A district judge is poised to decide whether a ten percent owner’s receipt of issuer stock in a merger of two public companies was outside the scope of Section 16(b) as an “unorthodox transaction” where approval of the merger by the target’s stockholders would have failed had the insider not voted his shares in favor of the merger.
The insider is Leonard Tannenbaum, who was the largest stockholder of both the issuer, Oaktree Specialty Lending Corporation, and the target, Oaktree Strategic Income Corporation (OCSI). The merger required approval by the stockholders of both corporations, including approval by the holders of a majority of OCSI’s outstanding shares. On the record date, OCSI had 29,466,768 shares outstanding, meaning the merger required approval by the holders of at least 14,733,384 shares. A total of 19,104,620 shares were present at the meeting, and 18,915,731 shares voted in favor of the merger. Of those shares, 6,357,731 were owned by Tannenbaum, directly or indirectly. Had Tannenbaum not voted his shares, therefore, the merger would not have received the required approval.
Two shareholders filed an action to recover short-swing profits resulting from Tannenbaum’s acquisition of stock in the merger and his sale of stock within less than six months. Tannenbaum moved to dismiss the complaint, arguing that his acquisition of stock in the merger was not subject to Section 16(b) because the merger was an “unorthodox transaction.” Based on the evidentiary materials the parties filed with the court, the court converted the motion to a motion for summary judgment and directed the parties to conduct discovery and brief the unorthodox transaction issue by December 22.
There is not a lot of law addressing the application of the unorthodox transaction exception to friendly mergers, but “involuntariness” is generally an element of the exception. The court noted that the outcome will depend in part on “the voting instructions Tannenbaum had given to OCSI and OCSL with respect to the merger.”
The plaintiffs are represented by David Lopez, Miriam Tauber and James Hunter, who join forces with increasing frequency. Tannenbaum reported his acquisition of stock in the merger using transaction code “J.”
-Alan Dye, Section16.net October 25, 2021