Gibbons v. Malone
801 F. Supp. 2d 243
S.D.N.Y.2011Background
- Discovery, a Delaware corporation, had Series A and Series C common stock with different rights; Malone, a Discovery director and >10% holder, engaged in December 2008 in ten purchases of Series A and nine sales of Series C; Gibbons, a Discovery shareholder, sues under Section 16(b) alleging short-swing profits; Plaintiff seeks disgorgement of profits and an accounting; Plaintiff relies on cross-series matching of voting and non-voting stock; Court to consider whether Section 16(b) liability extends to cross-class transactions.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Section 16(b) allows cross-class matching of voting and non-voting stock | Gibbons argues plain language permits cross-class matching | Malone argues statute requires same class | No; liability requires same equity security within six months |
| Whether Series A and Series C constitute the same class of equity security | Series A and C should be same class for matching | They are sufficiently different in rights and features | They are different classes; not matchable |
| Whether derivatives or debt instruments convertible to stock affect 16(b) applicability | Prices of Series A and C are correlated so cross-class liability applies | Series A/C are not derivatives or fixed-price instruments | Not derivatives; cross-class matching denied |
Key Cases Cited
- Morales v. New Valley Corp., 936 F. Supp. 119 (S.D.N.Y. 1996) (section 16(b) short-swing aims to deter insider trading)
- Chemical Fund, Inc. v. Xerox Corp., 377 F.2d 107 (2d Cir. 1967) (derivative securities are same class as underlying stock for 16(a); implications discussed for 16(b))
- Smolowe v. Delendo Corp., 136 F.2d 231 (2d Cir. 1943) (footnote acknowledging cross-class reading unlikely to be intended)
- Gund v. First Florida Banks, Inc., 726 F.2d 682 (11th Cir. 1984) (cross-class matching not adopted; distinguishable facts (convertible debentures))