Sale-of-Business Doctrine Law and Legal Definition

Sale of business doctrine is an outmoded legal principle that the transfer of stock incident to the sale of a business does not constitute a transfer of securities. Many courts have adopted this sale-of-business doctrine, but the Supreme Court rejected it in Landreth Timber Co. v. Landreth, 471 U.S. 681 (U.S. 1985). Thereafter in Gould v. Ruefenacht, 471 U.S. 701 (U.S. 1985) also the Supreme Court rejected the sale of business doctrine as a rule of decision in cases involving the sale of traditional stock in a closely held corporation. The court held “that application of the sale of business doctrine would lead to arbitrary distinctions between transactions covered by the federal securities laws and those that are not. Because applicability of the federal securities laws would depend on factors other than the type and characteristics of the instrument involved, a corporation's stock could be determined to be a security as to the seller, but not as to the purchaser, or as to some purchasers but not others. Likewise, if the same purchaser bought small amounts of stock through several different transactions, it is possible that the federal securities laws would apply as to some of the transactions, but not as to the one that gave him control. Such distinctions make little sense in view of the federal securities laws' purpose to protect investors. Moreover, the parties' inability to determine at the time of the transaction whether the federal securities laws apply neither serves the federal securities laws' protective purpose nor permits the purchaser to compensate for the added risk of no protection when negotiating the transaction.”