It’s not often that a 16(b) action is initiated by the issuer rather than a member of the 16(b) plaintiffs’ bar, but in Safe & Green Holdings v. Shaw the issuer sued two brothers (John and Leo Shaw) after they allegedly acquired over 23% of the issuer’s stock and then mounted a successful effort to defeat shareholder approval of compensation proposals at the issuer’s annual meeting. Neither of the brothers filed a Schedule 13D or Form 3, but apparently the issuer looked into the brothers’ ownership and trading after the annual meeting and concluded that they were ten percent owners and realized short-swing profits.
Only Leo owned more than 10% of S&G’s stock, but S&G alleged that the brothers were a group and therefore both were subject to Section 16. S&G made two arguments in support of the group allegation, each based on an alleged “agreement” between the brothers (meaning the court didn’t need to address the SEC’s recent position that a group can be formed in the absence of an agreement). The first agreement was to acquire S&G securities, and the second agreement was to vote against the proposals at the annual meeting.
On the first point, John had initially purchased S&G stock and recommended the stock to his brother, who responded by selling puts, which doesn’t suggest (to me) that the two had common investment strategies. The puts were a bad bet, though, and the put holders exercised when S&G’s stock price fell, so Leo ended up owning the stock just like John. On the second point, the brothers allegedly voted their shares the same way, so it’s not surprising that the court reached the conclusion, based in part on the family relationship, that the brothers may have agreed on how to vote their shares. In any case, the judge held that the allegations were sufficient to defeat the defendants’ motion to dismiss the complaint.
Separately, the judge rejected the defendants’ argument that the issuer did not have constitutional standing to bring the action. In doing so, the judge cited her recent holding in Avalon Holdings v. Gentile (discussed here) that a 16(b) plaintiff has standing to bring an action based on a statutory violation alone.
– Alan Dye, Section16.net, September 5, 2023
