David Colan, and Unocal Corporation v. Mesa Petroleum Co., David Colan, and Unocal Corporation v. Mesa Petroleum Co.

In this action for recovery of short-swing profits brought pursuant to section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), Unocal Corporation appeals from the denial of its cross motion for summary judgment, and the order granting a motion for summary judgment in favor of Mesa Petroleum Company, Mesa Southern Company, Mesa Asset Company, CY-41, Inc., and Jack-41, Inc. (Mesa Defendants). We must decide whether an exchange by a beneficial owner of its common stock for non-convertible debt securities, in response to a self-tender offer, is a “sale” within the meaning of section 16(b) of the Securities Exchange Act of 1934. We reverse because we have concluded that an exchange of common stock for a negotiable debt security pursuant to a self-tender offer is a “sale” within section 16(b).

Unocal’s contentions on appeal can be summarized as follows:

One. The district court erroneously weighed the evidence and made credibility determinations on ruling on cross motions for a summary judgment.

Two. The district court erred in concluding that Mesa’s exchange of Unocal common stock for negotiable debt securities in response to its self-tender offer *935 was an “unorthodox transaction,” and not a “sale” requiring a disgorgement by the Mesa Defendants of any profits that may have been realized as a result of this transaction.

PERTINENT FACTS

In October of 1984, Mesa Partners II was formed and began accumulating stock in Unocal. The general partners in Mesa Partners II were: (1) Mesa Asset Company, a wholly owned subsidiary of Mesa Southern Company, which is a wholly owned subsidiary of Mesa Petroleum Company; (2) Cy-41, Inc., wholly owned by Cyril Wagner, Jr.; and (3) Jack-41, Inc., wholly owned by Jack E. Brown.

Cyril Wagner, Jr., and Jack E. Brown are the sole partners of Wagner & Brown, and Brown & Wagner. Cyril Wagner, Jr., and Jack E. Brown, along with Brown & Wagner, are also the partners of Wagner & Brown II. T. Boone Pickens was the President and Chairman of the Board of Directors of Mesa Petroleum Company, President of Mesa Assets Company, and President of Mesa Southern Company. This joint venture shall be referred to as Mesa Partners II in this opinion.

On February 14, 1985, Mesa Partners II filed a Schedule 13D statement 1 with the Securities and Exchange Commission (SEC), in which it reported that it had acquired 7.3 percent of Unocal’s common stock for investment purposes. By February 22, 1985, Mesa Partners II owned 17 million shares of Unocal’s common stock, representing 9.7 percent of the outstanding shares.

Unocal initiated defensive measures in order to discourage a perceived takeover threat by Mesa Partners II. On February 25, 1985, Unocal amended its bylaws concerning the procedures for nominating directors and making shareholder proposals. Unocal also filed an action in the Superior Court of the State of California for the County of Los Angeles against Security Pacific National Bank on March 12, 1985, for breach of fiduciary duty, breach of contract, and deceit and misrepresentation in connection with loans it made to Mesa Partners II. Mesa Partners II used the money obtained from these loans to purchase Unocal common stock. Mesa Petroleum Company and Mesa Asset Company responded by filing an action in the same court against Unocal on March 21, 1985, alleging wrongful interference with their banking relationships.

On March 27, 1985, Mesa Partners II acquired a total of 6.7 million shares of Unocal common stock at $48.10 per share. This transaction increased Mesa Partners II’s shares to 23.7 million and its ownership interest to 13.6 percent of Unocal’s common stock.

On March 28, 1985, Mesa Partners II amended its Schedule 13D statement. Mesa Partners II reported to the SEC that it “may seek to obtain control of the company or to participate in the formulation, determination or direction of the basic business decisions of the Company.” Mesa Partners II also indicated that it intended to solicit proxies to gain postponement of the annual Unocal shareholders meeting then scheduled for April 29, 1985.

On April 1, 1985, Unocal filed a complaint alleging violations of section 13(d) of the Securities and Exchange Act of 1934 against T. Boone Pickens, Jr., Cyril Wagner, Jr., Jack E. Brown, Mesa Partnership, the Partners and certain affiliates of the Partners in the United States District Court for the Central District of California. Unocal claimed that the named defendants or their agents made false and misleading representations in Mesa Partners II’s original Schedule 13D statement by indicating that it acquired Unocal common stock for investment purposes. The defendants filed a counterclaim on April 12, 1985, alleging that Unocal violated proxy solicitation rules.

*936 On April 8, 1985, Mesa Partners II made a tender offer to purchase 64 million shares of Unocal common stock at $54 per share. 2 Unocal’s Board of Directors recommended that Unocal’s shareholders reject Mesa Partners II’s tender offer as inadequate and not in their best interests.

On April 16, 1985, Unocal offered to exchange “a package of its debt securities with an aggregate principal amount of $72 ... consisting of (i) $20 principal amount of 14% Senior Secured Notes Due 1990, (ii) $32 principal amount of Floating Rate Senior Secured Notes Due 1991 and (iii) $20 principal amount of Senior Secured Extendible Notes Due 1997” for up to 87.2 million shares (approximately one-half) of Unocal’s outstanding common stock. This offer was originally conditioned upon Mesa Partners IPs “acceptance for payment of 64,000,000 Shares pursuant to the Mesa Offer.” Unocal modified its offer on April 23,1985, to provide for the purchase of “up to 50 million shares of its common stock in exchange for $72 per share in senior secured notes, whether or not Mesa purchased the 64 million shares it was seeking through its tender offer.”

Unocal stated in its offer that one of its express purposes was “to make it more difficult for Mesa Bidders to complete the Mesa Offer.” Unocal expressly excluded Mesa Partners II from participating in its exchange offer. Unocal’s exchange offer provided that

[t]he Company [Unocal] will not accept for exchange, or issue Securities in exchange for, any Shares tendered by or on behalf of Mesa Petroleum, Mesa Partnership, Mesa Sub or any person controlling, controlled by or under common control with any of the foregoing (collectively, the “Mesa Group”), nor any Shares tendered by or on behalf of any other person that were transferred, directly or indirectly, after the date of this Offer to Purchase to such person by any member of the Mesa Group.

On April 22, 1985, Mesa Partners II challenged its exclusion from Unocal’s tender offer in Delaware state court. On April 29, 1985, the Court of Chancery temporarily restrained Unocal from proceeding with its offer unless it included Mesa Partners II.

On May 14, 1985, representatives of Unocal and Mesa Partners II, including T. Boone Pickens, met in an attempt to negotiate a settlement. These discussions broke off without resolution. On May 17, 1985, the Delaware Supreme Court reversed the Court of Chancery and held that Unocal was not prohibited by law from excluding Mesa Partners II from its tender offer.

Following the Delaware Supreme Court’s decision, representatives of Mesa Partners II contacted Unocal and sought to reopen negotiations. After several rounds of negotiations, an agreement was reached on May 20, 1985.

Pursuant to the agreement, the “Mesa Entities” were allowed to participate in Unocal’s self-tender offer. 3 Mesa Partners II agreed to terminate its tender offer. In addition, Mesa Partners II agreed that it would not participate in any proxy solicitation and would not acquire any additional Unocal shares for a period of twenty-five years. Mesa Partners II also agreed that, for a period of ten years, it would vote its Unocal stock on all matters in the same way and “in the same proportion as the votes cast by holders of Shares other than the Mesa Entities.” In addition, Mesa Partners II agreed to strict controls on its ability to sell its Unocal common stock.

On the same date, Mesa Partners II exchanged approximately 7.8 million shares of Unocal common stock for negotiable debt securities. 4 Each of these securities had a stated maturity date and provided for periodic interest payments. Mesa Asset *937 Company sold these debt securities on July 3, 1985, for approximately $589 million.

PROCEDURAL BACKGROUND

On June 3, 1986, David Colan, a shareholder in Unocal, filed a derivative action on behalf of Unocal, alleging violations of section 16(b) by the Mesa Defendants. The action sought recovery of short-swing profits realized by Mesa. Unocal was originally named as a defendant in this action, but was realigned as a real party plaintiff on August 3, 1989.

On September 25, 1989, the Mesa Defendants filed a motion for summary judgment, in which they argued that the exchange of their common stock for Unocal’s debt securities was not a sale within section 16(b). The Mesa Defendants argued that their exchange of stock for negotiable debt securities was not a sale because it fell within the “unorthodox transaction” defense to section 16(b) liability announced by the Supreme Court in Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582, 93 S.Ct. 1736, 36 L.Ed.2d 503 (1973). The district court denied the Mesa Defendants’ motion for summary judgment on October 23, 1989, concluding that genuine issues of material fact existed.

On December 1, 1989, Unocal filed a motion in limine in which it requested the district court to rule, as a matter of law, that the “unorthodox transaction” defense to a section 16(b) violation was inapplicable. In addition, Unocal sought a protective order precluding the Mesa Defendants from introducing any evidence before the jury concerning the “unorthodox transaction” defense. Unocal asserted that if any facts were in dispute concerning the applicability of the “unorthodox transaction” defense, the district court should conduct an eviden-tiary hearing to resolve the issue before the selection of the jury.

In their opposition to Unocal’s motion in limine, the Mesa Defendants “renew[ed] [their] motion for a summary judgment and urge[d] th[e] court to accept plaintiff’s belated admission that this is an issue for the Court where the record is sufficiently developed to permit the Court to determine whether the unorthodox transaction exception applies to these facts.”

A hearing on the motion in limine was scheduled for January 4, 1990. On that date, the court informed counsel that it would decide the in limine motion concerning the “unorthodox transaction” defense “if there is agreement, unequivocal agreement among counsel that the facts are sufficiently developed to rule on this matter.”

Mr. Michael Diamond, counsel for Mesa Petroleum Company, argued that a motion in limine was not the proper vehicle to decide this question. Instead, Mr. Diamond contended that summary judgment is “the way we think it should be decided.” After further colloquy, Mr. Diamond stated: “[W]e now renew our summary judgment motion....”

After a brief recess was granted so that Unocal’s counsel could consider Mr. Diamond’s suggestion, Mr. William Lerach, one of Unocal’s attorneys, informed the court as follows: “We are prepared to have the Court treat this issue as tendered to it, if you will, on cross summary judgment motion....”

After further discussion, the court stated: “[Y]our motion in limine will be considered as a cross motion for summary judgment, and Mesa’s previously filed summary judgment motion will be reconsidered by the Court, and the record is to be supplemented by a national best seller.” The court granted Unocal’s unopposed request to receive, as an exhibit, a book written by Mr. T. Boone Pickens. The court declined to hear oral argument concerning the “unorthodox transaction” defense issue.

On January 22, 1990, the court entered an order which “grants Defendants’ Motion for Summary Judgment and denies Plaintiffs’ Cross-Motion for Summary Judgment.”

On January 26, 1990, a hearing was held to determine whether the case should proceed to trial before a jury on January 30, 1990. Unocal argued that a trial was necessary even if the May 20, 1985, exchange of stock for debt securities was an “unor *938 thodox transaction,” because the July 3, 1985, disposition of the debt securities by Mesa was a "sale” within section 16(b). The district court reminded Unocal’s counsel that during the January 4, 1990, hearing

you stipulated and agreed that [the in limine] motion may be considered as a cross motion for summary judgment, and also the representation was made that all of the facts necessary to decide those issues were in the record, either in the motion that was filed by Mesa as Mesa’s second motion for summary judgment or in your motion for in limine and elsewhere.

The court informed the parties that they could file supplemental motions relating to the January 19, 1990, order. Counsel for Unocal then inquired as follows:

MR. LERACH: Your Honor, just so I’m clear. You want this done on the existing factual record.

THE COURT: Well, if there are facts that — you see, again, you pose great problems for me. Because the representation was made, it was an unequivocable representation on January the 4th that all of the facts were in the record upon which I could base whatever findings, whatever inferences I could draw for the purpose of ruling on the cross motions for summary judgment. Those facts were before me.

MR. LERACH: That is still our position.

THE COURT: All right.

MR. LERACH: I’m not changing that. I just want to reaffirm that, that we’re working off the existing record.

THE COURT: Yes.

MR. LERACH: Thank you.

MR. SNIDER: Neither side will then supplement the record; is that correct, your Honor?

THE COURT: Well—

MR. SNIDER: The reason I say it’s very important, when the submission was made on January 4th, one of the reasons the submission was made to have it treated that way, as a Motion for Summary Judgment. We recessed and we conferred with one another, your Honor will recall, and we came back because we knew what facts were in the record on the issue of voluntariness. And there was a complete void of facts on that record from our point of view with respect to Mesa’s position as to either May 20th or July 3rd.

On February 9, 1990, counsel for Mesa Petroleum Company filed a document entitled “Supplemental Motion for Summary Judgment.” Mesa Petroleum Company also submitted a proposed order entitled “Supplemental Summary Judgment and Dismissal of Action With Prejudice.”

On April 10, 1990, the district court entered a new judgment and vacated the January 19, 1990, order. The court ruled that “[although Mesa's tender of its Unocal stock in exchange for debt securities can be considered a ‘sale’, the Court finds that the Kern County unorthodox transaction exception applies to the May 1985 exchange offer to exempt it from Section 16(b) liability.” The district court again entered an order that granted the Mesa Defendants’ motion for summary judgment and denied Unocal’s cross motion for summary judgment.

Unocal has timely appealed from the judgment which finally disposes of this section 16(b) action.

DISCUSSION

I. Nature of the Proceedings Before the Trial Court

Unocal contends that the district court violated its right to trial by jury by weighing the evidence submitted by the parties, drawing inferences from conflicting circumstantial evidence, resolving disputed issues of fact, and determining the credibility of T. Boone Pickens’ testimony, in ruling on cross motions for a summary judgment. The Mesa Defendants do not dispute Unocal’s argument that the district court failed to consider the evidence in the light most favorable to Unocal in ruling on the motion for a summary judgment. Instead, the Mesa Defendants contend that the district court conducted a bench trial, *939 not a hearing on cross motions for summary judgment. The Mesa Defendants argue that we must review the district court’s judgment under the clearly erroneous standard.

The record does not support the Mesa Defendants’ contention that the parties “authorized the court to conduct a bench trial.” Appellees’ Brief at 14. The Mesa Defendants requested that the district court reconsider their motion for a summary judgment rather than act on Unocal’s motion in limine. The Mesa Defendants prepared a proposed order granting their motion for a summary judgment and dismissing Unocal’s action with prejudice.

The Mesa Defendants’ reliance on Wolfe v. United States, 798 F.2d 1241 (9th Cir.), amended on other grounds, 806 F.2d 1410 (9th Cir.1986), cert. denied, 482 U.S. 927, 107 S.Ct. 3210, 96 L.Ed.2d 697 (1987), is misplaced. In Wolfe, we concluded, after reviewing the record, that “the parties intended to submit the case for a bench trial on stipulated facts.” Id. at 1243-44 n. 2. The other cases relied upon by the Mesa Defendants also involve facts showing that the parties intended to waive trial by jury and try their cases on stipulated or agreed facts. Starsky v. Williams, 512 F.2d 109, 111 (9th Cir.1975); Southwest Forest Indus., Inc. v. Westinghouse Elec. Corp., 422 F.2d 1013, 1016-17 (9th Cir.), cert. denied, 400 U.S. 902, 91 S.Ct. 138, 27 L.Ed.2d 138 (1970); Gillespie v. Norris, 231 F.2d 881, 883 (9th Cir.1956).

Unlike the situation in the cases relied upon by the Mesa Defendants, in the instant matter the parties expressly agreed to have the court decide the applicability of the “unorthodox transaction” defense on cross motions for summary judgment. The court reflected this mutual understanding by stating: “It’s now stipulated to be a motion, a cross summary judgment motion.”

On the same date that the “unorthodox transaction” defense issue was submitted to the court for decision without oral argument on the cross motions for summary judgment, the record reflects that the court inquired of counsel about the “timing for trial. The court stated that “[tjhere is a distinct possibility that I can start this case on January 30th.” After some discussion, the trial date was set for January 30, 1985. Mr. Diamond, an attorney for Mesa Petroleum Company, then inquired of the court how counsel should respond “on the question of our desires on the jury/non-jury issue?” The court replied: “Make up your mind and let me know.” Another of Mesa Petroleum Company’s attorneys, Mr. James Edward Maloney, whose law office is in Texas, then asked the court whether the trial judge conducts the voir dire in the Central District of California. Thereafter, Mr. Maloney’s request to be allowed to question the prospective jurors on voir dire was granted.

In light of the state of the record in this matter, which shows that the Mesa Defendants requested that the court determine the applicability of the “unorthodox transaction” defense on summary judgment rather than in a non-reviewable motion in limine proceeding, and sought permission to participate in the voir dire examination of the jurors, if they decided not to waive a trial by jury, we are troubled that they now argue that the record shows that the parties agreed to a bench trial. This type of overzealous advocacy burdens the court with a frivolous argument and does little to guide us in our efforts to reach a just result.

Because the record demonstrates that the district court decided the applicability of the “unorthodox transaction” defense in response to the Mesa Defendants request that the denial of its motion for a summary judgment be reconsidered, we must reject their contention that we should review the judgment for clear error.

We review an order granting summary judgment de novo. Ashton v. Cory, 780 F.2d 816, 818 (9th Cir.1986). Thus, we are required to review all the evidence presented to the district court in the light most favorable to the non-moving party. Id. We must also make an independent, non-deferential, determination concerning the question whether the district court correctly applied the law. Id. Because our re *940 view is independent, any error committed by the district court in weighing the evidence, drawing inferences from disputed facts, and in determining credibility in this matter was harmless.

II. Applicability of the “Unorthodox Transaction" Defense Under These Facts

Unocal argues that the district court erred in concluding that the “unorthodox transaction” defense to an action for disgorgement of short-swing profits by a beneficial owner is applicable if the facts in the record in this matter are viewed in the light most favorable to the Mesa Defendants. Unocal asks this court to direct the entry of a summary judgment in its favor on the ground that the exchange of the Mesa Defendants’ common stock for negotiable debt securities was a “sale” within section 16(b). Unocal asserts that the “unorthodox transaction” defense to an action brought pursuant to section 16(b) is not applicable to a self-tender offer in which a beneficial owner exchanges his common stock for negotiable debt securities issued as a result of a recapitalization of the issuer.

Section 16(b) of the Securities Exchange Act of 1934 provides that an issuer may recover any profits realized by a beneficial owner from the sale of the issuer’s equity securities within a six-month period. 5 A beneficial owner is a shareholder who owns, directly or indirectly, more than ten percent of any class of equity security. 15 U.S.C. § 78p(a) (1988).

One goal of the Securities and Exchange Act of 1934 is to “ ‘insure the maintenance of fair and honest markets.’ ” Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582, 591, 93 S.Ct. 1736, 1743, 36 L.Ed.2d 503 (1973) (quoting 15 U.S.C. § 78b). In adopting section 16(b), Congress intended “to curb manipulative and unethical practices resulting from misuse of corporate information for personal enrichment or unfair profit of the insider, thereby assuring the strict observance of the insider’s fiduciary duties to outside shareholders and the corporation by removing the profit from short-swing dealing in corporate securities.” Oliff v. Exchange Int’l Corp., 669 F.2d 1162, 1165 (7th Cir.1980), ce rt. denied, 450 U.S. 915, 101 S.Ct. 1358, 67 L.Ed.2d 340 (1981).

In order to achieve these goals, Congress adopted “a flat rule taking the profits out of a class of transactions in which the possibility of abuse was believed to be intolerably great.” Reliance Elec. Co. v. Emerson Elec. Co., 404 U.S. 418, 422, 92 S.Ct. 596, 599, 30 L.Ed.2d 575 (1972). ‘“The objective standard of Section 16(b) imposes strict liability upon substantially all transactions occurring within the statutory time period, regardless of the intent of the insider or the existence of actual speculation.’ ” Id. (quoting Bershad v. McDonough, 428 F.2d 693, 696 (7th Cir.1970), cert. denied, 400 U.S. 992, 91 S.Ct. 458, 27 L.Ed.2d 440 (1971)).

Section 16(b) has been referred to as a “crude rule of thumb.” Kern County Land Co., 411 U.S. 582, 592-93 n. 23, 93 S.Ct. 1736, 1743-44 n. 23, 36 L.Ed.2d 503 (1973) (quoting Hearings on Stock Exchange Practices before the Senate Committee on Banking and Currency, 73d Cong., 2d Sess., pt. 15, at 6557 (1934)). We have described the application of section 16(b)’s bright-line rule as “mechanical,” Portnoy v. Memorex Corp., 667 F.2d 1281, 1282 (9th Cir.1982), and “automatic,” Whittaker v. Whittaker Corp., 639 F.2d 516, 522 (9th Cir.), cert. denied, 454 U.S. 1031, 102 S.Ct. 566, 70 L.Ed.2d 473 (1981). Where a transaction involving an equity security falls within the objective standards established by Congress for section 16(b), liability attaches. Id.

*941 The Securities Exchange Act of 1934 broadly defines “sale” as “any contract to sell or otherwise dispose of” any security. 15 U.S.C. § 78c(a)(14) (1988). A “sale” has been deemed to occur “when an insider becomes irrevocably entitled to receive a sum certain for his security,” Seinfeld v. Hospital Corp. of Am., 685 F.Supp. 1057, 1062 n. 5 (N.D.Ill.1988) (emphasis in original), or when “the insider has incurred an ‘irrevocable liability’ to dispose of the stock so that his ‘rights and obligations’ have become fixed,” Lewis v. Bradley, 599 F.Supp. 327, 330 (S.D.N.Y.1984).

The district court concluded that “[although Mesa’s tender of its Unocal stock in exchange for debt securities can be considered a ‘sale’, the Court finds that the Kern County unorthodox transaction exception applies to the May 1985 exchange offer to exempt it from Section 16(b) liability.”

The Mesa Defendants conceded, at oral argument, that their exchange of Unocal equity stock for debt securities pursuant to Unocal’s self-tender offer was a “sale” if section 16(b) is given a literal interpretation. 6 The Mesa Defendants contend that their exchange of stock for non-convertible debt securities on May 20, 1985, falls within the “unorthodox transaction” defense to section 16(b) liability established by the Supreme Court in Kern County.

In Kern County, the Supreme Court addressed the following fact-specific question: “[I]s it a § 16(b) ‘sale’ when the target of [a] tender offer defends itself by merging into a third company and the tender offeror then exchanges his stock for the stock of the surviving company and also grants an option to purchase the latter stock that is not exercisable within the statutory six-month period?” 411 U.S. at 584, 93 S.Ct. at 1739.

In Kern County, Occidental Petroleum Corporation announced a tender offer to purchase 500,000 shares of Kern County Land Company (Kern County) common stock. The tender offer was expressly due to expire on June 8, 1967. Id. Kern County opposed Occidental’s takeover attempt and, on May 19, 1967, announced the Board of Directors’ approval of a “defensive” merger with Tenneco, Inc. Id. at 585-86, 93 S.Ct. at 1739-40. Pursuant to the merger, the Kern County shareholders would receive one share of Tenneco cumulative convertible preference stock for each share of Kern County common stock. Id.

The Kern County shareholders approved the merger with Tenneco on July 17, 1967. Id. at 588, 93 S.Ct. at 1741. Occidental issued a statement that it had decided not to oppose the merger, but it refrained from voting its shares in favor of the merger. Id. The merger between Kern County and Tenneco became effective on August 30, 1967, within six months from the expiration date of the Occidental tender offer. Id. at 589, 93 S.Ct. at 1742. On this date, all Kern County shareholders became irrevocably entitled to receive one share of Ten-neco preference stock in exchange for each share of Kern County stock. Id. Occidental realized a $19,506,419.22 profit on the Kern County shares it acquired through its tender offer. Id. at 589-90, 93 S.Ct. at 1741-42. ■

The new Kern County Land Company that was formed as a result of the merger, filed an action against Occidental under section 16(b) to recover the profits from the sale. Id. at 590, 93 S.Ct. at 1742. The district court held that the automatic exchange of shares on August 30, 1967, constituted a “sale” within the meaning of section 16(b). Id. The Second Circuit reversed, holding that the automatic exchange of shares pursuant to the merger did not constitute a “sale” for section 16(b) purposes. Id. at 590-91, 93 S.Ct. at 1742-43. The Supreme Court granted certiorari. Id. at 591, 93 S.Ct. at 1743.

In determining whether the exchange of stock pursuant to the merger between Kern County and Tenneco was a “sale” *942 giving rise to section 16(b) liability, the Supreme Court first recognized that the statute imposed a “ ‘flat rule.’ ” Id. at 592, 93 S.Ct. at 1743 (quoting Reliance Elec. Co., 404 U.S. at 422, 92 S.Ct. at 599). The Court then noted that

[although traditional cash-for-stock transactions that result in a purchase and sale or a sale and purchase within the six-month, statutory period are clearly within the purview of § 16(b), the courts have wrestled with the question of inclusion or exclusion of certain “unorthodox” transactions.... In deciding whether borderline transactions are within the reach of the statute, the courts have come to inquire whether the transaction may serve as a vehicle for the evil which Congress sought to prevent — the realization of short-swing profits based upon access to inside information — thereby endeavoring to implement congressional objectives without extending the reach of the statute beyond its intended limits.

Id. 411 U.S. at 593-95, 93 S.Ct. at 1744-45 (footnotes omitted). 7

The Court held that the exchange of Kern County stock for Tenneco stock on August 30, 1967, was not a “sale” within the scope of section 16(b). Id. at 596, 93 S.Ct. at 1745. The Court concluded that “the involuntary nature of Occidental’s exchange, when coupled with the absence of the possibility of speculative abuse of inside information, convinces us that § 16(b) should not apply to transactions such as this one.” Id. at 600, 93 S.Ct. at 1747. In reaching this conclusion, the Court characterized as “critical” the fact that the exchange was required pursuant to the merger between Kern County and Tenneco. Id. at 599, 93 S.Ct. at 1747. “Once the merger and exchange were approved, Occidental was left with no real choice with respect to the future of its shares of Old Kern.” Id. at 600, 93 S.Ct. at 1747.

The exchange of Unocal stock for debt securities pursuant to Unocal’s tender offer is factually distinguishable from the transaction in Kern County. The exchange of Occidental’s stock for equity shares of the new corporation which was formed as the result of the merger in Kern County was involuntary and automatic. The May 20, 1985, exchange of stock for debt securities by the Mesa Defendants was not an involuntary or automatic transaction. Unocal did not merge into a new corporation so as to compel its shareholders to exchange their stock.

The Mesa Defendants not only were not compelled to exchange their stock for Unocal’s debt securities, but Unocal expressly excluded them from its self-tender offer. The Mesa Defendants filed a suit in Delaware seeking an injunction to force Unocal to permit the Mesa Defendants to participate in Unocal’s tender offer.

The Mesa Defendants had the choice of participating in the tender offer or holding onto their stock. The record shows that it was anticipated that Unocal’s stock would sell at $30 a share as a result of the exchange set forth in the tender offer. One of the choices available to the Mesa Defendants was to buy up Unocal’s stock at the reduced price of $30 a share and acquire control of the corporation. Once in control of Unocal, the Mesa De