1 Home Fire Ins. Co. v. Barber, 67 Neb. 644, 673, 93 N.W. 1024 (1903) (hereinafter Home Fire). See also, Capital Wine & Spirit Co. v. Pokrass, 277 App. Div. 184, 98 N.Y.S. 2d 291 (1st Dep't 1950); affrd 302 N.Y. 734, 98 N.E. 2d 704 (1951), rearg. denied, 302 N.Y. 840, 100 N.E. 37 (1951).

2 Regal (Hastings) HL. v. Gulliver [1967] 2 A.C. 134n; 1942 All E.R. 378 (hereinafter Regal).

3 Gower, L.C.B., The Principles of Modern Company Law (3rd ed., 1969) 536Google Scholar, n. 36, (hereinafter Gower) observes that “only one of their Lordships seemed to be disturbed by this—Lord Porter at [1967] 2 A.C. 157”.

4 Diamond v. Oreamuno, 21 N.Y. 2d 494, 498–499 (1969).

5 Id. at 501.

6 Schein v. Chasen, 313 So. 2d 739 (1975).

7 417 U.S. 703, 41 L.Ed. 2d 418, 94 S.Ct. 2578 (1974).

8 219 F. 2d 73 (2d Cir. 1955).

9 Note, that it was by explicitly rejecting this exultation of form over substance that Dean Pound reached the result in Home Fire, at 664–665.

10 See infra, pp. 79–82.

11 E.g., the limited dividend corporations provisions under Secs. 221(d) (3) and 236 of the Housing and Urban Development Act of 1968, Public Law 90–448, 12 U.S.C.A. 1715 L and 1715 Z–l (1968).

12 417 U.S. 703 (1974).

13 Id. at 706.

14 Id. at 709; 482 F. 2nd 865 (1st Cir. 1973).

15 482 F. 2d at 871 (1st Cir. 1973).

16 417 U.S. at 724–725.

17 417 U.S. at 718 n. 15. That aliquot recovery (of excessive executive salaries) may, in a corporate action, be awarded to minority stockholders not barred by laches or acquiescence was ruled by the Maryland court as far back as 1917. Matthews v. Headley Chocolate Co., 130 Md. 523, 100 A. 645 (1917). Perlman v. Feldman, 219 F. 2d 73 (2d Cir. 1955), stands for the related proposition of aliquot recovery by minority stockholders when appropriate in a derivative action.

18 417 U.S. at 726.

19 353 F. Supp. 724, 730 (1972).

20 417 U.S. at 718.

21 These include: Buyer (B) 1—a non-contemporaneous controlling stockholder who purchased from an innocent prior controlling stockholder before the existence of the cause of action became known. A person who purchases after the wrong occurs is considered to be a non-contemporaneous stockholder; B 2—a non-contemporaneous controlling stockholder who purchased from an innocent prior controlling stockholder after the existence of the cause of action became known; B 3—a non-contemporaneous controlling stockholder who purchased his controlling interest from a wrongdoer before the existence of the cause of action became known; B 4—a non-contemporaneous controlling stockholder who purchased his controlling interest from a wrongdoer after the existence of the cause of action became known; Stockholder—a stockholder (either controlling or minority) who has held his shares since before the time at which the cause of action arose; M 1—a minority stockholder who held his shares at the time the cause of action arose, but who sold them before the existence of the cause of action became known. It is not uncommon that the wrongdoing is not discovered until sometime after its actual occurrence, e.g., Bangor Punta. M 1 would be a stockholder who had sold during that interim period; M 2—a minority stockholder who held his shares at the time the cause of action arose and at the time its existence became known, but who has since sold them; M 3—a non-contemporaneous minority stockholder who purchased his shares from an innocent party before the existence of the cause became known; M 4—a non-contemporaneous minority stockholder who purchased his shares from an innocent party after the existence of the cause of action became known; M 5—a non-contemporaneous minority stockholder who purchased his shares from a wrongdoer before the existence of the cause of action became known; and M 6—a non-contemporaneous minority stockholder who purchased from a wrongdoer after the existence of the cause of action had become known.

22 Green v. Victor Talking Maching Co., 24 F. 2d 378 (2d Cir. 1928).

23 Watson v. Button, 235 F. 2d 235 (9th Cir. 1956).

24 Id. at 237.

25 Id. at 237.

26 Id. at 236.

27 Id. at 237.

28 Id. at 237.

29 For an analysis of this general anti-fraud provision regarding securities transactions see Yoran, A., Insider Trading in Israel and England (1972) 51–55, and 147.Google Scholar

30 E.g. Heit v. Weitzen, 402 F 2d 909 (2d Cir. 1968).

31 211 F. Supp. 239 (S.D.N.Y. 1962).

32 219 F. 2d 73 (2d Cir. 1955). See supra, n. 17.

33 Watson v. Button, supra, n. 23 and Cochran v. Channing Corp., supra, n. 31.

34 See, e.g., Fed. Rule of Civil Procedure 23.1.

35 In Laviv v. The Bank for the Development of Industry in Israel Ltd. and M. Zanbar (1976) (III) 30 P.D. 225, the Supreme Court has recently refused standing to a journalist to bring a derivative action. The journalist had bought a few shares in the Bank in order judicially to pursue his public compaign against the retirement payments given to the chairman of the Bank's board. The court reasoned that the derivative action was shaped as an equitable exception to the principle of the separate legal personality of the corporation. Therefore, when considerations of equity and justice do not compel letting the stockholder before the court trigger the action, he should not be allowed standing. When the stockholder bought the stock after the cause of action had occurred, his derivative action will be allowed only if he can explain why he purchased the stock for investment despite his knowledge that the directors had wronged the corporation. A valid explanation was given in an earlier case—Neve Yam Hotels on Arsuf Beach Ltd. v. Cohen and Rothem (1976) (II) 30 P.D. 517—and the derivate action by an after-the-event stockholder was allowed there. But in the Laviv case the court concluded that Laviv purchased the stock merely to create an artificial judicial conflict and refused to let him act as a gadfly for stockholders who do not desire his championship.

36 In Seaton v. Grant (1867) L.R. 2 Ch. App. 459 and Bloxam v. Metropolitan Ry. (1868) L.R. 3 Ch. App. 337, plaintiff had bought shares in order to qualify to bring action. The courts upheld plaintiff's standing, noting that he is enforcing not his own right but a corporate one, which might go unremedied but for his intervention. See Gower at 592. In the Laviu case (see preceding note) the Israeli Supreme Court remarked that Seaton and Bloxam do not actually stand for a general proposition that there is no contemporaneous ownership rule in England; in Seaton the court refusing to demur the action reserved the final decision to the hearing on the merits; in Bloxam the question was considered only at the stage of temporary remedy.

37 E.g. Jepson v. Petersen, 69 S.D. 388, 10 N.W. 2d 749, 148 A.L.R. 1087 (1943).

38 Eisenberg, , “The Model Business Corporation Act and the Model Business Corporation Act Annotated” (1974) 29 Business Lawyer 1407 at 1424.Google Scholar

39 417 U.S. 703, 41 L. Ed. 2d 418, 94 S. Ct. 2578 (1974).

40 21 N.Y. 2d, 494, 498–499 (1969).

41 As a general rule the corporation is indifferent to the distribution of wealth among its past and present stockholders, or as to the price of its stock. Only if incidents of insider trading become known and depress the price of the stock when the corporation is issuing stock, may the corporation be injured by insider trading. Further, even if the inside information is recognised as a corporate asset, its utilisation by the insiders does not injure the corporation, unless the corporation itself could use the information to its benefit and the insider trading has deprived it of such utilisation. These potential corporate injuries hardly occur in the paradigm cases of insider trading.

42 24 N.Y. 2d at 497–8.

43 Id. at 499.

44 Id. at 498–499.

45 Schein v. Chasen, 478 F. 2d 817 (2d Cir. 1973); Vacated sub. nom. Lehman Bros v. Schein, 416 U.S. 386, 94 S. Ct. 1741 (1974).

46 478 F. 2d at 823.

47 Schein v. Chasen, 313 So. 2d 739 (1975).

48 Id. at 746.

49 A basic difference in the procedural background of Diamond and Schein should, however, be noted. In Diamond the court emphasized that no 10b–5 action was brought, nor would one most probably be brought, given the notice requirements for class actions. In Schein, on the other hand, stockholders' 10b–5 class actions were pending at the time the common law corporate action was dismissed. Further, the S.E.C, had already sought an injunction, that, like in S.E.C, v. Gulf Sulphur Co., 317 F. Supp. 77 (S.D.N.Y. 1970), could have produced corporate recovery. It may generally be questioned whether given the evolution of 10b–5 stockholders' remedies, the case for an automatic corporate recovery under Section 16(b) still exists. Put otherwise, when the victims of insider trading may directly be compensated, should windfall corporate recoveries under Section 16(b) still be commanded?

50 See e.g. the English cases of Regal and Industrial Developments Consultants Ltd. v. Cooley (1972) 1 W.L.R. 443 (Birmingham Assize), noted in Yoran, , “Director's Liability Resulting from the Use of Privately Obtained Information Pertaining to the Company's Business” (1973) 89 L.Q.R. 187.Google Scholar

51 15 U.S.C.A. § 78 p(b) (1970) Section 16(b) provides: “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 and purchase, of any equity security or such issues (other than an exempted security) within any period of less than six months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months. Suit to recover such profit may be instituted at law or in equity in any court of competent 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; but no such suit shall be brought more than two years after the date such profit was realized. This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of this subsection.”.

52 In general, an officer, director, or beneficial owner of 10% or more of the equity securities of the issuer. 15 U.S.C. § 78p(a) (1970).

53 S.E.C. v. Texas Gulf Sulphur Co., 317 F. Supp. 77 (S.D.N.Y. 1970.

54 327 F. Supp. 257 (S.D.N.Y. 1971).

55 417 U.S. at 718 n. 15.

56 Id. at 726.

57 There appears to exist a substantial conflict of authority as to whether a creditor, in the absence of a statute, may bring a direct personal action against insiders whose acts have allegedly, by mismanagement, made the corporation insolvent and thereby damaged the creditors: See Devereaux v. Berger 264 Md. 20, 284 A2d 605 (1971). Cf. Watson v. Button 235 F2d 235 (9th Cir. 1956); Gochenour v. George and Francis Ball Foundation 35 F Supp. 508 (1940); International Controls Corp. v. Vesco, 490 F2d 1334 (2d Cir. 1974). See also, Flechter, W. M., Cyclopedia of the Law of Private Corporations (rev. and permanent ed. 1959) §§ 1175–1184Google Scholar; Ballantine, H.W., Ballantine on Cor-Corporations (rev. ed., 1946) §§ 72 (a) and 148.Google Scholar It appears, however, that the creditors may, even in some of those jurisdictions which deny them a direct action, bring a suit in the right of the corporation (Killen v. State Bank of Mantiwoc, 106 Wis. 546, 82 NW 536 (1900)) or in the right of the common stockholders (Devereaux v. Berger, 264 Md. 20, 284 A. 2d 605 (1971)) against those insiders who have allegedly injured the corporation. Cf. Capitol Wine & Spirit Co. v. Pokrass, supra, n. 1.

58 Nothing of the above should rule out direct minority recovery in a corporate action. See supra n. 17. The discussion is only focused on a possible exception, for the sake of creditors; to a rule disallowing corporate recovery in corporate actions.

59 Cf. Pearlstein v. Scudder and German 429 F. 2d 1136, 1141 (2d Cir. 1970).