Short Swing Profits Rule

Question 1

Beneficial Owner

Answer 1

• Beneficial owner of more than 10% of any class of any equity is subject to 16b - thus you are a beneficial owner (BO)
• Anyone in position of BO, or officer/director, is presumed to have inside info

Question 2

RULE 16(b):

Answer 2

• Any profit realized from a director or beneficial owner (10% or more) from the purchases and sales of equity securities (not debt such as bonds),
• within 6 months ,
• must be returned to the corporation.
  
  • The corporation or a shareholder can bring the action to return the profits. 16(b) only applies to registered securities.

Question 3

Beneficial Owner Rules

Answer 3

• Beneficial owners must be beneficial owners both at the:
  
  1. time of the purchase and
  2. the time of the sale of the security
• to be liable to return the profits to the corporation.

Question 4

Directors/Officers

Answer 4

A director or officer must only hold a position as a director or an officer either at the time of the purchase or the time of the sale to be liable to return the profits under rule 16(b).

Question 5

Who are Officers and Directors?

Answer 5

Only people who are senior directors or are in charge of a business unit or have a major function in the corporation.

Question 6

How to avoid liability as an officer/director

Answer 6

If someone purchases stock before they became an officer or a director and that person sells their shares after they become an officer or director that person will not be liable under 16(b).

Question 7

Forced Sales

Answer 7

If a company is forced to sell their stock in a transaction in which they had no control, and in which they were in no position to use insider information, they will not be liable under rule 16(b).

Question 8

Call Options

Answer 8

Granting a call option is considered a sale for 16(b) purposes when determining whether there is liability to return profits to the corporation.

Question 9

Calculating Liability Rules

Answer 9

• GENERAL RULE:
  
  • If there is one purchase and one sale, the court will simply determine what the profit from the transaction was, and that amount must be remitted to the corporation.
• MULTIPLE TRANSACTIONS HIGHEST/LOWEST RULE:
  
  • if the short-swing profits involve multiple transactions the court will use the lowest purchase price and the highest sale price to calculate damages.

Question 10

Rules of 16b calculations

Answer 10

• Must be BO both at time of Purchase & Sale
• If you buy b4 you are an officer and director, then become one, then sell - it won’t count against you
• Who are Officers and Directors?
  
  • Don’t focus on title
  • Look at whether you are in charge of unit or have policy making function
• Have to own more than 10% of any class of equity securities
• Debt securities
  
  • Only count if convertible to equity securities
  • Method: convert only trader’s shares, and calculate % ownership

Question 11

Special Accounting (matching) Rules

Answer 11

Maximize disgorgement by matching lowest purchase with highest sale w/in 6 mo

• Buy low - Sell high
• Look to amount of stock owned IMMEDIETLY BEFORE SALE, not DURING SALE
• Must be BO at BOTH purchase & sale (owns 10% or more)
• Must be officer or director at EITHER purchase or sale
• Must be within 6 mo period
• If there is a loss don’t worry about it
• If stock is classed, find the matching between the classes

Question 12

Disgorgement Calculations

Answer 12

Match the Transactions (Rows) Buy Low - Sell High

1. Take the # of shares bought for the lowest purchase price - Transaction 1
2. Take the # of Shares sold for the highest sale price - Transaction 2
3. Take the difference in Price of Shares (purchase/sale) for the days of Transaction 1 & 2
4. Take the # of Shares in Transaction 1 & Multiply the difference in price of shares between the two days