Conditional Exercise of In-the-Money Option is Exempt Whether or Not Option is Still In-the-Money When Condition is Satisfied
The Second Circuit has affirmed the district court’s holding in Chechele v. Dundon that an insider’s exercise of an in-the-money option, subject to regulatory approval of the exercise, is exempted by Rule 16b-6(b) even if the market price of the underlying stock is less than the exercise price on the date regulators approve the exercise.
The case and its complicated history are discussed in my blog about the district court’s decision. The broad issue addressed in the appellate briefs was when a transaction is deemed to occur when consummation of the transaction is subject to a material condition. The plaintiff cited cases holding, for example, that a purchase or sale under a stock purchase agreement occurs at closing if the agreement contains material conditions to closing, and that a derivative security does not represent 13(d) beneficial ownership of the underlying security if the holder’s ability to exercise is subject to a material condition. The Second Circuit didn’t address those cases but held that Section 16b-6(b) exempted the defendant’s exercise because the option was in the money when the insider delivered its notice of exercise.
The Second Circuit’s ruling was issued as a summary order and therefore has no precedential effect.
-Alan Dye, Section16.net April 7, 2021
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