A district judge has granted the defendants’ motion for summary judgment in a case alleging that Jerry and Vicki Moyes, who are ten percent owners of Knight-Swift Transportation, realized a short-swing profit of over $150 million by terminating and cash-settling a variable prepaid forward contract (an alleged “purchase”) and subsequently amending the terms of other VPFC’s to increase their floor and ceiling prices (an alleged “sale”).
The transactions giving rise to the 16(b) action are far too complicated to detail here. At the risk of oversimplifying, beginning in 2013, the defendants entered into VPFCs with Citibank entities under which they received $438 million and which covered 26 million “pledged” shares. In February 2019, as the four existing VPFCs were reaching their settlement dates, the defendants entered into a fifth VPFC covering another 3.3 million shares and amended the four existing VPFCs to provide for higher floor and cap prices and to extend the settlement dates until later in 2019. As the later settlement dates approached, the defendants asked Citibank to propose a structure for extending the settlement dates on new terms, without requiring the defendants to pay any cash. The resulting transactions gave rise to the 16(b) claim.
Citibank proposed to amend all of the VPFCs to extend the settlement dates into 2020 and to increase the floor and cap prices (all of the contracts were substantially out of the money for the Moyes both before and after the amendments). As part of the restructuring, Citibank required the defendants to terminate the VPFC for 3.3 million shares and replace it with a new VPFC for the same number of shares with a different Citibank entity. This termination was the alleged “purchase.”
The Moyes were obligated to pay $332 million to terminate the old contract but were to receive only $314 million under the replacement contract. To address the $18 million shortfall, the parties entered into a “trigger price agreement” covering at least some of the newly amended contracts. The TPA was designed to transfer value to Citibank by establishing a “reset trigger price” and a higher “early termination price,” both of which were lower than the floor prices of the VPFCs. If Knight-Swift’s stock price hit the reset trigger price, Citibank would tell the defendants how much they would have to pay Citibank to increase the early termination price by $1. If the defendants failed to pay and the stock price reached the early termination price, Citibank could declare a default under the VPFCs and keep the pledged shares.
The reset trigger price was reached the next month, and Citibank told the defendants they needed to pay $18 million to increase the trigger prices. The defendants again asked Citibank to propose a transaction that would not require payment in cash. The parties ultimately agreed that the defendants would pay $6.5 million in cash and amend the VPFCs to increase the floor and cap prices and extend the settlement dates by a few weeks. These amendments were the alleged “sale.”
There was little dispute that the August termination of one VPFC was a purchase. The contested issue was whether the September amendments were material, resulting in a “cancellation and regrant” and thus a new sale. The court concluded that the amendments, even though they amended price and term, were not material because the floor price was increasing. Because the floor price already substantially exceeded the market price, the increase in the floor price made it even less likely that the defendants would realize any benefit from increases in stock price, and more likely they would have to deliver all of the shares at settlement. The Moyes could not, therefore, benefit from awareness of material nonpublic information. While the increase in the cap price provided the defendants with a theoretical benefit, the cap price was so far above the market price that the benefit was “infinitesimal.”
The court did not reach the separate issue of how to calculate profits but noted that, if the Smolowe rule would mean the defendants realized a profit of $150 million, the court would support reconsideration of the methodology. The judge’s difficulty with the profit calculation may reflect a problem with Rule 16a-6(c)(2) instead of (or in addition to) Smolowe.
– Alan Dye, Section16.net, April 4, 2023
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