I blogged a few months ago about a judge’s denial of a motion to dismiss a complaint alleging that an amendment to two warrants held by an investment fund resulted in the purchase of new warrants for purposes of Section 16(b). The defendants asked the court to reconsider its ruling, and the court has now denied that motion.
To recap, an investment fund (Armistice Capital) and its control persons were ten percent owners of Vaxart, Inc. based on their ownership of more than 10% of the outstanding common stock. Armistice also owned two warrants to purchase additional common stock, neither of which was exercisable due to blocker provisions containing caps of 4.99% and 9.99% respectively. Each warrant agreement provided that the fund could elect to increase the cap by giving Vaxart at least 61 days’ notice. The parties later amended the warrants to eliminate the 61-day notice requirement and increase the caps to 19.99%. The fund then exercised both warrants and sold almost all of its holdings.
In their motion to dismiss, the defendants argued that the increase in the caps was not material because it did not affect the economic terms of the warrants, and instead merely allowed the fund to exercise the warrants and sell the stock all at once rather than having to exercise and sell in small increments. The court, though, concluded that the amendments could be material, buy tiktok followers resulting in a new purchase, because they may have provided the defendants a “greater opportunity to abuse inside information” by allowing them “to exercise the warrants more expeditiously.”
The court’s denial of the motion to reconsider rejected several arguments made by the defendants. The court said that (1) the court did not imply that the defendants could not own more than the cap limits by owning stock directly and therefore did not base its earlier opinion of the defendants’ inability to own more than the cap amounts, (2) its decision was not inconsistent with a decision in a Rule 10b-5 case against Vaxart and its insiders dismissing Armistice as a defendant, and (3) the court could not consider, on a motion to dismiss, the actual warrants rather than the plaintiff’s characterization of the amendments in the complaint.
So, as before, whether the warrant amendments resulted in a new purchase will not be determined until additional evidence is adduced.
— Alan Dye, Section16.net, September 12, 2022
