Morrison v. Eminence Partners II, L.P., No. 17-843-cv (2d Cir. Oct. 19, 2017)
The Second Circuit affirmed the dismissal of an investor’s claim that a hedge fund company violated Section 16(b) of the Securities Exchange Act by allegedly obtaining “short-swing” profits from the sale of common stock in a national men’s clothing company. Before the investor had filed his complaint, the clothing company had completed a corporate reorganization that resulted in shareholders exchanging the company’s stock for share in a holding company.
The district court had previously dismissed the investor’s complaint for lack of statutory standing on the grounds that the investor did not hold stock in the issuer to which the short-swing trades pertained at the time he filed his complaint because he now owned stock of the parent holding company. The Second Circuit affirmed, determining that an investor must hold the security in the “issuer” to whom the short-swing profits would accrue at the time a complaint is filed. The court found that several exceptions to the general standing rule under Section 16(b) were inapplicable. The successor-issuer exception did not apply because the reorganized clothing company was not “merged out of existence” and remained a viable entity that itself had standing to bring a Section 16(b) claim for short-swing profits earned from purchases and sales of the company’s securities. The fraud exception to standing also did not apply. The investor failed to allege plausible facts that the reorganization was a fraudulent effort to deprive him of statutory standing. The court determined that such an allegation was implausible because the company had completed the reorganization before the investor filed his Section 16(b) claim and it had announced the reorganization in a public filing well before the investor filed a Section 16(b) demand on the company.