Tenth Circuit Affirms Dismissal of Challenge to Tax Withholding Exemption

Last year, I noted that a district judge in Oklahoma had dismissed a Section 16(b) complaint filed against two officers of WPX Energy challenging the application of Rule 16b-3(e) to the company’s withholding of shares to pay taxes due upon the vesting of restricted stock unit awards. The Tenth Circuit has now affirmed the district court’s decision, in Olagues v. Muncrief.

At the district court level, the parties disagreed regarding whether the RSU award agreements provided for “discretionary” withholding or “automatic” withholding. The district court concluded that the agreements provided for automatic withholding. On appeal, the plaintiff argued again that withholding was discretionary, and also argued that, even if withholding was automatic, the withholding was not exempt because the compensation committee approved only the award agreements, and did not approve the specific withholding transactions. The Tenth Circuit rejected both arguments. First, the court noted, the award agreements provided that the company “shall” withhold shares upon vesting to pay withholding taxes, making withholding automatic. Second, the award agreements provided that, upon vesting, the company would withhold a number of shares having a market value equal to the minimum required tax withholding. Because the agreements established a formula for the “time, manner and amount” of withholding, the court said, the committee’s approval of the award agreements constituted approval of the subsequent withholding by virtue of note 3 to Rule 16b-3(e).

The Tenth Circuit did not hold oral argument on the appeal, and said that its opinion therefore does not have precedential value. The case also does not address discretionary withholding. Nevertheless, the holding helps with the developing case law under Rule 16b-3, and fortunately means the plaintiff hasn’t yet succeeded in any of his challenges to Rule 16b-3.