Said the court, directors holding more than 10 percent of a company's shares, and those who have the power to appoint them, are exempt from the SEC's Section 16(b), which bars insiders from buying and selling a company's stock within six months. The exemption applies as long as the transactions are approved by the board of directors.
The decision by the U.S. 2nd Circuit Court of Appeals affirmed the SEC rule. The regulation was broadened by the U.S. Supreme Court in 1962 and amended by the SEC in 1996 to create a safe harbor for those acting with the company's consent.
Said attorney Claudius Sokenu, who co-chairs Mayer Brown’s securities enforcement practice group, the decision in favor of Wilmington, Massachusetts-based Beacon Power Corp. is of "significant precedential value.''
Private equity funds and institutional investors with seats on company boards "can now engage in transactions that would have otherwise been captured by the prohibition against short- swing profits,'' said Sokenu. "In other words, these entities do not have to worry about liability under Section 16, at least in the 2nd Circuit.''
The court unanimously rejected the claim of a Beacon shareholder that the company and an investor, Perseus LLC, a Washington-based private equity firm, breached 16(b) when Beacon allowed Perseus to obtain 7.5 million shares of stock and distribute it to its members, who then sold it.
The ruling affirms a lower court dismissal of investor Andrew Roth's derivative lawsuit, brought on behalf of the company, against its management, Perseus and affiliates. Roth had wanted the investors to disgorge any profits made from their short-swing trading, according to the appeals court.