Colan v. Mesa Petroleum Co.

Mesa Petroleum Company (Mesa) (defendant) rapidly amassed 13.6 percent of the common stock in Unocal Corporation (plaintiff). To fend off Mesa’s apparent takeover attempt, Unocal invited its shareholders to exchange their shares, at a premium, for nonconvertible Unocal debt securities. Unocal expressly excluded Mesa from participating in this exchange. After unsuccessfully challenging this exclusion in court, Mesa skillfully worked out a settlement with Unocal. Under the settlement agreement, in return for Mesa’s dropping its takeover attempt, Mesa was allowed to turn in many of the Unocal shares it had held for less than six months and exchange those shares for Unocal debt securities. Mesa viewed this settlement as a strategic victory. Unocal and one of its shareholders, David Colan (plaintiff), retaliated by suing Mesa for having violated § 16(b) of the Securities Exchange Act of 1934. In its defense, Mesa cited Kern County Land Co. v. Occidental Petroleum Co., in which the Kern County Land Company deliberately changed its corporate structure to force Occidental into selling recently acquired stock. The United States Supreme Court ruled for Occidental, holding that Congress never meant for § 16(b) to penalize involuntary participation in such an unorthodox transaction. Mesa likened itself to Occidental. The district court accepted this analogy and entered judgment for Mesa. Unocal appealed to the Ninth Circuit.