be
recoverable
by
the
issuer, irrespective
of
any
intention
on
the
part
of
such
benefical
owner,
director,
or
officer
in
entering
into
such
transaction
....
Suit
to
recover
such
profit
may be
instituted
at
law
or
in
equity
in
any
court
of
competenit
jurisdiction
by
the issuer,
or
by
the
owner
of
any
security
of
the
issuer
in
the name
and
in behalf
of
the issuer
if
the issuer
shall
fail
or
refuse
to
bring
such
suit
within
sixty
days
after
request
or
shall
fail
diligently
to
prosecute
the
same
thereafter
....
19781
125
1
Chod: Chod: Corporations--The Exercise of Warrants Constitutes
Published by University of Missouri School of Law Scholarship Repository, 1978
MISSOURI
LAW
REVIEW
recover
any
profits
made
by
Ross
on
the
sale
of
shares.
The
district
court granted
summary
judgment
for
the
defendant
Ross,
but
the
Tenth
Circuit
reversed
holding
that
a
cause
of
action
had
been
stated
against
Ross
under
section
16(b).
Prior
to
the
passage
of
the
Securities
Exchange
Act
of
1934,
the
common
law
provided
few
remedies
6
for
the
abuses
7
arising
from
in-
sider
trading.
The
majority
of
courts
held
that
officers,
directors,
and
substantial
shareholders
owed
no fiduciary
duty
to
corporate
sharehold-
ers.
Even
if
a
fiduciary
duty did
exist,
insider
liability
whs
difficult
to
establish.
The
common
law
remedies
proved
totally
inadequate
to
deter
abusive
insider
trading.
To
alleviate
these
inadequacies,
Congress
passed
section
16(b)
of
the
1934
Act
to
prevent
"the
unfair
use
of
information"
by
an
insider
ob-
tained
"by
reason
of
his
relationship
to
the
issuer.",
The
section
pro-
vides
that
an
insider
who
realizes
a
profit
on
the
sale
and
purchase,
or
the
purchase
and
sale,
of
the corporation's
securities
within
a
six
month
period
can
be
forced
to
surrender
those
profits
through
an
action
brought
by
the
corporation
on
its
own
behalf
or
by
a
shareholder
in
a
derivative
suit.
9
In
this
manner,
Congress
sought
to
curb
the
evils
of
insider
trading
by
restricting
the
profits
realized
by
insiders
in
transac-
tions
in
which
the
possibility
of
abuse
was
believed
to be
intolerably
great.
In
applying
section
16(b)
the
courts
have
fluctuated
between
two
tests
for
insider
liability:
an
objective
test,
and
a
pragmatic,
subjective
test.
Under
the
objective
approach,
the
only
question
is
whether
the
transaction
and
the
individual
involved
come
within
the
literal
statutory
requirements
of
section
16(b).
1
0
Liability
attaches
as
soon
as
it
is
shown
6.
Remedies
were
limited
under
three
theories
of.
relief.
Under
the
majority
view,
officers
and
directors
owed
no
fiduciary
duty
to
shareholders,
and
insiders
were
liable
only
if
they
perpetrated
a
fraud.
See,
e.g.,
Board
of
Comm'rs
v.
Reynolds,
44
Ind.
509
(1873);
Voellmeck
v.
Harding,
166
Wash.
93,
6
P.2d
373
(1931).
A
minority
of
jurisdictions
held
the corporate
insider
to a
strict
fiduciary
duty
of
disclosure
to
shareholders
in
connection
with
the
sale
of
shares.
See,
e.g.,
Steinfield
v.
Nielsen,
15
Ariz.
424,
139
P.
879
(1914);
Oliver
v.
Oliver,
118
Ga.
362,
45
S.E.
232
(1903).
Several
jurisdictions
followed
the
"special
facts"
doctrine
which
stated
that
officers
and
directors
did
not
owe
a
fiduciary
duty
to
share-
holders
unless
special
facts
made
it inequitable
for
the insider
to
take
advantage
of
the shareholders.
See,
e.g.,
Strong
v.
Repide,
213
U.S.
419
(1909).
See
generally
Comment,
Section
16(b):
Insider
Trading,
1974
WASH.
U.L.Q.
872.
7.
For
a
list
of
abuses
reported
to
Congress,
see
H.R.
REP.
Nos.
1383,
1838,
73d
Cong.,
2d
Sess.
(1934);
S.
REP.
Nos.
792,
1455,
73d
Cong.,
2d
Sess.
(1934).
8. 15
U.S.C.
§
78p(b)
(1970).
9.
Id.
See
also
Kern
County
Land
Co.
v.
Occidental
Petroleum
Corp.,
411
U.S.
582,
595
(1972).
10.
See
generally
Lowenfels,
Section
16(b):
A
New
Trend
in
Regulating
Insider
Trading,
54
CORNELL
L.
REv.
45
(1968);
Wentz,
Refining
a
Crude
Rule:
The
Pragma-
tic
Approach
To Section
16(b)
of
the
Securities
Exchange
Act
of
1934,
70
Nw.
U.L.
Rxv.
221
(1975).
[Vol.
43
2
Missouri Law Review, Vol. 43, Iss. 1 [1978], Art. 16
https://scholarship.law.missouri.edu/mlr/vol43/iss1/16
RECENT
CASES
that
a statutory
insider
has
purchased and
sold
the
securities
in
question
for
a
profit
within
a
six
month
period.
Whether
the
insider
actually
used
inside
information
or
whether the
transaction
possibly
could
lend
itself
to
the
type
of
speculative
abuse
that
the
statute
was
designed
to
prevent
are
irrelevant
questions.
The
majority
of
section
16(b)
decisions
between
1934
and
1964
re-
garded
the
objective
approach
as
vital
to
the
protection
of
the
investing
public
against
insider
abuses.
In
Smolowe
v.
Delendo
Corp."
the
Second
Circuit rejected
the
contention
that
the
statute's
preamble
required
the
court
to
find
actual use
of
inside
information
before
liability
attached.
Noting
that
virtually
any
transaction
within
the
definitional
limits
of
sec-
tion
16(b)
will
result
in
liability,
the court
stated
that
"[t]he
statute
is
broadly
remedial
....
We
must suppose
that
the
statute
was
intended
to
....
establish
a
standard
so
high
as
to
prevent
any
conflict
between
the
selfish
interest
of
a
fiduciary officer
...
and
the
faithful
performance
of
his
duty."
12
Similarly,
in
Park
&
Tilford,
Inc.
v.
Schulte1
3
the
Second
Circuit
specifically
adopted
the
objective
approach
and
concluded
that
once
the
statutory
requirements
of
16(b)
are
met,
liability
will
attach
whether
or
not
the
transaction
was
of
the
type
Congress
specifically
in-
tended
to
proscribe.
Dissatisfied
with
the harsh
result often
produced
by
the
literal
in-
terpretation
of
section
16(b),
courts
increasingly
have
adopted
a
pragma-
tic
approach. This
subjective
analysis
is
a
two-step process.
As
in
the
objective
approach,
the court
first
will
determine
whether
the
transaction
and
the
individual
involved come
within
a
broad
reading
of
the statute.
If
so,
the
court
will
examine
the
particular
circumstances
to
determine
whether that
situation
possibly
could
have
given
rise
to
an
abuse
of
in-
side
information.
Liability
will
ensue
if
the
possibility
of
abuse
existed.
14
The
pragmatic
approach
in section
16(b)
analysis
did
not
actually
emerge until
1965
in
Blau
v.
Max
Factor
&
Co.
15
The
Ninth
Circuit
looked
beyond
the
literal
requirements
of
the
statute
to
inquire
whether
the
transaction
under
scrutiny
offered
the
insider
the
opportunity
to
use
in-
side
information
in
short-term
speculation.1
6
In
that
case,
insiders
con-
verted
common
stock
into
"class
A"
stock
which
they
subsequently
sold
on
the
market.
The
court
refused
to
hold
that
such
an
exchange
was a
purchase
within
the meaning
of
section
16(b)
because
"the
making
of
the
exchange
...
[was]
simply
irrelevant
to
the
use
of
insider
information
in
11.
136
F.2d
231,
236
(2d Cir.),
cert.
denied,
320
U.S.
751
(1943)
(directors
and
officers
who
had
purchased and
sold
corporate
common
stock
within
a
six
month
period
were
held
liable
for
short-swing
profits).
12.
Id.
at
239.
13.
160
F.2d
984
(2d
Cir.),
cert.
denied,
332
U.S.
761
(1947).
14.
Lowenfels,
supra
note
10;
Wentz,
supra
note
10.
15.
342
F.2d
304
(9th
Cir.),
cert.
denied,
382
U.S.
892
(1965).
16.
Id. at
308.
19781
3
Chod: Chod: Corporations--The Exercise of Warrants Constitutes
Published by University of Missouri School of Law Scholarship Repository, 1978
MISSOURI
LAW
REVIEW
short-term
speculation-the
problem
with
which
Section
16(b)
is
con-
cerned."
1
7
Since
Max
Factor, courts
have
been
more
willing
to look
at
the
facts
surrounding
each
transaction
to
determine
whether
it
is
the
type
which
might
lend itself
to
the
abuse
of
inside
information.
1 8
The
Second
Cir-
cuit
has
changed
its
approach
since
Park
&
Tilford
and
has
begun
ex-
amining
each
case
on an ad
hoc
basis
to
determine
whether
the
trans-
action
comes
within
the
purpose
of
the
Act.
19
In
1966
the
Eighth
Cir-
cuit
in
Petteys
v.
Butler
2 0
specifically
refused
to
follow
the
objective
rule
prescribed
in
Park
&
Tilford.
Application
of
the
pragmatic
approach
is
a
growing
trend,
especially
where
"unorthodox
transactions" are
in-
volved.
2
1
Under
both the
objective
and
pragmatic approaches,
it
first
must
be
determined whether
the
transaction
is
within
the general definitional
boundaries
of
section
16(b).
22
The
transactions
in
Mapeo
were
clearly
within
the
statutory
definition.
The
defendant
Ross
was
an
"officer"
2
3
of
Mapco
who
realized
profits
from
what
was
arguably
the "purchase
and
sale"
24
of
an
equity
security
25
within
a
six
month
period.
26
It
is
irrele-
vant
whether
Ross
actually
used
inside
information
while
carrying
out
his
transactions
27
because
by
definition
liability
ensues "irrespective
of
any
intention
....
-28
17.
Id.
at
309.
18.
Kern
County
Land
Co.
v.
Occidental
Petroleum
Corp.,
411 U.S.
582
(1973);
Petteys
v.
Butler,
367
F.2d
528
(8th Cir.
1966),
cert.
denied,
385 U.S.
1006
(1967);
Blau
v.
Lamb,
363
F.2d
507
(2d
Cir.
1966),
cert.
denied,
385 U.S.
1002
(1967);
Ferraiolo
v.
Newman,
259
F.2d
342
(6th
Cir.
1958),
cert.
denied,
359
U.S.
927
(1959).
19.
Blau
v.
Lamb,
363
F.2d
507
(2d
Cir.
1966),
cert.
denied,
385
U.S.
1002
(1967).
20. 367
F.2d
528,
533
(8th Cir.
1966),
cert.
denied,
385 U.S.
1006
(1967).
21.
Unorthodox
transactions
involve
dealings
other
than
the normal
cash-
for-stock
exchange.
Examples
include
dealings
in
options,
warrants
and
rights,
merger
situations,
and
stock
conversions.
See
text
accompanying
notes
29, 34-50
infra.
22.
See
note
5
supra.
23.
'An
"officer"
is
a
"president,
vice-president,
...
and
any
other
person
who
performs
for
an
issuer
...
functions
corresponding
to those
performed
by
the
foregoing
officers."
17
C.F.R.
§
240.3b-2
(1977).
See
also
Colby
v.
Klune,
178
F.
2d
872,.
873
(2d
Cir.
1949)
(another
definition
of
"officer").
24.
See
notes
29-37
and
accompanying
text
infra.
25.
See
15
U.S.C.
§
78c(a)(11)
(1970).
Except
for
the
limitations
that
the
equity
security
must
be
"non-exempt"
and
be
registered
pursuant
to
§
12
of
the
1934
Act,
the
term
equity
security
has
been
defined
broadly
to
include
stock,
similar
securities
whether
or
not
issued
by
a
corporation,
securities convertible
into
stock
or
similar securities,
and
warrants
and
rights.
26.
[1976-1977
Transfer
Binder]
FED. SEC.
L.
REP.
(CCH)
at
90,
453-54.
27.
Since
the
pragmatic
approach
is
concerned
with
the
possibility
of
abuse
rather
than
actual
abuse,
the
intention
of
the
insider
also
is
irrelevant
under
the
pragmatic test.
28.
15
U.S.C.
§
78p(b)
(1970).
[Vol.
43
4
Missouri Law Review, Vol. 43, Iss. 1 [1978], Art. 16
https://scholarship.law.missouri.edu/mlr/vol43/iss1/16
RECENT
CASES
The
problem
in
Mapco
was
whether
the
conversion
of
warrants
into
Mapco
stock
was
a
"purchase"
within
section
16(b).
Although
traditional
cash-for-stock
transactions
clearly
are
encompassed
by
section
16(b),
the
question
of
the
inclusion
or
exclusion
of
certain
"unorthodox"
transac-
tions
such
as
options,
rights,
and
warrants
has
not
been
so
clear.
2 9
From
the
objective
test
viewpoint,
there
would
be
no
doubt that
a
"purchase
and
sale"
of
Mapco
common
stock
took
place.
Courts
gener-
ally
have
agreed
that
the
exercise
of
warrants
into
common
stock
is
a
"purchase"
within
the
statute
30
based
on
a
broad
definition
of
"pur-
chase"
which
includes
"any
contract
to
buy,
purchase,
or
otherwise
ac-
quire."
3
For
example,
the
court
in
Park
&
Tilford
held
that
the exer-
cise
of
an
option
to
convert
preferred
stock
into
common
stock,
followed
by
a
sale
of
the
common
stock
within
six
months,
was
a
"purchase
and
sale"
within
the
meaning
16(b).
32
In
Mapco
Ross
did
not
own
stock
by
holding
the
warrants.
However,
upon
the payment
of
$9.00
the
warrant
could
be
converted
into
one
share
of
stock.
This
was
a
purchase
within
the
meaning
of
the
statute.
The
transaction
thus
was
within
the
literal
boundaries
of
section
16(b) as
required
by
both
the
objective
test
and
the
first
step
of
the
pragmatic
analysis.
The
pragmatic
test
requires
the
further
finding
that
there
was
a
"possibility
of
speculative
abuse."
33
An
analysis
of
the
facts
will
support
the
court's
finding
that
Ross'
transac-
tions
were
purchases
subject
to speculative
abuse.
In
determining
whether
a
particular
unorthodox
transaction
lends
itself
to
speculative
abuse,
courts
have
taken into
consideration
such
fac-
tors
as
the
voluntary
nature
of
the
conversion
3 4
the
economic
indicia
of
the purchase,
3 5
whether
the
transaction
involves
economic
equivalents,
36
and
the
insider's
position
in
the
company
and
his
awareness
of
current
market
trends.
3
7
29.
For
a
discussion
on
unorthodox
transactions,
see
Wentz,
supra
note
10;
Comment,
supra
note
6,
at
884.
30.
Shaw
v.
Dreyfus,
172
F.2d
140,
142
(2d
Cir.),
cert.
denied,
337
U.S.
907
(1949);
Blau
v.
Hodgkinson,
100
F.
Supp.
361,
374
(S.D.N.Y.
1951).
31.
Park
&
Tilford,
Inc.
v.
Schulte,
160
F.2d
984,
987
(2d
Cir.),
cert.
denied,
332
U.S.
761
(1947);
15
U.S.C.
§
78c(a)(13)
(1970).
32.
160
F.2d
at
987.
33.
Kern
County
Land
Co.
v.
Occidental
Petroleum
Corp.,
411
U.S. 582,
595
(1973);
Reliance
Elec.
Co.
v.
Emerson
Elec.
Co.,
404
U.S.
418,
424
n.4
(1972);
Blau
v.
Lamb,
363
F.2d
507,
521-23
(2d
Cir.
1966),
cert.
denied,
385
U.S.
1002
(1967);
Ferraiolo
v.
Newman,
259
F.2d
342,
345
(6th
Cir.
1958),
cert.
denied,
359
U.S. 927
(1959).
34.
Ferraiolo
v.
Newman,
259
F.2d
342
(6th Cir.
1958), cert.
denied,
359
U.S.
927
(1959).
35.
Id.
36.
Id.;
Blau
v.
Lamb,
363
F.2d
507
(2d
Cir.
1966),
cert.
denied,
385
U.S.
1002
(1967).
37.
Kern
County
Land
Co.
v.
Occidental
Petroleum
Corp.,
411
U.S.
582
(1973).
1978]
5
Chod: Chod: Corporations--The Exercise of Warrants Constitutes
Published by University of Missouri School of Law Scholarship Repository, 1978
MISSOURI
LAW
REVIEW
An
example
of
an
unorthodox
transaction
in which
courts
have
utilized these
factors
to
determine
the
possibility
of
speculative
abuse
is
the
exchange
of
shares
following
a
merger.
3
Two
factors
appear
cru-
cial
in
this
situation:
the
insider's
ability
to
control
the
merger
and,
if
he
has
no
control
of
the
merger,
whether
he
has
access
to
inside
informa-
tion
concerning
the
merger.
39
If
an
insider
is
able
to
control
the
merger
and
dictate
its
terms,
courts
have
found
potential
for
speculative
abuse
and
the
insider
will
be
liable
for
any
short-swing
profits
made.
4
0
If
the
insider
has no
control
over
the
merger,
the
court
should
look to
the
question
of
access
to
information;
41
access
may
indicate
the
possibility
of
abuse.
Thus,
in
determining
whether
an
exchange
of
shares
upon
merger
constitutes
a
sale,
a
court
first
looks
to
control
and,
if
none
is
found,
then
examines
the
question
of
access
to
inside
information.
In
Ferraiolo
v. Newman,
4 2
carefully
considered
by
the
court
in
Mapco,
it
was
held
that
the
conversion
of
preferred
stock
into
common
stock
did
not
lend
itself
to
the
practices which
section
16(b)
was
enacted
to
pre-
vent.
The
court
considered
the
preferred
and
common
stocks
as
economic
equivalents
because
there
was
no
material
change
in
propor-
tional
equity
ownership
after
the
transaction.
43
The
court
pointed
out
that
no
money
had
been paid
for
the
conversion
of
preferred
into
com-
mon
stock.
The
court
further
noted
that
the
transaction
was
involuntary
for
all
practical
purposes
because
it
had
been forced
genuinely
and
in-
tentionally
by
a
call
for
redemption.
44
These
factors
led
the
court
to
conclude
that
the
transaction
was
not
subject
to speculative
abuse
and
had
none
of
the
"economic
indicia
of
a
purchase."
45
As
a
result,
liabil-
ity
did
not
attach.
It
therefore
appears
that
the
conversion
of
one
class
of
stock
for
another
may
not
be
within
the
scope
of
activity
that
section
16(b)
was
designed
to
prevent.
3-8.
Wentz,
supra
note
10,
at
235.
39.
Kern
County
Land
Co.
v.
Occidental
Petroleum
Corp.,
411
U.S.
582
(1973);
Newmark
v.
RKO
Gen.,
Inc.,
425
F.2d
348
(2d
Cir.),
cert.
denied,
400
U.S.
854
(1970).
40.
Newmark
v. RKO
Gen.,
Inc.,
425
F.2d
348
(2d
Cir.),
cert.
denied,
400
U.S.
854
(1970).
41.
See
Kern
County
Land
Co.
v.
Occidental
Petroleum
Corp.,
411
U.S.
582
(1973)
where
the
court
held
that
there
was
no
possibility
of
abuse in an
unsuc-
cessful
tender
offeror's
exchange
of
stock
following
a
defensive
merger.
If
the
insider
had
access
to
inside
information
concerning
the
merger
when
he
made
the purchase
to be
matched
with
the
exchange
of
shares
(sale)
upon
merger,
then
a
possibility
of
abuse
exists.
Clearly
the
insider,
knowing
that
merger
would
take
place
and
that
the
new
shares
would
be
worth
more
than
the
old,
could
abuse
his
position
by
purchasing before
the
merger
at
lower
prices
in
theexpecta-
tion
that
he
would
receive
something
more
valuable
upon
merger.
The
insider's
access
to
inside
information
concerning
the
merger
has
clearly
given
him
a
choice
which
can
be
turned
to
speculative
abuse.
42.
259
F.2d 342,
346
(6th
Cir.
1958),
cert.
denied,
359
U.S.
927
(1959).
43.
Id.
at
345-46.
44.
Id.
45.
Id.
[Vol.
43
6
Missouri Law Review, Vol. 43, Iss. 1 [1978], Art. 16
https://scholarship.law.missouri.edu/mlr/vol43/iss1/16
RECENT
CASES
Mapco
involved
a
different
"unorthodox
transaction"
from
those
al-
ready
mentioned.
This
transaction
was
the
conversion
of
warrants
into
common
stock
and
the subsequent
sale
thereof.
The
district
court,
citing
Ferraiolo,
held
that
the warrants
were
the
economic
equivalents
of
com-
mon stock
and
that
therefore
the
conversion
did
not
constitute
a
"purchase"
for
the
purposes
of
section
16(b).
46
The
court's
finding
was
due
in
part
to
the
fact
that
the
warrants
were
automatically
convertible
47
and
contained
an
anti-dilution
clause.
4
8
The
Tenth
Circuit
49
reversed,
concluding
that
the
warrants
and
the
Mapco
common
stock
were
not
economic
equivalents.
Ferraiolo
was
dis-
tinguished
on the
ground
that
the
preferred
stockholder
had
an
equity
ownership
and
his
subsequent
conversion
of preferred
into
common
stock
left
his
equitable
interest
basically
unchanged.
As
a
result,
the
pre-
ferred
and
common
stocks
were
held
to
be
economic
equivalents.
50
A
warrant,
on the
other
hand,
does
not
represent
a
present
equity
interest
in
a
corporation;
it
represents
nothing
more
than
a
right
to
acquire
such
an
interest
at
a
future
time.
51
Thus,
the
Mapco
warrant-holder
had
no
equity
ownership
until
the
warrant
was
exercised
or
terminated.
The
court
held
that
because
Ross
had
no
equity
ownership
before
the
exer-
cise
of
the
warrants
and
did
have
equity
ownership
after
the
exercise,
the
transaction
was
a
purchase
within
the
scope
of
section
16(b).
52
In
holding
that
the
transaction
was
outside
the
province
of
section
16(b),
the
district
court
noted
that
the
simultaneous
nature
of
the
exer-
cise
of
the
warrants
and
the
sale
of
the
common
stock
gave
no
opportun-
ity
for
abuse
by
Ross.
53
This
argument
is
weak
because
Ross
had
been
an
insider
prior
to
the
exercise
of
the
warrants
and
conseouentlv
w
s
in
a
position
to
gain
access
to
information
which,
when
publicly
released,
conceivably
could
cause
a
decline
in
the
market
price
of
the
stock.
54
In
such
a
case,
assuming
that
the
exercise
of
the warrants
was
classified
as
a
purchase
rather
than
as
a
conversion,
the
immediate
sale
of
the
common
stock
could
be
predicated
upon
the
type
of
speculative
abuse
at
which
the statute
is
directed.
Ross'
position
in
the
company
and
his
awareness
46.
[1974-1975
Transfer
Binder]
FED.
SEC.
L.
REP.
(CCH)
95,094,
at
97,875
(N.D.
Okla.
1975).
47.
Id.
The
court
found
that
since
the
warrants
were
automatically
converti-
ble
upon
expiration,
there
was
an
absence
of
voluntariness.
48.
Id.
49.
[1975-1976
Transfer
Binder]
FED.
SEC.
L.
REIp.
(CCH)
95,704,
at
90,451
(10th
Cir.
1976).
50.
Ferraiolo
v.
Newman,
259
F.2d
342,
345
(6th
Cir.
1958),
cert.
denied,
359
U.S.
927
(1959).
51.
Hazen,
The
New
Pragmatism
Under
Section
16(b)
of
the
Securities
Exchange
Act,
54
N.C.L.
REv.
1,
9
(1975).
52.
Morales
v.
Mapco,
Inc.,
[1975-1976
Transfer
Binder]
FED.
SEC.
L.
REP.
(CCH)
95,704,
at
90,454
(10th
Cir.
1976).
53.
Id.
at
97,879.
54.
Hazen,
supra
note
51,
at
27.
1978]
7
Chod: Chod: Corporations--The Exercise of Warrants Constitutes
Published by University of Missouri School of Law Scholarship Repository, 1978
MISSOURI
LAW
REVIEW
of
the
current
market
rendered
him
liable
for
any
short-swing
profits
because
the
resulting
transactions
included
the
possibility
of
speculative
abuse.
There
need
not
be
actual
speculative
abuse
for
liability
to
attach;
the
possibility
of
such abuse
is
sufficient.
Ross
should
be
liable
for
the
short-swing
profits
realized
under
either
the
objective
or
pragmatic
approach.
Applying
the
objective
ap-
proach,
Ross
was
an
insider
and
the "purchase
and
sales"
took
place
within
the
statutory
period.
Under
the
pragmatic
approach,
the
exercise
of
the
warrants
constituted
a
purchase
within
section
16(b)
and
the
transaction
contained
the
possibility
of
speculative
abuse
of
inside
infor-
mation.
For
unorthodox
transactions
such
as
that
in
Mapco,
the
pragmatic
test
is
the
better
approach
to
determine
insider
liability
under
section
16(b).
To
hold
an
insider
liable
under
the
literal
objective
approach
would
hinder
the
use
of
business
incentive
plans
such
as
stock
options,
warrants,
and
convertible
securities.
The
knowledge
that
the
ability
to
dispose
of
stock
acquired
through
one
of
the
above
plans
might
be
lim-
ited
could
make
insiders
reluctant
to
accept
the
arrangement.
Although
the
pragmatic
approach
does
provide
more
protection
for
the insider
by
requiring
the
possibility
of
abuse
in
the
transaction,
it
too
may
hinder
the
use
of
these
"bonus"
plans
for
officers
and
employees.
Because
a
finding
of
actual
abuse
is
not
required,
"a
perfectly
innocent
insider
may
have
to
account
to
the
corporation
for
any
profits
realized
from
an
unorthodox
transaction.
In
the
Mapco
situation,
the
pragmatic
approach
might
im-
pose
liability
even
if
he
had
let
the
warrants
automatically
convert
into
Mapco
common
stock.
5
5
This
result
may
seem
unfair
if
inside
informa-
tion
was
not
actually
used,
but
such
a
finding
is
necessary
in
order
to
protect
the
interests
of
outside
investors.
Corporate
insiders
owe
primary
loyalty
to
the
corporation
and
should
not
enter
transactions
which
may
have
a
detrimental
effect
on
shareholder
interests.
56
The
pragmatic
ap-
proach
has
the
effect
of
protecting
these
interests.
It
may
be
argued
that
the
test
should
be
whether
actual
abuse
has
occurred.
Such
abuse,
how-
ever,
is
difficult
to
prove.
Because
insiders
possess
special
knowledge
that
outside
shareholders
lack,
it
would
be
an
unfair
advantage
to
let
them
deal
freely
in
the
company's
securities
when
such
knowledge
may
benefit
them
at
the
expense
of
other
shareholders.
The
outside
shareholder
interest
should
be
the
primary
concern
of
the
corporation
and
therefore
insider
trading
must
be
restricted
in
those
situations
where
the
possibility
of
speculative
abuse
exists.
EDWARD
A.
CHOD
55.
In
such
a
case,
even
though
Ross'
special
knowledge
would
not
benefit
him
in
the
conversion
of
the
warrants,
it possibly
could
benefit
him
when
he
subsequently
sold
the
stock.
56.
The
sale
of
a
large
number
of
shares
by
insiders
could
cause
a
drop
in
the
stock's
market
price
thereby
causing
shareholder
interests
to
decline.
[Vol.
43
8
Missouri Law Review, Vol. 43, Iss. 1 [1978], Art. 16
https://scholarship.law.missouri.edu/mlr/vol43/iss1/16
