Landreth Timber Co. v. Landreth
Citation
471 U.S. 681 (1985). Supreme Court of the United States.
Facts
The Landreths sold all of the stock of their lumber company to the Irvings. The mill performed poorly — allegedly because of misrepresentations about its condition. The buyers sued under the Securities Exchange Act. The sellers argued that a sale of 100% of a company’s shares to a buyer who would actively manage the business was a “sale of business,” not a “securities transaction,” and therefore outside the Acts’ reach.
Issue
Are shares of a corporation securities under the Securities Exchange Act when the purchaser acquires 100% of the company and takes over its management?
Holding
The Court unanimously held that the shares were securities. The sale of business doctrine — which had held that a total stock sale for purposes of taking control was not a securities transaction — was rejected.
Rule / Doctrine
When an instrument bears all the traditional characteristics of stock — the right to receive dividends contingent on profits, negotiability, voting rights, appreciation potential, and pledgeability — it is a security under the Acts without further economic substance inquiry. The Howey economic reality test applies to novel instruments and investment contracts; when an instrument is labeled “stock” and has all the attributes of stock, it is stock. The sale of business doctrine was rejected as inconsistent with the text and purposes of the Securities Acts.
Significance
Landreth resolves the “sale of business” debate and clarifies the two-track analysis: traditional stock with all its usual attributes is categorically a security; novel or hybrid instruments require Howey analysis. Contrast: Forman (shares lacking usual stock attributes not securities) and SEC v. W.J. Howey Co. (defining investment contract).