A judge in the SDNY has denied a defendant’s motion to dismiss a complaint seeking to match the defendant’s sale of common stock with its purchase of a derivative security representing notional shares of common stock. The defendant argued that it didn’t realize a profit because the price at which it sold common stock was less than the price at which it purchased notional shares. The issuer responded that the “cap” in Rule 16b-6(c)(2), which provides that recoverable profits when matching a transaction in a derivative security with a transaction in the underlying security may not exceed the difference in market price of the underlying security on the date of purchase and the date of sale, is in fact a measure of recoverable profits. The judge said there is some support for that argument so declined to determine the appropriate measure at the motion to dismiss stage.
The defendant is DD Global Holdings Ltd., a Cayman Islands company that owned more than 10% of the stock of Canoo Inc., which went public in 2020 by merging with a SPAC. Part of the reason for the merger was to reduce DD’s majority ownership interest in Canoo in response to national security concerns raised by the Committee on Foreign Investment in the U.S. DD also entered into an agreement with U.S. agencies to reduce its ownership to less than 10% or transfer shares to a voting trust. To that end, on October 6, 2021, DD entered into an agreement to sell 53.6 million shares to an entity controlled by Canoo’s CEO at a price of $6.53 a share, slightly less than the closing price that day of $6.65. The parties amended the agreement on November 21 to reduce the number of shares to 35 million, and the sale closed the following day, when Canoo’s closing price was $11.53.
DD still owned more than 10% of Canoo, so on March 15, 2022, DD entered into two “integrated” transactions to divest itself of voting power without giving up its economic interest. In one transaction, DD sold 10.5 million shares to a Swiss counterparty, and in the other transaction, DD purchased from another counterparty a “participation note” representing 10.5 million notional shares. The sale was priced at $6.53 a share, and the purchase was priced at $6.72 a share. Canoo’s stock closed that day at $5.57.
Based on the actual purchase and sale prices of DD’s transactions, DD did not realize a profit. If, however, the market price of Canoo’s stock on the dates of purchase and sale ($5.57 and $11.53) are deemed to be DD’s purchase and sale prices, DD realized a profit exceeding $60 million. Presumably discovery will reveal why the parties priced the March transactions above the market price, which in turn may affect the court’s determination of the profit realized.
The court also rejected two other arguments DD made, holding that that DD’s conversion of long shares into notional shares was not a change in form of beneficial ownership exempted by Rule 16a-13, and that DD’s transactions were not “forced” and were not “involuntary” for purposes of the unorthodox transaction exception because, among other things, DD could have elected to transfer its holdings to a voting trust rather than sell them.
– Alan Dye, Section16.net, September 25, 2023
