I blogged last year about the SDNY’s grant of summary judgment to Leonard Tannenbaum, who was a ten percent owner of two closed-end investment companies that combined in a stock merger. The district judge held that Tannenbaum’s acquisition of the acquiror’s stock in the merger was exempt from Section 16(b) under the “unorthodox transaction exception,” which courts apply when: (1) the transaction is “involuntary” on the part of the insider, and (2) the insider had no access to inside information that could have been exploited in connection with the transaction.
Involuntariness. The merger required approval by the stockholders of both companies. Tannenbaum was a party to a stockholders agreement which required that he vote his shares of both companies as instructed by a third party, and the third party directed Tannenbaum to vote in favor of the merger. On that basis, the district court concluded that, even though Tannenbaum’s vote was necessary to approve the merger, stockholder approval was not within his control and therefore his acquisition was involuntary. On appeal, the Second Circuit agreed with this conclusion, rejecting plaintiff’s argument that Tannenbaum’s vote in favor of the merger was voluntary because (1) he had voluntarily entered into the stockholders agreement and (2) he could have breached his contractual obligation and voted against the merger.
Access to Inside Information. In the district court, the plaintiff argued that Tannenbaum had access to material nonpublic information based on his pre-merger telephone conversation with Matt Pendo, who was president of both companies. The press release announcing the merger said the exchange ratio would be based on the net asset value of each company immediately prior to closing and illustrated how the ratio would be calculated based on the NAV of each company at the end of the prior quarter. Tannenbaum testified that he called Pendo after the announcement to try to determine whether he was being “hurt” or “benefitted” by the merger. He testified that Pendo walked him through the public disclosure of the exchange ratio but provided no material nonpublic information. Based on this unrefuted testimony, the district court held that Tannenbaum did not have access to exploitable inside information. Even if Pendo had shared inside information, the district court said, that information could not have been material, because the only material information unknown to the public was what the companies’ NAVs would be at the time of closing, and that information was inherently unknowable.
The Second Circuit disagreed with the finding that Tannebaum didn’t have access to inside information. Although Tannenbaum testified that Pendo only walked him through “how the NAV was being calculated,” it wasn’t clear to the appellate court that all aspects of the valuation methodology, and the information Pendo provided, had been made public. The court did not address how any nonpublic information might have been exploitable but remanded the case for a determination: “(1) whether Pendo and Tannenbaum discussed the NAV calculation methodologies, (2) whether those methodologies were in fact nonpublic, and (3) how, if at all, such methodologies were immaterial.”
– Alan Dye, Section16.net, July 24, 2023
