Last fall, I blogged about a case (Rubenstein v. Knight-Swift) in which a district judge held that an amendment to the exercise price of a repurchase agreement did not constitute a purchase of a new derivative security for purposes of Section 16. The plaintiff filed a motion to reconsider, which the judge has now denied.
The facts of the case are described in my earlier blog. In short, the defendants, a married couple, had entered into a repurchase agreement with an investment bank under which they “sold” Knight-Swift common stock to the bank at current market prices and agreed to repurchase the shares at the end of the agreement’s term at the same price plus interest. The defendants drew down $125 million and delivered 4,868,208 shares of stock to the bank. The parties later agreed to a partial “termination” of the repo agreement to allow the bank to sell 1,537,205 of the shares and apply the proceeds ($37,612,793, or $23.98 per share) against the $125 million advanced. At the same time, the parties amended the repo agreement to reflect that the remaining amount the defendants owed ($125 million – $37,612,793) effectively increased the per-share price of the remaining 3,331,003 shares from $25.68 to $26.23.
The plaintiff alleged that the amendment to the exercise price was a disposition of the original agreement and the purchase of a new one. The defendants argued that the partial termination reduced the defendants’ call equivalent position and therefore involved a sale, not a purchase. The court held that the amendment resulted in a sale, not a purchase, because the amendment increased, rather than decreased, the per-share repurchase price and reduced the number of shares subject to the agreement.
The plaintiff asked the court to reconsider its holding. The court again reviewed the case law addressing amendments to derivative securities and concluded that courts “only consider amendments to be simultaneous purchases and sales where ‘the changed terms … gave [the insiders] a greater opportunity to abuse inside information in short-swing trading at any time from acquisition … to maturity[.]’” The changes to the repo agreement here, the court said, reduced the defendants’ call equivalent position, which under Rule 16b-6(b) is a sale. The plaintiff also argued that amending the exercise price could have allowed the defendants to take advantage of material nonpublic information, a point the court found unpersuasive given that, if the defendants were aware of positive inside information, they wouldn’t have authorized the bank to sell a portion of the stock at current market prices and then agreed to an increase in the exercise price of the repo.
-Alan Dye, Section16.net September 7, 2021
