Opinion ID: 778512
Heading Depth: 2
Heading Rank: 3

Heading: Approval by the Issuer's Board of Directors

Text: 22 Where there are multiple securities transactions involved, as here, the text of Rule 16b-3(d)(1) does not mandate that the issuer's board of directors approve each individual transaction separately. Rather, it is sufficient if the board approves the overall plan of which the subject transactions are but a constituent part, so long as the plan approved is one pursuant to which the terms and conditions of each transaction are fixed in advance, such as a formula plan. 17 C.F.R. § 240.16b-3 note 3.
23 For guidance as to the manner in which a formula plan under the Board Approval Exemption should fix in advance the terms and conditions of its constituent securities transactions, the Securities and Exchange Commission (SEC) release accompanying the promulgation of Rule 16b-3(d)(1) points to former Rule 16b-3(c)(2)(ii). See Ownership Reports & Trading by Officers, Dirs. & Principal Sec. Holders, Exchange Act Release No. 34-37260, 61 F.R. 30,376, at 30,381 n.71 (June 14, 1996) [hereinafter 1996 Release]. That former rule defined a formula plan as the grant or award of securities made pursuant to a plan that by its terms ... sets forth a formula that determines the amount, price and timing, using objective criteria. 17 C.F.R. § 240.16b-3(c)(2)(ii) (amended Aug. 15, 1996). A formula plan must be sufficiently prescriptive in order to prevent insiders from having, directly or indirectly, any control over the terms of their own awards, and therefore removes the ability of the insiders to time their acquisitions under the plan to take advantage of inside information. 1991 Release at 81,269. 24 Formula specificity further serves the goal, urged by the SEC as amicus curiae, of ensuring that the approving board gives due consideration to the securities transactions that will subsequently flow out of the formula plan, thereby evincing acknowledgment and accountability by the board as to its own actions. SEC Amicus Br. at 24 (internal quotation marks omitted). Of course, whether the formulae set forth in a given plan are adequately specific turns on the overall corporate context served by the plan's grant or award of securities. Are the securities being awarded solely as a form of special compensation to a limited number of highly influential insiders? Or are the securities instead being granted to all eligible option holders, without regard to status, as a means of fully effecting an overarching, value-adding corporate event (e.g., a merger)? Clearly, the latter scenario presents a diminished risk that the securities grants are not motivated by a legitimate corporate purpose and, as such, should generally require less in the way of formula specificity. 25 In respect of the securities transactions at issue in this case, we find that Article VI, Paragraph 6.1(a) of the Merger Agreement encapsulated the formula plan required for purposes of the Board Approval Exemption. All of the relevant terms and conditions of the Roberts-Shire option conversion were fixed within that single passage: 26 &#x2022; Who? All holders of Roberts options. 27 &#x2022; What do they receive? Shire options. 28 &#x2022; When? At the Effective Time of the Merger and without any action on the part of the [Roberts option] Holders. 29 &#x2022; In what quantity? An amount equal to the product of (1) the number of Roberts options held by the option holder immediately prior to the merger and (2) a stipulated exchange ratio. 30 &#x2022; At what exercise price? A price equal to the exercise price of the old Roberts option divided by the exchange ratio. 31 &#x2022; Under what governing terms? The duration and all other exercise terms of the converted Shire options would be identical to those of the old Roberts options. 32 In the detailed and prescriptive manner demanded of formula plans under former Rule 16b-3(c)(2)(ii), the option conversion provisions contained in Article VI, Paragraph 6.1(a) of the Merger Agreement left Roberts option holders no discretion unilaterally to alter in their favor the amount, price, timing and exercise terms of the impending option conversion. 4 Far from being open-ended, the Merger Agreement precisely delimited the securities grants that the individual defendants would ultimately receive on the effective date of the Merger. 33 The plaintiffs object that the Merger Agreement's formula plan failed to spell out the full names of all the individuals holding Roberts options prior to the Merger, the exact quantity of Roberts options held separately by each such person, and the actual exercise terms governing the Roberts options. Cf. Skadden, Arps, Slate, Meagher & Flom L.L.P., SEC No-Action Letter [1999 Transfer Binder], Fed. Sec. L. Rep. (CCH) ¶ 77,515, at 78,565-66 (Jan. 12, 1999) [hereinafter Skadden No Action Letter]. However, while we agree that listing such minutiae would not be inconsistent with the Board Approval Exemption, all-encompassing precision is not mandatory in every application of the exemption. This is particularly so where, as here, the three missing pieces of information were not free-floating variables manipulable by the future beneficiaries of the Roberts-Shire option conversion. 34 Whether or not separately identified in the formula plan, all holders of Roberts options at the moment of the Merger would receive converted Shire options — and the Shire board, by approving the formula plan, would so be aware. Whether or not quantified according to individual holdings, all extant Roberts options would be converted — and, again, the Shire board would so be aware. Finally, whether or not reprinted verbatim in the Merger Agreement, the terms previously governing the Roberts options would still govern the converted Shire options — and, as before, the Shire board would so be aware. 35
36 Having concluded that the Merger Agreement contained an appropriate formula plan, we must now decide whether the Merger Agreement received the requisite board approval. That the full Shire board approved the Merger Agreement is made clear from a public document that the plaintiffs concede they relied upon in drafting their complaint. On November 22, 1999, Shire filed with the SEC its Form F-4 Registration Statement Under the Securities Act of 1933 (the Registration Statement), appended to which was a copy of the executed Merger Agreement. Within the body of the Registration Statement was a point-by-point summary of the Merger Agreement, including a description of the option conversion plan that mirrored Article VI, Paragraph 6.1(a) of the Merger Agreement. 5 As for the Shire board's approval of the Merger Agreement, the Registration Statement stated that 37 on July 22, 1999, the Shire board met to discuss the merger, the terms of the merger agreement and the proposed exchange ratio.... The Shire board then approved the merger agreement ..., contingent upon approval of a special committee.... 38 Registration Statement at 48-49. The Registration Statement was signed by all of Shire's directors. See id. at II-5. 39 The plaintiffs do not challenge the factual accuracy of the Registration Statement, nor do they dispute that the Shire board approved the Merger Agreement on July 22, 1999. Rather, they claim that the nature of the July 22 approval — as reflected in the Registration Statement — was of a type insufficient as a matter of law to invoke the Board Approval Exemption. This supposedly fatal deficiency arises from: (1) the conditionality of the July 22 approval in that such approval was ultimately conditioned on final approval of the Merger Agreement by a committee of the board 6 as well as final approval of the Merger by Shire's shareholders; and (2) the Shire board's failure to indicate that its approval of the Roberts-Shire option conversion was specifically for purposes of exempting the individual defendants from Section 16(b) liability. Both of the plaintiffs' arguments are unavailing. 7 40 First, as observed by amicus curiae, once the board has approved an issuer-to-insider transaction involving a grant or award of securities, it is irrelevant that the grant or award it approved may become final and effective only upon approval by others or the occurrence of other subsequent events. SEC Amicus Br. at 23. This is because the Board Approval Exemption does not require that board approval be the final definitive event in the grant of securities to an officer or director. Id. at 22; see also 1996 Release at 30,380 (If a transaction has satisfied more than one of the alternative approval conditions specified in ... rule [16b-3(d)]... the issuer may rely on any condition that provides the basis of the exemption.). We thus distinguish between the multiple approval preconditions to the Merger itself — here, board, committee and shareholder approval — and the single board approval precondition to applying the Board Approval Exemption. Only the latter, which we deem satisfied, is at issue in this case. 41 Second, the plaintiffs contend that application of the Board Approval Exemption required the Shire board to approve the option conversion plan with an express indication that its approval was intended to invoke the exemption. Although a single SEC no-action letter superficially supports this view, see Skadden No Action Letter at 78,566, the SEC in its amicus brief now counsels against reading a purpose-specific approval requirement into Rule 16b-3(d)(1). See SEC Amicus Br. at 24-26. While we must defer to the SEC's interpretations of its own regulations in its amicus briefs unless they are plainly erroneous or inconsistent with the regulations, see Levy v. Southbrook Int'l Invs., Ltd., 263 F.3d 10, 14 (2d Cir.2001), SEC no-action letters constitute neither agency rule-making nor adjudication and thus are entitled to no deference beyond whatever persuasive value they might have, see Morales v. Quintel Entm't, Inc., 249 F.3d 115, 129 (2d Cir.2001); N.Y. City Employees' Ret. Sys. v. SEC, 45 F.3d 7, 13 (2d Cir.1995); Amalgamated Clothing & Textile Workers Union v. SEC, 15 F.3d 254, 257 (2d Cir.1994). Indeed, [e]ven when district courts have ruled in accord with no-action letters, they almost always have analyzed the issues independently of the letters. N.Y. City Employees' Ret. Sys., 45 F.3d at 13. 42 We find wholly unpersuasive the artificial imposition of purpose-specific approval on the Board Approval Exemption, as did the District Court and the only other court to have addressed this issue. See Atlantic Tele-Network v. Prosser, 151 F.Supp.2d 633, 637-42 (D.Vi.2000). The Skadden No-Action Letter provides neither authority nor rationale for requiring purpose-specific approval. Certainly the text of the rule itself contains no suggestion that such a requirement exists. In fact, the rule focuses singularly and objectively on requiring that the terms and conditions of the transaction receive board approval; it mentions nothing about the subjective motivations of the approving body. 43 A requirement of purpose-specific approval would run counter to the very reason why the Board Approval Exemption was established in the first place. As the SEC stated in its release accompanying the promulgation of Rule 16b-3, the provision of a broader exemption from short-swing profit recovery for transactions between an issuer and its directors or officers ... presented a simplified, flexible approach based on the premise that transactions between an issuer and its directors or officers 44 do not appear to present the same opportunities for insider profit on the basis of non-public information as do market transactions by officers and directors. Typically, where the issuer, rather than the trading markets, is on the other side of an officer or director's transaction in the issuer's equity securities, any profit obtained is not at the expense of uninformed shareholders and other market participants of the type contemplated by the statute. Based on its experience with the Section 16 rules, the Commission is persuaded that transactions between the issuer and its officers and directors that are pursuant to plans ... that satisfy other objective gate-keeping conditions, are not vehicles for the speculative abuse that section 16(b) was designed to prevent. Accordingly, these transactions are exempted by new Rule 16b-3 as adopted. 45 1996 Release at 30,377. 8 So long as the relevant securities transaction is between an issuer and insider, and so long as the terms and conditions of that transaction receive advance approval by the board of directors, there exists sufficient protection to ensure that any short-swing profit taking that follows is not the result of unfair market manipulation. Accordingly, we hold that a securities transaction need not receive purpose-specific approval in order to qualify for the Board Approval Exemption of Rule 16b-3(d)(1).