Court Opinion

ID: 6330967
Source: CourtListenerOpinion
Date Created: 2022-04-13 17:02:12.651028+00
Date Added: 2024-06-11T09:23:07.279768
License: Public Domain

FOR PUBLICATION

   UNITED STATES COURT OF APPEALS
        FOR THE NINTH CIRCUIT

 ALPHA VENTURE CAPITAL PARTNERS                     No. 21-35274
 LP; CARACCIOLO FAMILY TRUST;
 GREGORY A. GOULD; LAW OFFICES                        D.C. No.
 OF KENNETH E. CHYTEN 401(K)                       3:20-cv-05909-
 PROFIT SHARING PLAN; GAVIN                             JLR
 MYERS; MARTIN PETERSON,
 derivatively on behalf of CytoDyn
 Inc,                                                 OPINION
                 Plaintiffs-Appellants,

                      v.

 NADER Z. POURHASSAN; CYTODYN,
 INC., Nominal; a Delaware
 corporation,
               Defendants-Appellees.

         Appeal from the United States District Court
            for the Western District of Washington
          James L. Robart, District Judge, Presiding

                 Submitted February 11, 2022 *
                     Seattle, Washington

                        Filed April 8, 2022

    *
      The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).
2 ALPHA VENTURE CAPITAL PARTNERS V. POURHASSAN

          Before: Jay S. Bybee, Carlos T. Bea, and
             Morgan Christen, Circuit Judges.

                      Opinion by Judge Bea

                          SUMMARY **

                             Securities

    The panel affirmed the district court’s dismissal of an
action brought by shareholders of CytoDyn, Inc., alleging
that a corporate insider violated § 16(b) of the Securities
Exchange Act of 1934 by failing to disgorge to the
corporation all profits made from a short-swing transaction
in which he bought and then sold company securities within
a six-month period.

    The panel held that defendant Nader Pourhassan was not
required to disgorge to CytoDyn his short-swing profits from
exercising options and warrants granted by CytoDyn,
entitling him to purchase and later sell CytoDyn shares. The
panel held that the short-swing transaction fell within an
exemption, set forth in SEC Rule 16b-3(d)(1), because the
option and warrant award was “approved by the board of
directors” of CytoDyn. The panel concluded that the
affirmative votes of three of CytoDyn’s five board members,
at a meeting where only four board members were present,
was sufficient, and a unanimous decision was not required

    **
       This summary constitutes no part of the opinion of the court. It
has been prepared by court staff for the convenience of the reader.
   ALPHA VENTURE CAPITAL PARTNERS V. POURHASSAN 3

under either the plain text of Rule 16-3(d)(1), Delaware
corporate law, or CytoDyn’s bylaws.

                       COUNSEL

Rylan Weythman and Kelly A. Mennemeier, Foster Garvey
PC, Seattle, Washington; Mark Richardson, Labaton
Sucharow LLP, Wilmington, Delaware; Michael J.
Maimone, Barnes & Thornburg LLP, Wilmington,
Delaware; Steven J. Purcell, Purcell Julie & Lefkowitz LLP,
New York, New York; for Plaintiffs-Appellants.

Thomas R. Johnson, Perkins Coie LLP, Portland, Oregon,
for Defendant-Appellee Nader Z. Purhassan.

Ian Christy, Miller Nash LLP, Portland, Oregon, for
Nominal Defendant-Appellee CytoDyn, Inc.

                        OPINION

BEA, Circuit Judge:

    CytoDyn, Inc. is a publicly traded corporation
incorporated in the state of Delaware. Appellee Nader
Pourhassan is (and was, at all relevant times) CytoDyn’s
Chief Executive Officer (CEO) and a member of its board of
directors. In late 2019, CytoDyn granted Pourhassan options
and warrants entitling him to purchase several million
CytoDyn shares at certain, specified prices. In mid-2020,
about five months after that option and warrant award,
Pourhassan exercised those options and warrants and then
sold the resulting CytoDyn stock at a profit. Appellants
4 ALPHA VENTURE CAPITAL PARTNERS V. POURHASSAN

here—several       shareholders     of     CytoDyn     (the
“Shareholders”)—sued Pourhassan, alleging that he violated
Section 16(b) of the Securities Exchange Act of 1934.
Section 16(b) requires corporate insiders like CEO
Pourhassan to disgorge to the corporation all profits the
insiders make from buying and then selling (or selling and
then buying) company securities within any six-month
period (a so-called “short-swing” transaction).

    The district court dismissed the Shareholders’ complaint,
finding that Pourhassan need not disgorge his short-swing
profits to CytoDyn because his short-swing transaction fell
within an exemption to the federal rule because the option
and warrant award was “approved” by CytoDyn’s board of
directors. We affirm.

I. BACKGROUND

   A. Statutory Background

    Section 16(b) of the Securities Exchange Act of 1934 is
meant to prevent corporate insiders (i.e., corporate
executives, officers, and directors) from “exploit[ing]
information not generally available to others to secure quick
profits.” Kern Cnty. Land Co. v. Occidental Petroleum
Corp., 411 U.S. 582, 592 (1973). In Congress’s view, short-
swing transactions by corporate insiders pose an “intolerably
great” risk of this type of exploitation. Dreiling v. Am.
Express Co., 458 F.3d 942, 947 (9th Cir. 2006) (quoting
Kern, 411 U.S. at 592). So, to prevent potential abuse by
corporate insiders, Section 16(b) requires such insiders to
return to the corporation any profits they realize from short-
swing transactions. See 15 U.S.C. § 78p(b). Section 16(b)
“imposes strict liability regardless of motive,” requiring all
corporate insiders to disgorge their profits from all short-
   ALPHA VENTURE CAPITAL PARTNERS V. POURHASSAN 5

swing transactions, even those transactions “not actually
based on inside information.” Dreiling, 458 F.3d at 947.

    Recognizing Section 16(b)’s broad reach, Congress
authorized the Securities and Exchange Commission to issue
rules exempting from Section 16(b) certain transactions that
the SEC deemed unlikely to involve inside information. See
15 U.S.C. § 78p(b). Under that rulemaking authority, the
SEC issued rules creating several exemptions from Section
16(b). As relevant here, SEC Rule 16b-3(d) exempts from
Section 16(b) any “transaction . . . involving an acquisition
from the issuer” (i.e., an acquisition from the insider’s
corporation itself) so long as the transaction was either:
1) “approved by the board of directors of the issuer” (here,
the issuer is CytoDyn); 2) approved by “a committee of the
board of directors that is composed solely of two or more
Non-Employee Directors”; or 3) approved by a shareholder
vote. 17 C.F.R. § 240.16b-3(d)(1), (2). In the SEC’s view,
an insider’s acquisition of securities from the issuer does not
“present the same opportunities for insider profit on the basis
of non-public information as do” other types of transactions.
Dreiling, 458 F.3d at 948 (quoting Ownership Reports and
Trading by Officers, Directors and Principal Security
Holders, 61 Fed. Reg. 30,376, 30,377 (June 14, 1996)).
“[W]here the issuer, rather than 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 [Section 16(b)].”
Id. (quoting Ownership Reports and Trading, 61 Fed. Reg.
at 30,377).

   The first of these exemptions—the board approval
exemption—is the exemption at issue here. Under that
exemption, an insider’s acquisition of securities from the
6 ALPHA VENTURE CAPITAL PARTNERS V. POURHASSAN

issuer are exempt from Section 16(b) if the acquisition was
“approved by the board of directors of the issuer.” 17 C.F.R.
§ 240.16b-3(d)(1). So, under this exemption, a corporate
insider can obtain corporate securities from the issuer with
board approval and then re-sell those securities within six
months without triggering Section 16(b)’s profit-remission
requirements. 1

    B. Factual Background

    In December 2019, CytoDyn granted Pourhassan stock
options giving him the right to purchase 2,000,000 shares of
CytoDyn stock and warrants giving him the right to purchase
an additional 2,000,000 CytoDyn shares. 2 The same day,
CytoDyn’s board of directors met. Of the five board
members, four were present at the meeting; one was absent.
Of the four members present, three voted to approve the
award of options and warrants to Pourhassan; Pourhassan
himself was present but did not cast a vote. Under
CytoDyn’s bylaws, the four board members present at the
December 2019 meeting constituted a “quorum for the

    1
       The parties do not contest that the board of directors need only
approve the insider’s acquisition of securities from the issuer and need
not also approve the insider’s subsequent sale of those securities. So we
assume without deciding that the parties are correct. See also Gryl ex
rel. Shire Pharms. Grp. PLC v. Shire Pharms. Grp., 298 F.3d 136, 140–
46 (2d Cir. 2002) (affirming a lower court ruling that the 16b-3(d)(1)
exemption applied because the board approved a compensation plan that
“precisely delimited the securities grants that the individual defendants
would ultimately receive” without inquiring whether the plan also
specified how the defendants were to sell the securities).

    2
       Warrants are similar to stock options in that they entitle the
warrant-holder to purchase shares of stock of a specified company at a
specific exercise price, usually within a specified time period. See
Warrant, Black’s Law Dictionary (11th ed. 2019).
   ALPHA VENTURE CAPITAL PARTNERS V. POURHASSAN 7

transaction of business” and the affirmative vote of three
directors—a majority of the directors present—
“constitute[d] action by the Board of Directors.”

    In late April and early May 2020, less than six months
after the December 2019 option and warrant award and
board meeting, Pourhassan exercised the options that he held
to buy 2,000,000 shares of CytoDyn stock and sold nearly
5,000,000 shares of CytoDyn stock, making a significant
profit.    Soon thereafter, some CytoDyn shareholders
demanded that Pourhassan disgorge to CytoDyn the profits
that he made from selling the shares of CytoDyn stock that
he obtained through the 2019 option and warrant award. The
Shareholders argued that because the 2019 award and the
subsequent sales were within six months of one another, they
were a short-swing transaction under Section 16(b) of the
Exchange Act. 3 CytoDyn responded that the option and
warrant award was exempt under SEC Rule 16b-3(d)(1),
relieving Pourhassan of his obligation to disgorge his profits
to CytoDyn. After several fruitless back-and-forths between
the Shareholders and CytoDyn, the Shareholders sued.

    In the district court, Pourhassan moved to dismiss the
Shareholders’ complaint on the grounds that Rule 16b-
3(d)(1)’s board approval exemption applied to the 2019
option and warrant award. The Shareholders argued that the
16b-3(d)(1) exemption did not apply because, in their view,
the relevant insider-issuer transaction must be approved by
“the company’s ‘full board’ of directors—all directors, not
    3
      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.
See also Gryl, 298 F.3d at 141 (“[F]or purposes of the rules promulgated
under Section 16(b) the acquisition of a securities option is deemed to be
equivalent to the acquisition of the security underlying that option.”).
8 ALPHA VENTURE CAPITAL PARTNERS V. POURHASSAN

merely a majority.” And here, the parties agree that, of
CytoDyn’s five board members, only four attended the
meeting to approve the option and warrant award and only
three voted to approve that award. The district court
dismissed the Shareholders’ complaint, finding no support
for the Shareholders’ argument in the applicable caselaw or
the text of Rule 16b-3(d). The Shareholders timely
appealed.

II. STANDARD OF REVIEW

    We review de novo a district court’s decision to dismiss
a complaint under Fed. R. Civ. P. 12(b)(6). See Dreiling,
458 F.3d at 946 n.2. We may consider documents referred
to in the complaint or any matter subject to judicial notice,
including SEC filings. See id.

III.    DISCUSSION

    The parties dispute only whether the Rule 16b-3(d)(1)
board approval exemption applies to Pourhassan’s 2019
option and warrant award. 4 Specifically, the parties dispute
the meaning of the phrase “approved by the board of
directors” as used in that rule. The Shareholders argue that
16b-3(d)(1) requires approval by the “full board” of
directors. On that theory, the affirmative votes of three of
CytoDyn’s five board members, at a meeting where only
four board members were present, does not constitute
“approv[al] by the board of directors” of CytoDyn under
Rule 16b-3(d)(1). Pourhassan disagrees. In his view,
because the CytoDyn board approved the 2019 option and
warrant award by a majority vote “in compliance with

    4
      The parties do not dispute that Pourhassan, as CytoDyn’s CEO, is
a corporate executive subject to Section 16(b).
   ALPHA VENTURE CAPITAL PARTNERS V. POURHASSAN 9

Delaware law and CytoDyn’s bylaws,” the board
“approved” the award under 16b-3(d)(1). The district court
agreed with Pourhassan. With jurisdiction under 28 U.S.C.
§ 1291, we affirm.

    Recall that Rule 16b-3(d)(1) exempts from Section 16(b)
any transactions that involve a corporate insider’s
acquisition of securities from the issuer if the acquisition was
“approved by the board of directors” of the issuer (here,
CytoDyn). 17 C.F.R. § 240.16b-3(d)(1). In plain English, if
a corporation’s board “approve[s]” the corporation’s
decision to give securities to an insider, the insider can re-
sell those securities within six months without having to
disgorge his profits to the corporation under Section 16(b).
The operative text from the rule is “approved by the board
of directors”; the two component phrases are “approved” and
“board of directors.”         Neither phrase supports the
Shareholders’ proposed unanimity requirement.

    First is the word “approved.” “Approved” is the past
tense of the verb “approve,” which means to “give formal
sanction to” or to “confirm authoritatively.” Approve,
Black’s Law Dictionary (11th ed. 2019). “Approved” by
itself does not prescribe any particular form of approval or
process for obtaining approval.         Approval does not
inherently require unanimity, a supermajority, a particular
quorum, or any other specific steps. A complete but non-
unanimous body can give approval, as can a body missing
some of its members. Cf., e.g., Crawford v. Bd. of Educ.,
458 U.S. 527, 532 n.5 (1982) (noting that “[t]he State Senate
[of California] approved the Proposition by a vote of 28 to 6”
though the California Senate had (and has) 40 seats);
Trunk v. City of San Diego, 629 F.3d 1099, 1104 (9th Cir.
2011) (noting that the U.S. House of Representatives
10 ALPHA VENTURE CAPITAL PARTNERS V. POURHASSAN

“approved the bill by a vote of 349 to 74” though the House
has 435 members).

    Next is the phrase “board of directors.” That phrase
means the “governing body of a corporation, partnership,
association, or other organization, elected by the
shareholders or members to establish policy, elect or appoint
officers and committees, and make other governing
decisions.” 5 Board of Directors, Black’s Law Dictionary
(11th ed. 2019). Nothing in this definition supports the
unanimity requirement either. A board of directors certainly
differs from a “committee of the board of directors” and
from an individual director. But a board of directors does
not cease to be a board of directors if a member is absent or
non-voting any more than the United States Senate ceases to
be the United States Senate if a Senator is absent or non-
voting. Cf. Viet. Ass’n for Victims of Agent Orange v. Dow
Chem. Co., 517 F.3d 104, 110 (2d Cir. 2008) (“The full
Senate rejected this measure by a vote of 62–22.”);
Rosado v. Civiletti, 621 F.2d 1179, 1187 (2d Cir. 1980)
(“Following extensive hearings in the Senate Foreign
Relations and Judiciary Committees, the full Senate
unanimously approved the treaty by a vote of 90 to 0 on July
21, 1977.”). So by its plain terms, Rule 16b-3(d)(1)’s text—
“approved by the board of directors”—places no limits on
how a board of directors must “approve[]” insider-issuer
transactions like Pourhassan’s 2019 option and warrant

    5
      The law of Delaware, the state where CytoDyn is incorporated, has
an analogous understanding. Boards of directors are groups of “1 or
more members, each of whom shall be a natural person,” and “[t]he
business and affairs of every corporation [incorporated in Delaware]
shall be managed by or under the direction of” that corporation’s board.
8 Del. Code. § 141(a), (b).
   ALPHA VENTURE CAPITAL PARTNERS V. POURHASSAN 11

award. Rule 16b-3(d)(1) has no embedded requirements of
unanimity, a supermajority, or a particular quorum.

    So, if Rule 16b-3(d)(1) sets out no specific procedure for
how a board must approve an insider-issuer securities
acquisition, where do we find any procedural requirements?
The specific context here—corporate boards of directors—
provides the answer. In situations like this, the Supreme
Court has recognized that the “gaps” in the federal laws
“bearing on the allocation of governing power within [a]
corporation” should generally be “filled with state law.”
Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 99 (1991).
Here, state law fills the gap well. State corporate codes,
supplemented by the articles of incorporation and corporate
bylaws of individual corporations, typically specify the
procedures that a corporate board must follow to “approve”
corporate decisions. For instance, the corporate law of
Delaware, CytoDyn’s state of incorporation and the home of
most American corporations, explains that the “vote of the
majority of the directors present at a meeting at which a
quorum is present shall be the act of the board of directors.”
8 Del. Code § 141(b). In turn, Delaware defines a quorum
as a “majority of the total number of directors.” Id. Note
the precise language in the statute: a board decision made by
majority of a quorum of a board constitutes an “act of the
board of directors,” not an act of just part of the board. Id.
So, for Delaware corporations like CytoDyn, a quorum of
the board can take action by a majority vote. 6 Here,
    6
      Delaware law does permit corporations to specify, through their
bylaws or articles of incorporation, different procedures that their boards
can use. Corporations may, for instance, require a larger or smaller
number of directors than a simple majority for a quorum, or may require
an affirmative vote by more than a simple majority of directors for the
vote to be an “act of the board of directors.” See 8 Del. Code § 141(b).
CytoDyn elected to retain Delaware’s default rules, such that a
12 ALPHA VENTURE CAPITAL PARTNERS V. POURHASSAN

Delaware law thus fills the gap left by Rule 16b-3(d)(1).
Delaware state law controls the specific procedures that
CytoDyn’s board must follow to “approve[]” insider-issuer
security transactions under Rule 16b-3(d)(1).

    The appellant Shareholders disagree. They argue that
under Rule 16b-3(d)(1), “the board of directors” means the
“full board” such that each and every board member must
vote to approve an insider-issuer transaction for that
transaction to be “approved by the board of directors.” But
the word “full” appears nowhere in Rule 16b-3(d)(1). And
as just explained, the rule’s actual text—“approved by the
board of directors”—does not support the Shareholders’
unanimity requirement.

    Recognizing that Rule 16b-3(d)(1)’s text cuts against
them, the Shareholders cite several sources that do use the
phrase “full board” when discussing Rule 16b-3(d)(1)’s
board approval exemption. First are a few SEC writings that
discuss Rule 16b-3(d)(1). E.g. Ownership Reports and
Trading, 61 Fed. Reg. at 30,381 (“When the rule requires
‘Non-Employee Director,’ full board or shareholder
approval, the Commission intends that the approval relate
to specific transactions rather than the plan in its
entirety.” (footnote omitted)); Exchange Act Section 16 and
Related Rules and Forms, U.S. SEC (Aug. 11, 2010),
https://www.sec.gov/divisions/corpfin/guidance/sec16interp.htm
(“[A]n amendment to a material term of a security acquired
pursuant to the full board, Non-Employee Director or

“majority” of CytoDyn’s board of directors “constitute[s] a quorum” and
“the vote of a majority of the directors present . . . constitute[s] action by
[CytoDyn’s] Board of Directors.”
   ALPHA VENTURE CAPITAL PARTNERS V. POURHASSAN 13

shareholder approval conditions of Rule 16b-3(d) would
require further approval . . . .”).

    The SEC writings cited by the Shareholder do not
persuade. At the outset, the Ownership Reports and Trading
source is the SEC release containing the text of the final Rule
16b-3(d)(1). But the Shareholders quote from the Rule’s
preamble, not from the text of the Rule itself. As noted
above, Rule 16b-3(d)(1) itself omits the word “full,” and
when a rule conflicts with its own preamble, the rule
controls. See El Comite Para El Bienestar de Earlimart v.
Warmerdam, 539 F.3d 1062, 1070 (9th Cir. 2008). More
pointedly, we have already rejected an argument nearly
identical to the Shareholders’ here. In WildEarth Guardians
v. Provencio, we refused to modify an agency rule’s
meaning with the word “sparingly” because “the word
‘sparingly’ d[id] not appear in the Rule, but instead in its
preamble.” 923 F.3d 655, 667 (9th Cir. 2019). Here, as in
WildEarth, “the preamble does not ‘impose a duty above and
beyond the actual terms of the regulation.’” Id.

    More broadly, the SEC writings cited by the
Shareholders are better interpreted as consistent with Rule
16b-3(d)(1), not in conflict with it. The writings each use
the phrase “full board” in the same sentence as descriptions
of other forms of approval that can exempt an insider-issuer
securities acquisition from Section 16(b) disgorgement. For
instance, the Rule preamble notes that Rule 16b-3(d)
requires the “approval of either the full board, the committee
of Non-Employee Directors or shareholders,” Ownership
Reports and Trading, 61 Fed. Reg. at 30,382, referring to the
three exemptions set out in 17 C.F.R. § 240.16b-3(d).
Further, the writings nowhere define the board approval
exemption as, or limit that exemption to, approval by a
unanimous corporate board.
14 ALPHA VENTURE CAPITAL PARTNERS V. POURHASSAN

    With these facts in mind, the SEC writings do not appear
to use the phrase “full board” to imply that the board
approval exemption requires the assent of each and every
board member. Rather, the writings are better understood as
using “full board” to distinguish between the different Rule
16b-3(d) approval exemptions, one of which requires
approval from the “board of directors” as a whole and
another of which requires approval from a constituent part
of the board of directors: a “committee of the board.”
17 C.F.R. § 240.16b-3(d)(1). So the SEC writings neither
contradict Rule 16b-3(d)(1)’s plain text nor support the
Shareholders’ unanimity requirement. A “full” board of
directors (as opposed to a “committee of the board”) is still
the “full” board (again, as opposed to a “committee” thereof)
even if some members are absent or not voting. Cf. Dow
Chem. Co., 517 F.3d at 110 (“The full Senate rejected this
measure by a vote of 62–22.” (emphasis added)); Rosado,
621 F.2d at 1187 (“Following extensive hearings in the
Senate Foreign Relations and Judiciary Committees, the full
Senate unanimously approved the treaty by a vote of 90 to 0
on July 21, 1977.” (emphasis added)).

    Next, the Shareholders cite a few federal court opinions
that also use the “full board” language, but these also provide
the Shareholders no support. Dreiling did not address the
question on appeal here—what form of “approv[al]” is
necessary to trigger Rule 16b-3’s board approval
exemption—and it uses the phrase “full board” only in
passing and only as part of two direct quotations of the SEC
writings just described. 7 458 F.3d at 949, 954 (twice quoting
Ownership Reports and Trading, 61 Fed. Reg. at 30,381).
Similarly, Gryl ex rel. Shire Pharmaceuticals Group PLC v.

    7
      So too with Atl. Tele-Network v. Prosser, 151 F. Supp. 2d 633
(D.V.I. 2000). See id. at 638, 639.
   ALPHA VENTURE CAPITAL PARTNERS V. POURHASSAN 15

Shire Pharmaceuticals Group PLC uses the phrase “full
board” just once and does so whilst citing those same SEC
writings. 298 F.3d at 141 n.2 (citing Ownership Reports and
Trading, 61 Fed. Reg. at 30,381). If the SEC writings’ use
of the phrase “full board” does not support the Shareholders’
position, then neither do cases that cite those writings
without adding any additional exposition or interpretation.
Further impugning the Shareholders’ argument, Gryl
affirmed that the Rule 16b-3(d)(1) exemption applied
without bothering to analyze whether the relevant board vote
was unanimous or whether the board meeting in question
was attended by every board member. See Gryl, 298 F.3d
at 144.

    Third, the Shareholders point to a variety of sources,
including Delaware state law, decisions of Delaware state
courts, and CytoDyn’s own corporate bylaws, that
distinguish between the “whole board” or “full board” on
one hand and a “majority” of the board of directors on
another. See, e.g., In re Oracle Corp. Derivative Litig.,
No. 2017-0337, 2018 WL 1381331, at *22 n.287 (Del. Ch.
Mar. 19, 2018); 8 Del. Code § 312(h). But like the SEC
writings and the federal case law cited by the Shareholders,
these sources are unpersuasive. A mere “majority” of a
corporate board and the “whole board” (defined in
CytoDyn’s bylaws as “the total number of authorized
Directors”) are plainly different concepts.        But this
distinction is unhelpful here because Rule 16b-3(d) does not
contain the words “whole,” “full,” or “majority.” Rather,
16b-3(d)(1) simply says that for insider-issuer security
transactions to be exempt from Section 16(b), the
transactions must be “approved by the board of directors.”
And for the reasons given above, this language imposes no
specific procedural requirements on how the board must give
that approval.
16 ALPHA VENTURE CAPITAL PARTNERS V. POURHASSAN

    Last, the Shareholders object that Pourhassan’s
interpretation of Rule 16b-3(d)(1) creates an “illogical”
“loophole.” If Rule 16b-3(d)(1) permits corporate boards to
approve insider-issuer security transactions in any way that
complies with corporate bylaws and Delaware state law, the
Shareholders complain that the level of board support
necessary to approve such a transaction turns on the “form
of the approval in question.” What the Shareholders mean
is that had CytoDyn’s board approved Pourhassan’s 2019
option and warrant award without a board meeting but by the
written approval of the directors, the board would have
needed to act unanimously. But because the board acted
during an actual meeting, the board needed only a majority
vote under Delaware law. Compare 8 Del. Code § 141(b)
(“The vote of the majority of the directors present at a
meeting at which a quorum is present shall be the act of the
board of directors . . . .”), with id. § 141(f) (providing that a
board of directors can take action “without a meeting if all
members of the board . . . consent thereto in writing”). 8 But
this is not a “loophole.” This is how corporate law works.
Delaware state law deliberately imposes stricter-than-usual
requirements on corporate boards when they act by written
consent, a process that lacks the deliberation and procedural
formalities inherent in a board meeting. The distinction that
Delaware draws between board approval at a meeting and
board approval by written consent is, as they say, not a bug
but a feature.

    With the above in mind, we agree with the district court
that Rule 16b-3(d)(1) exempts Pourhassan’s 2019 option and
warrant award from Section 16(b). Taking as true the
allegations in paragraphs 31 and 32 of the Shareholders’
complaint, a quorum of CytoDyn’s board met and approved

    8
        CytoDyn’s corporate bylaws draw the same distinction.
   ALPHA VENTURE CAPITAL PARTNERS V. POURHASSAN 17

that award by a majority vote, in compliance with both
Delaware corporate law and CytoDyn’s bylaws. See 8 Del.
Code § 141(b). This is sufficient under Rule 16b-3(d)(1).
Pourhassan thus was not required to disgorge to CytoDyn his
profits when he sold stock less than six months after
receiving the 2019 option and warrant award. See 15 U.S.C.
§ 78p(b); 17 C.F.R. § 240.16b-3(d)(1). The Shareholders’
complaint was properly dismissed.

                            ***

    While this case turns on discrete questions of regulatory
and statutory interpretation, it is just a part of a larger
balancing act between federal securities law and state
corporate law. As the Supreme Court observed decades ago,
corporations are “creatures of state law.” Santa Fe Indus. v.
Green, 430 U.S. 462, 479 (1977) (quoting Cort v. Ash,
422 U.S. 66, 84 (1975)). Investors thus “commit their funds
to corporate directors on the understanding that, except
where federal law expressly requires certain responsibilities
of directors with respect to stockholders, state law will
govern the internal affairs of the corporation.” Id. (quoting
Cort, 422 U.S. at 84).

    Here, no federal law expressly requires us to federalize
the state rules governing corporate boards’ internal affairs.
SEC Rule 16b-3(d)(1) exempts insider-issuer acquisitions
from Section 16(b) of the Securities Exchange Act if a
corporate board of directors “approve[s]” those acquisitions,
but the rule’s text does not require the board to follow any
particular procedure or process when giving that approval.
17 C.F.R. § 240.16b-3(d). 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. See Kamen, 500 U.S.
18 ALPHA VENTURE CAPITAL PARTNERS V. POURHASSAN

at 99. When it comes to the precise procedure that a
corporate board of directors must follow to satisfy Rule 16b-
3(d)(1), federal securities law defers to—and does not
displace—the state laws governing corporate boards.

IV.      CONCLUSION

      The district court’s ruling is AFFIRMED.