Rosenberg v. XM Ventures

Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit
12-5-2001
Rosenberg v. XM Ventures
Precedential or Non-Precedential:
Docket 01-1484
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Recommended Citation
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Filed December 5, 2001
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 01-1484
ARON ROSENBERG,
Appellant
v.
XM VENTURES, a Maryland trust; and
MOTIENT CORPORATION, a Delaware corporation
Appeal from the United States District Court
for the District of Delaware
(D.C. Civ. No. 00-cv-00528)
District Judge: Honorable Gregory M. Sleet
Submitted Under Third Circuit LAR 34.1(a)
September 10, 2001
Before: MANSMANN, RENDELL and ALDISERT,
Circuit Judges.
(Filed December 5, 2001)
Jeffrey S. Goddess, Esquire
Rosenthal, Monhait, Gross
& Goddess
First Federal Plaza
P.O. Box 1070
Wilmington, DE 19899-1070
Mitchell M. Twersky, Esquire
Fruchter & Twersky
60 East 42nd Street
Suite 4700
New York, NY 10165
Jeffrey S. Abraham, Esquire
Abraham & Paskowitz
60 East 42nd Street
Suite 4700
New York, NY 10165
Counsel for Appellant
Timothy J. Finn, Esquire
Jones, Day, Reavis & Pogue
51 Louisiana Avenue, N.W.
Washignton, D.C. 20001
Counsel for Appellee
XM Ventures
Jon E. Abramczyk, Esquire
Donna L. Culver, Esquire
Morris, Nichols, Arsht & Tunnell
1201 North Market Street
P.O. Box 1347
Wilmington, DE 19899
Counsel for Appellee
Motient Corporation
OPINION OF THE COURT
MANSMANN, Circuit Judge.
I.
The appellant, Aron Rosenberg, is a shareholder of
Motient corporation. He has appealed from a District Court
judgment dismissing, with prejudice, his shareholder
derivative action against XM Ventures for failing to state a
claim upon which relief can be granted. The complaint
asserted a violation of section 16(b) of the Securities and
Exchange Act of 1934 resulting from XM Ventures' sale of
Motient stock.
The issue on this appeal requires us to determine
whether beneficial ownership of a subject issuer's equity
securities is a necessary element of group membership
2
within the meaning of section 13(d)(3) of the Securities and
Exchange Act of 1934. We conclude that it is. We have
carefully considered the other issues presented by the
Appellant and conclude that no extended discussion is
necessary. As a result, we will affirm the Order of the
District Court dismissing Rosenberg's Complaint. 1
The specific question before us is whether beneficial
ownership of the equity securities of a corporate issuer by
each group member is a necessary element for entrance in
a section 13(d) group. Put another way, may an individual
without beneficial ownership of the equity securities of an
issuer become a member of a group consisting of
individuals who are beneficial owners of the issuer's equity
securities for the purpose of determining whether the group
members are statutory insiders subject to section 16(b) of
the Securities and Exchange Act of 1934?
II.
Plaintiff-Appellant Aron Rosenberg appeals from the
District Court's grant of Defendant-Appellee XM Ventures'
motion to dismiss pursuant to FED. R. C IV. P. 12(b)(6). We
note from the outset that this case takes many twists and
turns through the thicket of federal securities law.
Therefore, we begin our trek, compass in hand, with the
salient facts. Rosenberg is a shareholder of Motient, Inc.
(Motient), a public company registered under section 12 of
the Securities and Exchange Act of 1934. 15 U.S.C.S 78l
(1994). Motient owned 80 percent of the outstanding shares
of XM Satellite Radio Holdings, Inc. Another company,
WorldSpace, Inc., owned the remaining shares of XM
Holdings.
Rosenberg alleges that "in or about mid 1999, Motient,
its significant shareholders, and WorldSpace agreed that
_________________________________________________________________
1. The District Court properly had jurisdiction based on 15 U.S.C.
S 78aa. We have jurisdiction based on 28 U.S.C. S 1291. Appeal was
timely filed under FED. R. APP. P. 4(a). In addition, we exercise plenary
review of a District Court's grant of a motion to dismiss under FED. R.
CIV. P. 12(b)(6). Maio v. Aetna, Inc., 221 F.3d 472, 481 (3d Cir. 2000).
Furthermore, we exercise plenary review over the interpretation of
statutes. United States v. Schneider, 14 F.3d 876 (3d Cir. 1994).
3
Motient would purchase WorldSpace's 20 % interest in
AMRC [XM Holdings]." See App. at 15. Further, Rosenberg
alleges that "various agreements, formal and informal,
entered into by and between, Motient, XM, WorldSpace and
Motient's significant shareholders, created a group which
acted together for the purpose of acquiring, holding or
voting the Company's [Motient's] Equity securities . . . [and]
at all relevant times, that group included XM and owned
more than 10 percent of the Company's [Motient's]
outstanding Common Stock." Id. at 16.
On June 7, 1999, Motient, XM Holdings, and WorldSpace
entered into a formal Share Exchange Agreement. At
bottom, the Agreement provided that WorldSpace would
transfer all of its shares of XM Holdings to Motient in
exchange for Motient's issuance of 8, 614, 244 shares of its
own stock to an irrevocable grantor trust (XM Ventures) to
be created by WorldSpace. The Agreement further provided
that XM Ventures would transfer its XM Holdings stock to
Motient; thereafter, Motient would issue its own stock to
XM Ventures in two distributions. The transaction would
result in XM Holdings being a wholly owned subsidiary of
Motient, and XM Ventures, with the CEO of WorldSpace
acting as trustee, would be a substantial shareholder of
Motient.
According to Rosenberg, between September 1999 and
February 2000, XM sold a portion of the Motient shares
that it acquired under the Agreement. Rosenberg filed the
present action, contending that XM must disgorge the
profits it realized on these trades to Motient pursuant to
section 16(b) of the Securities and Exchange Act of 1934.
See 15 U.S.C. S 78p(b) (1994). In response to Rosenberg's
complaint, XM filed a motion to dismiss pursuant to FED. R.
CIV. P. 12(b)(6).
The District Court granted XM's motion to dismiss, with
prejudice, partially on the ground that XM was not a
member of a group that owned more than a 10 percent
beneficial interest in Motient equity securities prior to XM's
acquisition of Motient Stock. App. at 141. In opposing XM's
motion to dismiss, Rosenberg argued, among other things,
that WorldSpace acted as XM's agent because "it is
reasonable to infer . . . that XM specifically requested that
4
the Group be formed to insure XM's acquisition of the
additional shares." App. at 149. The District Court rejected
this argument, concluding that "a critical flaw in this
argument is the fact that WorldSpace, whether as principal
or agent, could not have been a member of an ownership
group prior to the purchase because it never owned any
Motient stock prior to the transaction in question." Id. We
write to clarify the District Court's conclusion on this point
because it could be interpreted as requiring record
ownership of an equity security as a prerequisite to
membership in a section 13(d) group.
III.
To answer the question before us on this appeal properly,
we are required to interpret provisions of the Securities and
Exchange Act of 1934. 15 U.S.C. S 78a, et. seq. (1994).
Therefore, we begin by briefly setting forth the general
analytical framework underlying our construction of the
provision at issue. The role of the courts in interpreting a
statute is to give effect to Congress's intent. See Idahoan
Fresh v. Advantage Produce, Inc., 157 F.3d 197, 202 (3d
Cir. 1998), citing Negonsott v. Samuels, 507 U.S. 99, 104
(1993). Because it is presumed that Congress expresses its
intent through the ordinary meaning of its language, every
exercise of statutory interpretation begins with an
examination of the plain language of the statute. See id. at
202, citing, Santa Fe Med. Servs., Inc. v. Segal (In re Segal),
57 F.3d 342, 345 (3d Cir. 1995) (citing Mansell v. Mansell,
490 U.S. 581 (1989)); United States v. Pelullo, 14 F.3d 881,
903 (3d Cir. 1994). Where the statutory language is plain
and unambiguous, further inquiry is not required. See In re
Segal, 57 F.3d at 346. To determine whether the statutory
language is ambiguous, we must examine "the language
itself, the specific context in which that language is used,
and the broader context of the statute as a whole." See
Marshak v. Treadwell, 240 F.3d 184, 192-93 (3d. Cir.
2001), quoting, Robinson v. Shell Oil Co., 519 U.S. 337, 341
(1997). In addition, when interpreting a statute, courts
should endeavor to give meaning to every word which
Congress used and therefore should avoid an interpretation
which renders an element of the language superfluous. See
5
United States v. State of Alaska, 521 U.S. 1 (1997), reh'g
denied, 521 U.S. 1144 (1997); United Food & Commercial
Workers Union Local 751 v. Brown Group, Inc., 517 U.S.
544, 550 (1996) (reading which gives effect to all of a
statute's provisions prevails over one which disregards a
provision as legislative oversight); First Bank Nat'l Ass'n v.
FDIC, 79 F.3d 362, 367 (3d Cir. 1996). This precept of
statutory construction applies to the interpretation of
regulations as well. See Silverman v. Eastrich Multiple
Investor Fund, LP, 51 F.3d 28, 31 (3d Cir. 1995) (court's
construction should give effect to all provisions); LaVallee
Northside Civic Ass'n v. Virgin Islands Coastal Zone
Management Comm'n, 866 F.2d 616, 623 (3d Cir. 1989)
(court should endeavor to reconcile conflicting statute and
regulation). Thus, the preferred construction of a statute
and its regulations is one that gives meaning to all
provisions. See United States v. Higgins, 128 F.3d 138, 142
(3d Cir. 1997). With these principles in mind, we turn our
attention to the Act.
A. Section 16(b) of the Securities and Exchange Act of
1934.
Before we begin our analysis, however, we will provide
context by setting forth the statutory provision that gives
rise to liability in this case. Section 16(b) of the Securities
and Exchange Act of 1934 provides that any profit realized
by a corporation's principal stockholders arising from the
purchase and sale of a corporation's equity securities
within a period of less than six months must be disgorged
to the corporation. See 15 U.S.C. S 78p(b) (1994); Foremost-
Mckesson, Inc. v. Provident Sec. Co., 423 U.S. 232 (1976).
We mention in passing that we are not concerned with
section 16(b) liability as it applies to corporate officers and
directors. Here, we address section 16(b) liability
specifically as it relates to the principal stockholders of a
corporation in a purchase-sale sequence.
The principal stockholders of a corporation are those
shareholders who directly or indirectly beneficially own
more than ten percent of the corporation's equity securities.
Gollust v. Mendell, 501 U.S. 115 (1991). From these
precepts, it is clear that liability will attach under section
16(b) when an individual having beneficial ownership of
6
more than 10 percent of any one class of the issuer's equity
securities both purchases and sells shares of the issuer
within six months. See, e.g., Feder v. Frost 220 F.3d 29, 32
(2d Cir. 2000) quoting Gwozdzinsky v. Zell/Chilmark Fund,
156 F.3d 305, 308 (2d Cir. 1998). In other words, an
individual will not be liable as a principal stockholder
under section 16(b) for buying and selling stock within six
months of each other unless prior to the purchase he
beneficially owns more than ten percent of the equity
securities of a corporation. Having explained when liability
will attach to a beneficial owner of securities under section
16(b) for certain trading activity, we now turn to a
discussion of exactly who can be a beneficial owner, within
the meaning of section 16, of equity securities.
B. Beneficial Ownership of Equity Securities .
Section 16 of the Securities and Exchange Act of 1934
does not specifically define beneficial ownership with
respect to determining the principal stockholders of a
subject issuer. See 15 U.S.C. S 78p(a) (1994). Rather, the
Securities and Exchange Commission (SEC), the agency
authorized by Congress to implement the statute,
promulgated rules in 1991 prescribing the contours of
beneficial ownership under section 16 for the purpose of
determining whether a person is a beneficial owner of more
than 10 percent of a class of equity security. See Feder,
220 F.3d at 33, see also Ownership Reports and Trading by
Officers, Directors and Principal Security Holders,
Exchange Act Release No. 34-28869, 56 Fed. Reg. 7242
(Feb. 21, 1991). The relevant rule states that "the term
`beneficial owner' for purposes of section 16(b) shall mean
any person who is deemed a beneficial owner pursuant to
section 13(d) of the Securities and Exchange Act of 1934
and the rules thereunder." 17 C.F.R. S 240.16a-1(a)(1)
(2000). In substance, the SEC merely engrafted section
13(d)'s definition of beneficial ownership onto section 16.
We note here, however, that the term "beneficial owner" has
another definition under Rule 16a-1(a)(2) that is used to
determine the particular securities held by a beneficial
owner after it has been determined that the beneficial
owner is an insider subject to short swing recovery. See 17
C.F.R. S 240.16a-1(a)(2). Here, we do not pass upon this
7
rule. Because, as we have already noted, section 16 defines
beneficial ownership, for the purpose of determining who is
a principal shareholder, by reference to section 13(d) of the
`34 Act, we turn now, as we must, to an examination of
beneficial ownership under section 13(d).
Section 13(d) is essentially a reporting provision that
requires the disclosure of certain information to the SEC,
the issuing entity, and the exchanges where the stock is
traded. See 15 U.S.C. S 78m(d)(1)(D) (1994). It provides as
follows:
(d) Reports by persons acquiring more than five per
centum of certain classes of securities.
(1) Any person who, after acquiring directly or
indirectly the beneficial ownership of any equity
security . . . shall, within ten days after such
acquisition, send to the issuer of the security at its
principal executive office, by registered or certified
mail, send to each exchange where the security is
traded, and filed with the Commission, a statement
containing such of the following information, and such
additional information, as the Commission may by
rules and regulations, prescribe as necessary or
appropriate in the public interest or for the protection
of investors -- (A) the background, and identity,
residence, and citizenship of, and the nature of such
beneficial ownership by, such person and all other
persons by whom or on whose behalf the purchases
have been or are to be effected;
15 U.S.C. S 78m(d)(1) (1994). The text of this provision is
clear on its face. After a person has acquired beneficial
ownership of the relevant security, the person is required to
file a report with various entities within 10 days. We
observe that the heading of the subsection speaks in terms
of a person who acquires beneficial ownership of a security.
Next, we turn to the regulation promulgated by the SEC to
implement this provision. SEC Rule 13d-3 provides in
pertinent part:
(a) for the purposes of sections 13(d) . . . of the Act a
beneficial owner of a security includes any person
8
who, directly or indirectly, through any contract,
arrangement, understanding, relationship, or otherwise
has or shares: (1) Voting power which includes the
power to vote, or to direct the voting of, such security;
and/or, (2) investment power which includes the power
to dispose, or to direct the disposition of, such
security.
17 C.F.R. S 240.13d-3 (2000) (emphasis added). Clearly,
Rule 13d-3 casts a wide net in prescribing the sorts of
activity that will qualify one as a beneficial owner of an
equity security. Indeed, our sister circuits and various
commentators have noted that in determining who is a
beneficial owner of securities section 13d-3 focuses on the
person who can actually vote the shares, rather than the
record owner of the stock. See, e.g., Calvary Holdings, Inc.,
v. Chandler, 948 F.2d 59, 64 (1st Cir. 1991) (holding that
record owner of stock was not a beneficial owner of the
stock because he did not have the power to vote or dispose
of the stock without the permission of others); GAF Corp. v.
Milstein, 453 F.2d 709, 716 (2d Cir. 1971), cert. denied, 406
U.S. 910 (1972) (noting that voting control of stock is the
only relevant element of beneficial ownership); Bath Indus.,
v. Blot, 427 F.2d 97, 112 (7th Cir. 1970) (noting that legal
title is irrelevant for the purpose of the statute if someone
else can guarantee a block of votes). The Rule, textually at
least, like the statute it implements, is clear with respect to
the type of activity that will qualify one as a beneficial
owner of securities. Further, in casting its net, the Rule
defines a beneficial owner as a person with certain
attributes.
C. Group Beneficial Ownership.
Finally, we come to the crux of the matter before us--
whether an entity can be a member of a group of beneficial
owners without first beneficially owning stock itself. To
answer that question, we direct our attention to section
13(d)(3) of the Securities and Exchange Act of 1934, which
outlines the contours of a "group." See 15 U.S.C.
S 78m(d)(3) (1994); Morales v. Freund, 163 F.3d 763, 766
(1999). It has been noted by the only other court
specifically addressing the issue before us that neither
section 13(d)(3), its regulations, nor its congressional
9
commentary provides a clear answer with respect to the
question before us. See Transcon Lines v. Becker , 470 F.
Supp. 356, 372-73 (S.D.N.Y. 1979). We agree. After
considering the text and its contextual relevance, both
narrowly and in relation to the statute as a whole, we
believe that the statute, the regulations, and the
accompanying legislative history are ambiguous with
respect to the specific question before us. It is true that
elements of the language of the various statutes and
regulations may, when read in isolation, support each
party's position. In fact, in the case sub judice each party
has cited to particular snippets of text from the statute,
regulations, or legislative history that tends to support each
side's respective construction. As we have previously stated,
however, we do not base our construction of a statute,
complex or not, on a sentence or two taken from volumes
of statutory text, regulations, and legislative history.
The relevant text of section 13(d)(3) provides that"when
two or more persons act as a partnership, limited
partnership, syndicate, or other group for the purpose of
acquiring, holding, or disposing of securities of an issuer,
such syndicate or group shall be deemed a person for the
purposes of this subsection." 15 U.S.C. S 78m(d)(3) (1994)
(emphasis added). This provision has the effect of
aggregating the individual stock beneficially owned by each
group member and attributing to each member the total
holdings of the group. See, e.g., Morales v. Quintel
Entertainment, Inc., 249 F.3d 115, 123 (2d Cir. 2001). For
example, if a group has three members each owning ten
shares of stock, then each member will be treated as
beneficially owning thirty shares of stock. Here, when
defining a group, Congress chose to speak in terms of a
person or persons acting for an enumerated purpose.
The implication of using the term "person" in subsection
(d)(3) after its use in subsection (d)(1), which defines
beneficial ownership, indicates to us that Congress
intended to attribute the same meaning to person as it had
in the preceding subsection defining beneficial ownership.
In other words, the "persons" that subsection (d)(3) refers to
are the same "persons" that Congress set forth in
subsection (d)(1)--beneficial owners. We simply fail to see
10
why Congress would specifically state that the group shall
be deemed a person if Congress did not intend to refer to
persons as that term is used throughout the section.
Moreover, the Rule promulgated by the SEC to implement
section 13(d)(3) provides support for this construction. Rule
13d-5 defines group beneficial ownership in pertinent part:
When two or more persons agree to act together for the
purpose of acquiring, holding, voting or disposing of
equity securities of an issuer, the group formed thereby
shall be deemed to have acquired beneficial ownership
for purposes of sections 13(d) . . . of the Act, as of the
date of such agreement, of all equity securities of that
issuer beneficially owned by any such persons .
17 C.F.R. S 240.13d-5(b)(1) (2000) (emphasis added).
Keeping in mind the canon of construction that we must
give effect to all the provisions of a statute or regulation, we
conclude that the "persons" Rule 13d-5 speaks of are
persons as that term is used in Rule 13d-3. To conclude
otherwise would require us to disregard not only the text of
the statutory provisions and the regulations promulgated
under them, but also the context in which the provisions
are used. Specifically, reading section 13(d)(3) and its
regulations without acknowledging the meaning of"person"
that Congress previously attributed to it in section 13(d)(1)
would require us to read section 13(d)(3) in isolation. This
we cannot do.
As a result, we construe the Rule to mean that when two
or more beneficial owners agree to act together for one of
the statutorily enumerated purposes the group formed
would be deemed to be a beneficial owner of all of the
securities held by its members. It necessarily follows from
this precept, by negative implication, that one who does not
have beneficial ownership of the equity securities of an
issuer cannot be a member of a group of individuals that do
have beneficial ownership.
Our construction is supported by section 13(d)'s
legislative history and the early cases construing section
13(d). The legislative history accompanying section 13(d)(3)
provides in pertinent part:
11
Paragraph (3) of subsection (d) defines `person' as
follows: `when two or more persons act as a
partnership, limited partnership . . . or other group . . .
such syndicate or group shall be deemed a `person' for
the purposes of this subsection.' This provision would
prevent a group of persons who seek to pool their voting
or other interests in the securities of an issuer from
evading the provisions of the statute because no one
individual owns more than 10 percent of the securities.
The group would be deemed to have become the
beneficial owner, directly or indirectly, of more than 10
percent of a class of securities at the time they agreed
to act in concert.
H.R. REP. NO. 90-1711 at 7, reprinted in 1968 U.S.C.C.A.N.
2818 (emphasis added). Two observations are apparent.
First, in the sentence immediately following the definition of
"person," the commentary explains that the purpose of the
provision is to prevent groups of persons from evading the
statute. It would seem to us then, that in explaining its
purpose, Congress used the term "person" in the same
context that it defined the term "person" in the statutory
scheme. We simply fail to see why Congress would
suddenly depart from using its previous definition of
"person" when explaining what the provision was designed
to combat. Next, the commentary makes it clear that
Congress was concerned about aggregations of beneficial
owners coming together to form a group when it stated that
the "provision would prevent a group of persons who seek
to pool their voting or other interests in the securities of an
issuer." The implication is, of course, that each member of
the group must have something to "pool". The commentary
first gives the example of voting interests. Obviously, under
the statutory definition of beneficial owner in section
13(d)(1) if one has voting interests of an equity security, one
is a beneficial owner of the security. The commentary
explains that it would prevent persons from pooling"other
interests" in an issuer's securities. We believe that the
"other interests" Congress referred to are contained in the
second prong of section 13(d)(1)'s definition of beneficial
ownership--the power to dispose of the security or the
power to direct the disposition of the security.
12
Here, it would also seem that Congress did not intend to
expand upon the scope of activity that encompasses
beneficial ownership beyond that used in the previous
subsection, because in discussing the provision's intended
function, Congress did not add anything to its previous
definition of a beneficial owner. We therefore conclude that
the legislative history accompanying section 13(d) manifests
Congress' intent that an individual must be a beneficial
owner of an issuer's securities prior to becoming a member
of a section 13(d) "group."
As a final aid to our inquiry, we now turn to the caselaw
interpreting section 13(d). To our knowledge, the precise
issue presented by this appeal has yet to be addressed by
an appellate court. Indeed, it has been specifically
addressed by only one district court. See Transcon Lines v.
A.G. Becker Inc., 470 F. Supp. 356 (S.D.N.Y. 1979) (noting
that the precise question is not clearly answered by the
statute, its regulations, or legislative history). We observe,
however, that the Transcon court did not engage in a
thorough textual analysis, as we have here, of section 13(d)
before concluding that beneficial ownership is a necessary
prerequisite for entrance into a group. See id . at 374.
On the other hand, though not confronted with the
precise issue before us, there are a number of appellate
court decisions that lend additional support for our
construction of section 13(d). In an early case construing
the requirements of section 13(d), the Seventh Circuit
concluded that "section 13(d) should be interpreted to
require compliance with its disclosure provisions when, but
only when, any group of stockholders owning more than 10
percent of the outstanding shares of the corporation agree
to act . . . ." See Bath Indus., Inc. v. Blot , 427 F.2d 97 (7th
Cir. 1970). The D.C. Circuit likewise rejected the argument
that a defendant could not be a group member because he
"lacked involvement" with the issuing corporation because
the defendant had a "substantial interest in the corporation
by virtue of his individual stock holdings prior to becoming
a group member." See SEC v. Savoy Indus., Inc., 587 F.2d
1149, 1164 (D.C. Cir. 1978). Similarly, in affirming a
District Court's finding of liability against a defendant for
failing to file a Schedule 13D, the Second Circuit noted that
13
it had to evaluate the record to determine whether there
was sufficient evidence to conclude that an understanding
existed between the defendant and others holding beneficial
ownership of more than 5 percent of the stock. See
Wellman v. Dickinson, 682 F.2d 355, 363 (1982) (emphasis
added). Thereafter, the court determined that each member
of the alleged group had beneficial ownership of the issuing
corporation's shares prior to becoming a group member. Id.
See also Morales, 249 F.3d at 123 (stating that"S13(d)
encompasses not only the isolated shareholder who
accumulates shares of a corporation's common stock, but
also a group of shareholders who undertake the same
activity as part of a collective effort."). Thus, the various
authorities cited above, while construing other aspects of
group membership, all seemed to assume, a fortiori, that
each individual member of the group must have beneficial
ownership of the securities of the issuing entity prior to
becoming a group member. As a result, based upon the
statutory and regulatory text, relevant legislative history,
and caselaw from our sister circuits, we conclude that for
the purpose of determining who is a principal stockholder
under section 16 of the `34 Act, each member of a section
13(d) group must hold beneficial ownership of the shares of
the issuing entity prior to becoming a section 13(d) group
member.
IV.
Having determined that membership in a section 13(d)
group is contingent upon each member of the group
holding beneficial ownership of the securities of the issuer
in question, we now turn to Rosenberg's argument. In his
opening brief, Rosenberg states that "section 13(d) does not
require a member of a 13(d) group to beneficially own
common stock of the subject issuer prior to its entry into
such a group." See Appellant's Opening Brief at 15. Then,
in an abrupt about face, Rosenberg, in his reply brief,
argues that "Beneficial Ownership . . . Is the Necessary
Element for membership in a group." See Appellant's Reply
Brief at 1. Therefore, we will proceed on the basis that
Rosenberg has conceded that membership in a 13(d) group
is predicated upon each member of the group holding
14
beneficial ownership of the subject issuer's stock prior to
becoming a group member. Since we agree with the District
Court that XM did not exist before July 7, 1999, we need
not address Rosenberg's group membership arguments
with regard to XM.
Rosenberg, however, does not stop with XM. He also
argues that the District Court erred by denying his request
to amend his Complaint by adding WorldSpace as a
Defendant. Appellant's Opening Brief at 15. In this vein,
Rosenberg argues that WorldSpace was a group member by
virtue of its entering into the stockholder agreement on
June 7, 1999, with Motient's majority shareholders.
Significantly, Rosenberg does not allege, nor could he on
the record presented to us, that WorldSpace was, at any
time prior to the transaction in issue, a beneficial owner of
Motient Stock. As a result, we fail to see how WorldSpace
could have been a section 13(d) group member. Indeed,
based on our construction of section 13(d) and its
regulatory provisions, WorldSpace, as a matter of law,
could not have been a member of such a group precisely
because it did not have beneficial ownership of any Motient
shares prior to the formation of the section 13(d) group.
The consequence of our conclusion that WorldSpace, as
a matter of law, could not have been a section 13(d) group
member is that WorldSpace could not, in light of our
agreement with the District Court's other findings, have
violated section 16(b) because it was not a statutory insider
of Motient before the purchase of Motient stock occurred.
We note in passing that our disposition of this case makes
it unnecessary for us to reach the question of whether
WorldSpace became a beneficial owner of Motient shares
that were purchased by XM.
V.
To recapitulate, we have concluded that, for the purpose
of determining who is a principal stockholder under section
16 of the `34 Act, each member of a section 13(d) group
must hold beneficial ownership of the equity securities of
the issuing entity prior to its entry into such a group.
15
Accordingly, we will affirm the judgment of the District
Court.
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
16