A judge in the SDNY has denied a 10% owner’s motion to dismiss a complaint alleging that an amendment to a warrant to increase the “cap” in its blocker provision was “material” and therefore resulted in the purchase of a new warrant for purposes of Section 16(b).
Securities Owned by Defendants
The defendants are an investment fund (Armistice Capital), its affiliated registered investment adviser, and the RIA’s principal. The fund became a 10% owner of Vaxart Inc., which develops oral vaccines, in September 2019, when it had acquired a total of 16,666,666 shares of Vaxart common stock. At that time, the fund also owned two warrants it had acquired from Vaxart, one exercisable for 4,090,909 shares at $1.10 a share and the other exercisable for 16,666,667 shares at 30 cents a share. The first warrant had a blocker provision barring exercise if, following exercise, the fund would own more than 4.99% of the class, and the second warrant had a similar blocker with a cap of 9.99%. Because the fund already owned shares exceeding both caps, the warrants were not currently exercisable, but each provided that the fund could elect to increase the cap by giving Vaxart more than 60 days’ notice.
The Amendments to the Warrants
In March 2020, Vaxart announced that it was trying to develop a COVID-19 vaccine. Vaxart’s stock began to run up and the fund sold most of its direct holdings on the open market. On June 8th, Vaxart and the fund amended the two warrants to eliminate the 60-day notice requirement and increase both caps to 19.99%. On June 25th, Vaxart announced that it had been selected to participate in Operation Warp Speed and the stock doubled. The fund then exercised both warrants and sold almost all of its holdings. The plaintiff filed a complaint alleging that the amendment of the warrants to increase the caps was a new purchase, matchable with the fund’s open market sales. The plaintiff did not argue that elimination of the 60-day notice requirement was material.
Court’s Denial of Motion to Dismiss
In their motion to dismiss, the defendants argued that the increase in the caps was not material because it did not affect the economic terms of the warrants, and instead merely allowed the fund to exercise the warrants all at once and sell the stock pursuant to a single order, rather than having to exercise the warrants in small increments and sell the stock received before exercising the warrants for similar incremental amounts. Either way, the defendants could exercise the warrants and sell the underlying stock in a single day.
The court noted that courts have deemed an amendment to a derivative security to be material when, for example, the amendment reduced the exercise price or extended the security’s term. While those cases involved amendments to the basic economic terms of the security, the court interpreted them to mean that any amendment may be deemed material if it gives the insider a “greater opportunity to abuse inside information.” The court concluded that increasing the cap in a blocker might provide an “opportunity to exercise the warrants more expeditiously” and therefore offer “latitude to use inside information” to obtain a greater return.
The court held only that the plaintiff has “plausibly alleged” that the warrant amendments involved a new purchase. The question of the materiality of the amendments remains to be determined. Query whether deeming these amendments to be “material” would be consistent with the SEC staff’s position in the 1991 Foster Pepper & Hamilton letter that acceleration of vesting of an employee stock option would not constitute a cancellation and regrant for purposes of Rule 16b-3.
— Alan Dye, Section16.net, April 12, 2022