Court Opinion

ID: 9896587
Source: CourtListenerOpinion
Date Created: 2023-11-13 19:00:41.914452+00
Date Added: 2024-06-11T09:15:08.491606
License: Public Domain

FOR PUBLICATION

      UNITED STATES COURT OF APPEALS
           FOR THE NINTH CIRCUIT

ANDREW E. ROTH,                                 Nos.    22-16632
                                                        22-16633
                Plaintiff-Appellee /
                Cross-Appellant,               D.C. No. 4:21-cv-
     v.                                          04288-YGR

FORIS VENTURES, LLC; VALLEJO
VENTURES TRUST U/T/A 2/12/96;                       OPINION
L. JOHN DOERR; ANN DOERR;
AMYRIS, INC.,

                Defendants-Appellants /
                Cross-Appellees.

            Appeal from the United States District Court
               for the Northern District of California
          Yvonne Gonzalez Rogers, District Judge, Presiding
                 Argued and Submitted July 17, 2023
                     San Francisco, California
                      Filed November 13, 2023

     Before: KIM MCLANE WARDLAW and MILAN D.
    SMITH, JR., Circuit Judges, and DOUGLAS L. RAYES, *
                         District Judge.

*
 The Honorable Douglas L. Rayes, United States District Judge for the
District of Arizona, sitting by designation.
2                  ROTH V. FORIS VENTURES, LLC

             Opinion by Judge Milan D. Smith, Jr.

                          SUMMARY **

                         Securities Law

    The panel affirmed in part and reversed in part the
district court’s order denying defendants’ motion to dismiss
a derivative action brought by a shareholder of Amyris, Inc.,
under § 16(b) of the Securities Exchange Act of 1934, which
imposes liability for sales and purchases of securities
between an issuer of securities and a beneficial owner,
director, or officer of that issuer that occur within six months
of each other and realize a profit.
    Securities and Exchange Rule 16b-3(d)(1) exempts from
liability under § 16(b) transactions between an issuer and a
director where the issuer’s board approves the
transaction. Agreeing with the Second Circuit, the panel
held that Rule 16b-3(d)(1) does not require the board of
directors to approve a transaction for the specific purpose of
exempting it from liability.
    The panel held that the district court erred by imposing a
purpose-specific approval requirement. However, the
district court did not err in finding that the Amyris board was
aware that defendant John Doerr had an indirect pecuniary
interest in the challenged transactions when it approved
them. The panel left it for the district court on remand to

**
  This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
                ROTH V. FORIS VENTURES, LLC              3

address whether defendant Foris Ventures, LLC, a beneficial
owner of Amyris, was a director by deputation and thus
eligible for the Rule 16b-3(d)(1) exemption.

                       COUNSEL

Michael D. Celio (argued), Jessica Valenzuela, Kevin J.
White, and Paul J. Collins, Gibson Dunn & Crutcher LLP,
Palo Alto, California; Jonathan A. Shapiro, Goodwin Procter
LLP, San Francisco, California; Robert M. Tiefenbrun,
Goodwin Procter LLP, Los Angeles, California; Grant P.
Fondo, Goodwin Procter LLP, Redwood City; Daniel R.
Adler, Gibson Dunn & Crutcher LLP, Los Angeles,
California; for Defendant-Appellant.
Glenn F. Ostrager (argued) and Joshua S. Broitman,
Ostrager Chong Flaherty & Broitman PC, New York, New
York; William F. Jonckheer and Robert C. Schubert,
Schubert Jonckheer & Kolbe LLP, San Francisco,
California; for Plaintiff-Appellee.
Kerry J. Dingle, Senior Appellate Counsel; Dominick V.
Freda, Assistant General Counsel; Michael A. Conley,
Solicitor; Securities & Exchange Commission, Washington
D.C.; for Amicus Curiae Securities and Exchange
Commission.
4                   ROTH V. FORIS VENTURES, LLC

                             OPINION

M. SMITH, Circuit Judge:

    Section 16(b) of the Securities Exchange Act of 1934
imposes liability for sales and purchases of securities
between an issuer of securities and a beneficial owner,
director, or officer of that issuer that occur within six months
of each other and realize a profit. 15 U.S.C. § 78p(b). The
statute authorizes the Securities and Exchange Commission
(SEC) to exempt certain transactions from liability pursuant
to that section. Id. Pursuant to this authority, the SEC
promulgated Rule 16b-3, which exempts transactions
between an issuer and a director where the issuer’s board
approves the transaction. 17 C.F.R. § 240.16b-3(d)(1).
    The primary question presented in this appeal is whether
Rule 16b-3 requires the board of directors to approve a
transaction for the specific purpose of exempting it from
liability. We hold that it does not. 1
STATUTORY AND REGULATORY BACKGROUND
    Section 16(b) provides, in relevant part:

         For the purpose of preventing the unfair use
         of information which may have been

1
  This appeal has been held in abeyance as to Amyris since August 14,
2023, due to the automatic stay imposed by 11 U.S.C. § 362. See Docket
Entry No. 49. The Clerk will administratively close this appeal as to
Amyris. No mandate will issue in connection with this administrative
closure, and this opinion does not constitute a decision on the merits as
to Amyris. Within 28 days after any change to the automatic stay’s effect
in this appeal, any party may notify this court and move to reopen the
appeal as to Amyris or for other appropriate relief.
                  ROTH V. FORIS VENTURES, LLC                     5

        obtained by such beneficial owner, 2 director,
        or officer by reason of his relationship to the
        issuer, any profit realized by him from any
        purchase and sale, or any sale and purchase,
        of any equity security of such issuer (other
        than an exempted security) . . . within any
        period of less than six months . . . shall inure
        to and be recoverable by the issuer . . . .

15 U.S.C. § 78p(b). This allows securities issuers and their
shareholders to file suit for disgorgement of profits from
potentially exploitative transactions between the issuer and
corporate insiders. Dreiling v. Am. Online, Inc., 578 F.3d
995, 1001 (9th Cir. 2009). The provision imposes strict
liability as a prophylactic rule against such abuse. Id.
    However, Congress also granted the SEC the authority
to make rules exempting certain transactions from liability
when strict application of Section 16(b) would not serve its
intended purpose. 15 U.S.C. § 78p(b). Pursuant to this
authority, the SEC promulgated Rule 16b-3, which exempts
“[t]ransactions between an issuer and its officers or
directors,” that are “approved by the board of directors of the
issuer.” 17 C.F.R. § 240.16b-3(d)(1).           As we have
recognized, the SEC exempted these transactions because
they “‘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.’” Dreiling v.
Am. Online, Inc., 458 F.3d 942, 948 (9th Cir. 2006) (quoting
Ownership Reports and Trading by Officers, Directors and
Principal Security Holders, Exchange Act Release No. 34-

2
 A “beneficial owner” is a person or entity that owns “more than 10
percent of any class of any equity security.” 15 U.S.C. § 78p(a)(1).
6                   ROTH V. FORIS VENTURES, LLC

37260, 61 Fed. Reg. 30376-01, 1996 WL 324486, at *30377
(June 14, 1996)).
    FACTUAL AND PROCEDURAL BACKGROUND
    Amyris is a publicly traded biotechnology company that
operates out of California. John Doerr is a member of the
Amyris board of directors. Doerr and his wife, Ann Doerr,
are also trustees of Vallejo Ventures Trust (Vallejo), which
is the member of Foris Ventures, LLC (Foris)—a private
investment company that owns over 10% of Amyris
common stock and related derivative securities. Doerr
indirectly owns all membership interests in Foris.
   Foris and Amyris entered into several transactions
involving Amyris stock, warrants, and debt between April
2019 and January 2020. 3 The Amyris board of directors
approved each of those transactions.
    The following year, Andrew Roth, an Amyris
shareholder, filed a derivative lawsuit on behalf of Amyris
against the Doerrs, Foris, and Vallejo, alleging that those
transactions violated Section 16(b) and seeking
disgorgement of profits. 4 Defendants moved to dismiss on
the basis that, inter alia, the relevant transactions were
exempt from Section 16(b) liability pursuant to Rule 16b-3
because they were approved by the Amyris board. The
district court denied the motion. Relying on an SEC no-
action letter, the district court first opined that Rule 16b-3’s

3
   The district court determined that Roth adequately pled that the
transactions constituted purchases and sales pursuant to Section 16(b).
No party challenges that finding on appeal.
4
  Roth also sued Barbara Hager, a special trustee of Vallejo and manager
of Foris, but the claims against her were subsequently dismissed and are
not at issue in this appeal.
                 ROTH V. FORIS VENTURES, LLC                7

exemption covers transactions in which a director has an
indirect pecuniary interest, such as those between Amyris
and Foris. See Am. Bar Assoc., 1999 WL 61837, at *2 (Feb.
10, 1999). However, the district court held that these
transactions were not exempt because the board did not
approve the transactions for the specific purpose of
exempting them under Rule 16b-3.
    The district court subsequently granted a certificate of
interlocutory appealability on the sole issue of whether Rule
16b-3 requires a board of directors to explicitly approve
transactions for the purpose of exempting them under the
Rule. We granted Defendants’ petition to appeal (as well as
Roth’s petition to conditionally cross-appeal).
   JURISDICTION AND STANDARD OF REVIEW
    We have interlocutory jurisdiction pursuant to 28 U.S.C.
§ 1292(b). This jurisdiction “permits [us] to address any
issue fairly included within the certified order because it is
the order that is appealable, and not the controlling question
identified by the district court . . . .’” Deutsche Bank Nat.
Trust Co. v. FDIC, 744 F.3d 1124, 1134 (9th Cir. 2014)
(quoting Nevada v. Bank of Am. Corp., 672 F.3d 661, 673
(9th Cir. 2012)). “We review a district court’s decision to
grant or deny a motion to dismiss pursuant to Rule 12(b)(6)
de novo.” Camacho v. Bridgeport Fin. Inc., 430 F.3d 1078,
1079 (9th Cir. 2005); see also Drieling, 458 F.3d at 954
(reviewing eligibility for Rule 16b-3 exemption to Section
16(b) liability de novo).
                        ANALYSIS
                              I
   Defendants challenge the district court’s holding that, for
Rule 16b-3(d) to apply, a board of directors must approve a
8                ROTH V. FORIS VENTURES, LLC

transaction for the specific purpose of exempting it from
Section 16(b) liability. This is the rare case where all parties
involved agree that we must reverse. Both Roth and the
SEC—which filed an amicus brief in this case—
acknowledge that Rule 16b-3 lacks a purpose-specific
approval requirement. We agree.
     The district court derived its purpose-specific approval
requirement from an SEC no-action letter stating that board
must specify that its approval was “granted for purposes of
making the transaction exempt under Rule 16b-3.” Am. Bar
Assoc., 1999 WL 61837, at *2. However, courts generally
do not defer to no-action letters. See Gryl v. Shire Pharms.
Grp. PLC, 298 F.3d 136, 145 (2d Cir. 2002) (“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.”); N.Y.C.
Emps.’ Ret. Sys. v. SEC, 45 F.3d 7, 12, 14 (2d Cir. 1995)
(explaining that SEC no-action letters “do not bind . . . the
courts”). And, in any event, the SEC subsequently
disavowed the purpose-specific approval requirement in
amicus briefs filed before both the Second Circuit, see Brief
of the Securities and Exchange Commission, Amicus
Curiae, Gryl, 298 F.3d 136 (No. 01-9139), 2002 WL
32625905, at *24, and our court in this case.
    Rightly so. The text of Rule 16b-3 does not include a
purpose-specific approval requirement. The Rule states, in
relevant part, that “[a]ny transaction . . . involving an
acquisition from the issuer . . . shall be exempt if . . . [t]he
transaction is approved by the board of directors of the
issuer.” 17 C.F.R. § 240.16b-3(d)(1). Simply put, nothing in
the regulation indicates that the board must approve the
transaction for the specific purpose of exempting it from
Section 16(b) liability.
                 ROTH V. FORIS VENTURES, LLC                  9

     When presented with this same issue, the Second Circuit
rejected the argument that Rule 16b-3(d) requires purpose-
specific approval of a transaction for the exemption to apply.
Gryl, 298 F.3d at 144–45 (“We find wholly unpersuasive the
artificial imposition of purpose-specific approval on the
Board Approval Exemption . . . .”). In so doing, the court
observed that “the text of the rule itself contains no
suggestion that [a purpose-specific] requirement exists” and
“mentions nothing about the subjective motivations of the
approving body.” Id. at 145. Therefore, the court explained,
the requirements of the exemption are satisfied “[s]o 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.” Id. at 145–46. We find this interpretation
persuasive and hold that Rule 16b-3 does not include a
purpose-specific approval requirement.
                               II
    Notwithstanding that Rule 16b-3 lacks a purpose-
specific approval requirement, Roth argues that this case
should be remanded for two other reasons. First, Roth
argues that remand is required to determine whether the
Amyris board knew about and acknowledged Doerr’s
pecuniary interest in the challenged transactions when
approving them. But the district court explicitly found that
the Amyris board evinced awareness of the existence and
extent of Doerr’s indirect interest in the transactions. SEC
regulations define “pecuniary interest” as “the opportunity,
directly or indirectly, to profit or share in any profit derived
from a transaction.” 17 C.F.R. § 240.16a-1(a)(2)(i). The
complaint straightforwardly recognizes that “[Doerr]
indirectly owns all membership interests in [Foris.]”
Furthermore, SEC filings show that the Amyris board
10               ROTH V. FORIS VENTURES, LLC

considered Doerr’s indirect ownership of all of the
membership interests in Foris when approving the
transactions. Those filings also include Amyris shares
owned by Foris in calculating Doerr’s beneficial ownership
of the company. This is sufficient to establish the board’s
knowledge of Doerr’s indirect pecuniary interest in the
challenged transactions. The district court did not err in so
finding.
     Second, the parties dispute whether Rule 16b-3 exempts
Foris—a beneficial owner of Amyris—from Section 16(b)
liability in the first place. Roth argues that because Section
16(b) imposes liability for transactions between issuers and
beneficial owners while Rule 16b-3(d) exempts transactions
between issuers and directors or officers (but not beneficial
owners), Foris is only eligible for the exemption if it can
show that it is a “director by deputization.” “[A] corporation
may be a virtual director, and thus an insider for purposes of
§ 16(b) liability, by deputizing a natural person to perform
its duties on the board.” Dreiling, 458 F.3d at 952 (citation
omitted). Because companies may incur Section 16(b)
liability as directors by deputization, our court has
recognized that they may also invoke the Rule 16b-3(d)
exemption where the board is aware of the deputization. Id.
at 953–54. However, “[w]hether a company is a director by
deputization is a question of fact to be settled case by case
and not a conclusion of law.” Id. at 952 (quotation marks
and citation omitted); see also Strom v. United States, 641
F.3d 1051, 1060 (9th Cir. 2011) (“[T]he applicability of
§ 16(b) often will turn on factual issues not appropriately
resolved on a motion to dismiss.”). The district court
determined that the complaint and the judicially noticed
documents did not suffice to show that Foris was a director
by deputization at the motion to dismiss stage. We agree and
                  ROTH V. FORIS VENTURES, LLC                  11

therefore remand the case to the district court for further
proceedings to determine whether Foris was a director by
deputization.
     We do not now address the related issue of whether the
challenged transactions are exempt under Rule 16b-3
regardless of whether Foris is a director by deputization
because Rule 16b-3(d) exempts entire transactions, rather
than specific defendants, from Section 16(b) liability. This
argument was never squarely addressed by the district court.
“The matter of what questions may be taken up and resolved
for the first time on appeal is one left primarily to the
discretion of the courts of appeals.” Singleton v. Wulff, 428
U.S. 106, 121 (1976). “As a federal court of appeals, we
must always be mindful that we are a court of review, not
first view.” Shirk v. United States ex rel. Dep’t of Interior,
773 F.3d 999, 1007 (9th Cir. 2014) (quotations and citations
omitted). Accordingly, we leave it to the district court to
address this potentially dispositive issue in the first instance.
See Detrich v. Ryan, 740 F.3d 1237, 1248–49 (9th Cir. 2013)
(en banc) (“A standard practice . . . is to remand to the district
court for a decision in the first instance without requiring any
special justification for so doing.”).
                       CONCLUSION
    The district court erred by imposing a purpose-specific
approval requirement in its Rule 16b-3(d) exemption
analysis. However, contra Roth’s argument, it did not err in
finding that the Amyris board was aware that Doerr had an
indirect pecuniary interest in the challenged transactions
when it approved them. Finally, because the issue of
whether Foris is a director by deputization is a question of
fact, we remand the case, except as to Amyris, to the district
court for further proceedings to determine whether Foris was
12                ROTH V. FORIS VENTURES, LLC

a director by deputization. The appeal as to Amyris is closed
for administrative purposes.
  AFFIRMED IN PART AND REVERSED AND
REMANDED IN PART.
     The parties shall bear their own costs.