Last year, I blogged about a district judge’s denial of a ten percent owner’s motion to dismiss a complaint which alleged that the insider’s acquisition of stock in a merger was a purchase which could be matched with the insider’s sales of stock both before and after the merger. The insider argued that the acquisition in the merger was outside the scope of Section 16(b) under the “unorthodox transaction” exception, but the plaintiffs alleged that the acquisition did not meet the exception’s “involuntariness” requirement because the insider voted his shares in favor of the merger. While the judge denied the defendant’s motion to dismiss, the judge has now granted his motion for summary judgment.
The insider, Leonard Tannenbaum, was the largest stockholder of both the issuer, Oaktree Specialty Lending Corporation, and the target, Oaktree Strategic Income Corporation. The merger required approval by the holders of a majority of the outstanding shares of both companies, and Tannenbaum voted his shares in favor of the proposals at both shareholder meetings. His vote was essential to OCSI’s approval of the merger and allegedly had a significant influence on the outcome at OCSL’s meeting.
In granting summary judgment, the court found that Tannenbaum had no discretion in voting his shares because he was a party to voting agreements which required that he vote his shares as instructed by a third party. That third party directed Tannenbaum to vote his shares in favor of the merger, and therefore Tannenbaum could not control the outcome of the vote, making his acquisition of shares in the merger involuntary. In reaching that conclusion, the court rejected the plaintiffs’ allegations that the third party had not directed the voting of Tannenbaum’s OCSL stock and that Tannenbaum was aware of material nonpublic information which allowed him to engage in speculative abuse in connection with the merger.
While the court didn’t say so, it sounded like the court would have considered the transaction “voluntary” if Tannenbaum had had discretion regarding how to vote his shares, presumably because the merger would not have been consummated without his vote in favor. The case is a reminder that ten percent owners who are not officers or directors, and therefore are not eligible for the Rule 16b-3 exemption, need to be careful when deciding whether and how to vote on a merger proposal.
— Alan Dye, Section16.net May 2, 2022
