A judge in the SDNY has held that an issuer’s voting common stock, which was convertible into non-voting common stock on a one-for-one basis, was not a “derivative security” because it had only a fixed conversion ratio, not a fixed conversion price, and therefore an insider’s purchase of the non-voting common stock was not matchable with his sale of the voting common stock.
The defendant in the case is Alfred C. Liggins III, the CEO of Urban One, Inc., said by the court to be “the largest African-American owned television network . . . in the United States.” The short-swing transactions involved two of Urban One’s four classes of stock, the Class D non-voting common stock and the Class A voting common stock, both of which traded on NASDAQ. In early 2020, the Class D stock began trading below the minimum price required to remain listed, leading Urban One to repurchase, on June 11, 2020, a large block of Class D stock from an investment fund. At the same closing, Liggett purchased from the fund 729,873 shares of Class D stock for $0.76 a share.
Shortly after the transaction was announced, the price of both classes of stock began to run up, corresponding, the defendant said, with “a public movement encouraging investment into African-American owned businesses.” The Class D rose to about $4 a share, while the Class A rose from around $5 a share to over $36 a share. On June 22, Liggins sold 574,909 Class A shares for around $24 a share. By November both classes had fallen back to their pre-June trading ranges, and Liggett purchased more Class D stock on the open market.
Liggins moved to dismiss the complaint on the ground that the Class D stock and the Class A stock were separate classes of stock, such that sales of one class could not be matched with purchases of the other. Liggins cited Gibbons v. Malone, in which the Second Circuit held that two classes of common stock, neither of which was convertible into the other and which traded at different prices, were not “economic equivalents” and therefore were not subject to matching with one another. The plaintiff countered that Urban One’s Class A stock, unlike the securities involved in Gibbons, was convertible into Class D stock and therefore was a derivative security, making it matchable with the underlying Class D stock under Rules 16a-4 and 16b-6. The court disagreed, holding that a fixed conversion ratio is not a “fixed price.” So, the court said, Liggins’ transactions were matchable only if the Class A shares and Class B shares were economic equivalents. Because the securities had different voting rights and traded at different prices, the court said, they were not economic equivalents.
-Alan Dye, Section16.net January 18, 2022