Reliance Electric Co. v. Emerson Electric Co.

404 U.S. 418 (1972)

Quick Summary

Reliance Electric Co. (defendant) and Emerson Electric Co. (plaintiff) were engaged in a legal dispute concerning Section 16(b) liability for profits from stock sales after Emerson attempted a takeover of Dodge Manufacturing Co. Emerson sold its Dodge shares in two steps, initially reducing its ownership below 10% before selling the remainder.

The issue before the Supreme Court was whether profits from the second sale were recoverable under Section 16(b). The Court concluded that they were not, as Emerson was no longer a statutory insider at the time of the second sale.

Facts of the Case

In an attempt to take over Dodge Manufacturing Co., Emerson Electric Co. (plaintiff) acquired 13.2% of Dodge’s shares. When Dodge merged with Reliance Electric Co. (defendant), Emerson sought to sell its holdings without incurring Section 16(b) liability under the Securities Exchange Act of 1934.

Emerson sold a portion of its shares, reducing its ownership to below 10% and subsequently sold the remainder. Emerson argued it was not liable for profits from the second sale as it was no longer a 10% owner at the time of that sale.

Reliance contended that Emerson was liable for profits from both sales, asserting that the transactions were part of a single plan to avoid Section 16(b) liability. The district court agreed with Reliance, but the court of appeals reversed the decision, leading to Reliance’s appeal to the Supreme Court.

Procedural Posture and History

  1. Emerson Electric Co. acquired more than 10% of Dodge Manufacturing Co.’s stock and then sold shares in two transactions.
  2. Reliance Electric Co. demanded profits from both sales, claiming Section 16(b) liability.
  3. The district court ruled in favor of Reliance, finding Emerson liable for profits from both sales.
  4. The court of appeals reversed the district court’s decision, holding Emerson liable only for profits from the first sale.
  5. Reliance appealed to the Supreme Court of the United States.

I.R.A.C. Format


Whether profits derived from a second sale of stock by an original owner of more than 10% of a corporation’s shares, who reduced their ownership to below 10% before the second sale, are recoverable by the corporation under Section 16(b) of the Securities Exchange Act of 1934.

Rule of Law

An owner of more than 10% of a corporation’s shares must be such both at the time of purchase and sale to incur liability under Section 16(b) for profits realized from stock transactions within a six-month period.

Reasoning and Analysis

The Supreme Court analyzed Section 16(b) in light of its purpose to prevent speculative abuse by insiders who have access to confidential corporate information. The Court recognized Congress’s intent for strict liability in transactions within a six-month period by those meeting the statutory definition of an insider.

The Court held that Emerson’s reduction of its shareholding below 10% before the second sale aligned with the statute’s requirement that liability applies only if the seller is a 10% owner at the time of both purchase and sale.

The Court rejected the argument that Emerson’s sales were interrelated parts of a single plan to evade Section 16(b), emphasizing that intent is irrelevant under the statute’s objective standards. The Court affirmed that applying Section 16(b) should rely on clear statutory criteria rather than subjective assessments of an investor’s intent.


The Supreme Court affirmed that profits from Emerson’s second sale, which occurred after its ownership was reduced below 10%, were not recoverable by Reliance under Section 16(b).

Dissenting Opinions

Justice Douglas, joined by Justices Brennan and White, dissented, arguing that treating the two sales as separate transactions undermines the purpose of Section 16(b). The dissenting opinion posited that all sales by a more-than-10% owner within six months carry a presumption of insider trading, regardless of ownership percentage at the time of sale.

Key Takeaways

  1. Section 16(b) imposes strict liability on insiders for profits from stock sales within six months only if they own more than 10% of shares at both purchase and sale times.
  2. The intent behind transactions is irrelevant for determining Section 16(b) liability; what matters is whether statutory criteria are met.
  3. The Supreme Court’s decision emphasizes an objective interpretation of Section 16(b), focusing on statutory definitions rather than subjective investor intent.

Relevant FAQs of this case


Last updated

Was this case brief helpful?