This is my fourth blog about Packer v. Raging Capital, which has been chugging its way through the courts for eight years now. In my most recent blog, I discussed the Second Circuit’s remand of the case for a determination whether the defendant investment fund was a beneficial owner of its portfolio securities where the fund had delegated voting and investment power to a registered investment adviser.
While the case was on remand, the Supreme Court held in TransUnion LLC v. Ramirez that, for a plaintiff to have constitutional standing to file an action based on a defendant’s violation of a statute (there, the Fair Credit Reporting Act), the plaintiff must establish that it suffered an actual, concrete injury. The Court’s decision led Raging Capital to move for summary judgment on the ground that neither the plaintiff security holder nor the issuer (1-800 Flowers.com) had suffered a concrete injury as a result of the fund’s short-swing trades.
Yesterday the district judge granted the motion, saying that Second Circuit case law (Donoghue v. Bulldog Investors) holding that 16(b) standing exists so long as the plaintiff can establish a violation of Section 16(b) is inconsistent with TransUnion‘s requirement that a plaintiff also establish that it suffered a concrete injury. In Packer, the plaintiff argued that Section 16(b) imposes a fiduciary obligation on insiders not to engage in short-swing trading, such that the issuer suffers concrete harm based on the breach of duty and the reputational harm from the appearance of insider trading. The court rejected that argument, noting that, while a plaintiff may in fact establish that if suffered concrete harm as a result of an insider’s short-swing transactions, the plaintiff here had not made a sufficient showing.
Based on the defendant’s briefs, it appears that the court may have based its decision, at least in part, on the fact that Raging Capital owned more than 10% of a class of low-voting common stock but held only 1% of total voting power, suggesting that the fund was not a control person and therefore was unlikely to owe a common law fiduciary duty to the issuer or other stockholders or to have access to material nonpublic information. If that fact influenced the court’s decision, the decision may have little impact on 16(b) actions against officers, directors, or ten percent owners who hold more than 10% of total voting power.
– Alan Dye, Section16.net, March 14, 2023
