Last year, I blogged about a case in which shareholders of CytoDyn Inc. alleged that the board’s grant of options and warrants to CytoDyn’s CEO was not exempt under Rule 16b-3(d)(1) because the grant was not approved by all five members of CytoDyn’s board. One director did not attend the board meeting and the CEO recused himself from the vote. The remaining three directors voted to approve the grant.
The district judge dismissed the complaint, holding that because the CEO’s grant was approved at a meeting of CytoDyn’s board in accordance with applicable state law and CytoDyn’s bylaws (i.e., a majority of a quorum), the grant was approved by the board of directors within the meaning of Rule 16b-3(d)(1). The plaintiffs appealed the ruling to the Ninth Circuit.
The Ninth Circuit has now affirmed the district court’s ruling. One of the arguments the plaintiffs made was that federal law, not state law, should determine what constitutes board approval (although federal law didn’t seem to support plaintiffs’ argument, either). The court’s opinion clearly rejected that argument, saying “Mindful of the careful balance between federal securities law and state corporate law, we leave the determination of what a corporate board must do to approve insider-issuer acquisitions to the laws of the state where the corporation is incorporated.”
Interestingly, the court raised and left open the question whether an option grant is a “purchase,” an issue neither party had raised. In a footnote, the court said: “The parties do not contest that Pourhassan’s acquisition of the options and warrants was a ‘purchase’ of securities under Section 16(b), so we assume without deciding that the parties are correct on this matter.”
— Alan Dye, Section16.net, April 11, 2022
