A district judge has denied an insider’s motion to dismiss a complaint alleging that his reacquisitions of stock from GRATs he had established for the benefit of his children were purchases subject to Section 16(b). The insider is a member of the founding family of Sinclair Broadcast, which owns virtually all of Sinclair’s high-vote Class B common stock, which is convertible into the publicly traded, lower-vote Class A common stock. The defendant established GRATs for the benefit of his children and contributed to each GRAT shares of Class B common stock. The insider later reacquired the stock pursuant to a provision of the GRAT agreements allowing him to substitute assets of equal value, and he sold Class A stock within less than six months of the reacquisitions.
The insider moved to dismiss the complaint on the ground that asset substitutions, like the in-kind annuity payments addressed in the SEC Staff’s Peter J. Kight interpretative letter, were merely a change in form of beneficial ownership, exempted by Rule 16a-13. The plaintiffs responded that the court should follow Morales v. Quintiles Transnational Corp., which held that asset substitutions, as opposed to in-kind annuity payments, are purchases subject to Section 16(b). The court did not endorse either position, noting that both Kight and Quintiles involved an insider-settlor who also served as trustee of the GRAT, whereas the Sinclair insider was not the named trustee of his GRATs, making Kight and Quintiles inapplicable at this stage of the proceedings.
The Staff said in Kight that an insider who contributes stock to a GRAT of which the insider is trustee and sole annuitant remains the sole beneficial owner of the stock while it is held by the GRAT (because Rule 16a-8 attributes beneficial ownership to a trustee/beneficiary) and that the insider’s reacquisition of the stock as an annuity payment is therefore exempt as a change in form of beneficial ownership. In this case, the insider named his personal attorney and his personal accountant as trustees, but the insider argued that he had effective investment control over the GRATs, tantamount to that of a trustee, because he had the power to prevent any proposed sale of the Class B stock through asset substitution. Because nothing in the GRAT trust agreements required the trustees to give the insider advance notice of a planned sale, the court said, the insider’s ability to prevent a sale by the trustees could not be resolved on a motion to dismiss, and instead would have to be established through testimony. Only after that factual issue is resolved will the court address whether the insider’s “veto power,” if it existed, constituted “investment control” sufficient to support a claim of beneficial ownership and, if so, whether the asset substitutions were purchases in view of Kight and Quintiles.
— Alan Dye, Section16.net May 3, 2022
