A judge has denied an insider’s motion to dismiss a 16(b) complaint alleging that the insider “purchased” issuer common stock within six months of a sale by exchanging his ownership interest in an investment fund for a portion of the issuer stock held by the fund. The insider argued that his receipt of stock in the exchange was exempted by Rule 16a-13 as a change in form of beneficial ownership. The court denied the motion without addressing the merits of the defense, holding that much of the supporting evidence the insider presented could not be considered on a motion to dismiss.
The defendant, Thomas Gad, is an officer and a director of Y-mAbs and is the sole owner of GAD Enterprises, which owned approximately 20% of WG Biotech, a fund whose sole asset was 5.5 million shares of Y-mAbs common stock. Gad reported WG’s stockholdings on his Forms 4 (but said in a footnote that he had no voting or dispositive power over the stock) and reported the exchange on a Form 4 in which he said the transaction merely changed the form of his beneficial ownership.
Gad’s motion to dismiss relied on the statements in his Forms 4 as well as three documents he filed with the court: a “distribution agreement” between GAD Enterprises and WG providing for the exchange of 20,565 shares of WG for 1,029,027 shares of Y-mAbs; a “shareholder register” listing all owners of WG’s stock, the number of shares owned by each and the number of shares of Y-mAbs allocable to each owner; and a “shareholders agreement” governing Gad’s and GAD Enterprises’ investment in WG. The effect of these documents, Gad argued, was to establish that he beneficially owned his proportionate share of the Y-mAbs stock held by WG and that the exchange merely changed the form of his beneficial ownership.
The court agreed that it could take judicial notice of Gad’s Section 16(a) filings, as documents publicly filed with the SEC, but said the court could not rely on the filings for the truth of the matter asserted (i.e., that Gad beneficially owned the Y-mAbs stock held by WG Biotech and received only his pro rata interest in the stock).
The court also agreed that it could consider the distribution agreement because it was “integral to the complaint.” The distribution was integral to the complaint, because the complaint alleged that Gad exchanged his interest in WG for shares of Y-mAbs, a transaction effectuated by the distribution agreement.
The shareholder ledger and the shareholders agreement, on the other hand, were not referred to in the complaint and, the court said, were not integral to the complaint. Gad had filed those agreements to show that he controlled WG, and therefore beneficially owned his pro rata share of its holdings, and that he received only his pro rata share of those holdings. Without those agreements, the court could not conclude that Rule 16a-13 exempted Gad’s acquisition in the exchange.
The court’s ruling means only that whether Rule 16a-13 exempted Gad’s acquisition will have to be determined at trial or on a motion for summary judgment. There is very little case law addressing the application of Rule 16a-13 to redemptions, so a ruling on the merits here might offer some clarity (and comfort).
— Alan Dye, Section16.net, August 16, 2022
