Levy v. Southbrook Int'l Investments

• Citation: 263 F.3d 10
• Decision Date: 14 December 2000
• Docket Number: DEFENDANT-APPELLEE,NOMINAL-DEFENDANT-APPELLEE,No. 00-7630,PLAINTIFF-APPELLANT,MINAL-DEFENDANT-APPELLEE,00-7630
• Parties: (2nd Cir. 2001) MARK LEVY, DERIVATIVELY ON BEHALF OF IMMUNOGEN INC.,, v. SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD. and IMMUNOGEN, INC., Argued:
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 10

263 F.3d 10 (2nd Cir. 2001)

MARK LEVY, DERIVATIVELY ON BEHALF OF IMMUNOGEN INC., PLAINTIFF-APPELLANT, v. SOUTHBROOK INTERNATIONAL INVESTMENTS, LTD. DEFENDANT-APPELLEE and IMMUNOGEN, INC., NOMINAL-DEFENDANT-APPELLEE.

No. 00-7630

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

Argued: December 14, 2000

Decided: August 23, 2001

Jeffrey S. Abraham, Law Office of Jeffrey S. Abraham, New York, Ny, for Appellant.

Herbert Teitelbaum, Peter Sapanoff, Noah Weissman, Robinson Silverman Pearce Aronsohn & Berman Llp, New York, Ny, for Appellee.

Allan A. Capute, Eric Summergrad, Meyer Eisenberg, David M. Becker, General Counsel, for the Securities and Exchange Commission, Amicus Curiae.

Before: Feinberg, Parker, Circuit Judges, and Covello, District Judge.^*

Parker, Circuit Judge

Plaintiff-appellant, Mark Levy ("Levy"), is a shareholder of ImmunoGen, Inc ("ImmunoGen"). He brings this shareholder derivative action alleging that defendant, Southbrook International Investment, Ltd. ("Southbrook"), by virtue of its ownership of ImmunoGen convertible preferred shares, is a more than 10% beneficial owner of ImmunoGen common stock and realized short swing profits through the purchase and sale of ImmunoGen stock within a six month period. Plaintiff-appellant seeks disgorgement of Southbrook's profits as required by Section 16(b) of the Securities and Exchange Act of 1934 as amended, 15 U.S.C. § 78p(b) ("the Exchange Act").

Article III, Paragraph 3.10 ("the conversion cap") of the Convertible Preferred Stock Purchase Agreement between ImmunoGen and Southbrook ("the Agreement") provides that Southbrook may not convert shares to the extent that such conversion would result in Southbrook owning more than 4.9% of ImmunoGen's outstanding common stock.

There is no claim that Southbrook ever exceeded the conversion cap. Rather, plaintiff-appellant claims that due to Southbrook's ability to make limited conversions and sales over a sixty-day period it could have cumulatively owned more than 10% of ImmunoGen's common stock within the meaning of 17 C.F.R. § 240.13d-3(a) and 13d-3(d)(1)(i) ("Rules 13d-3(a) and 13d-3(d)(1)(i)," respectively). Therefore, according to plaintiff-appellant, Southbrook is a more than 10% beneficial owner within the meaning of Section 16(b) and subject to Section 16(b) short-swing trading liability.

In the alternative, plaintiff-appellant contends that:

(1) the Agreement is void as a "sham transaction"; (2) the conversion limitation provision is void pursuant to 17 C.F.R. § 240.13d-3b ("Rule 13d-3(b)");¹ and (3) the conversion limitation constitutes a waiver of section 16(b), and therefore is void pursuant to Section 29(a) of the Exchange Act as amended, 15 U.S.C. § 78cc(a).²

Southbrook counters that, because the conversion cap prevents Southbrook from owning, at any one point, more than 4.9% of ImmunoGen's common stock, Southbrook is not a more than 10% beneficial owner within the meaning of Rules 13d-3(a) and 13d-3(d)(1)(i), and consequently, is not subject to Section 16(b) short-swing trading liability. Additionally, according to Southbrook, because the conversion cap is valid and binding, plaintiff-appellant's alternative grounds for relief are inapplicable.

We conclude that where a binding conversion cap denies an investor the right to acquire more than 10% of the underlying equity securities of an issuer, at any one time, the investor is not, by virtue of his or her ownership of convertible securities, the beneficial owner of more than 10% of those equity securities within the meaning of Rules 13d-3(a) and 13d-3(d)(1)(i). We further find that the conversion cap in this case is binding, and accordingly, affirm the decision of the district court.

I. BACKGROUND

The allegations in the complaint disclose the following. On October 16, 1996 Southbrook and ImmunoGen entered into the Agreement. Pursuant to the agreement Southbrook agreed to purchase Immunogen convertible preferred stock. The Agreement limits Southbrook's ability to convert the preferred stock to the extent that such conversion would result in Southbrook owning more than 4.9% of the common stock, at any one time. The conversion cap in part reads as follows:

3.10 Purchaser Ownership of Common Stock. The Purchaser may not use its ability to convert Shares hereunder or under the terms of the Vote Certificates or to exercise its right to acquire shares of common stock under the Warrants to the extent that such conversion or exercise would result in the Purchaser owning more than 4.9% of the outstanding shares of the Common Stock.

Joint App. at 36 (Convertible Preferred Stock Purchase Agreement, ¶ 3.10).

Plaintiff-appellant alleges that by February 21, 1997, Southbrook was a more than 10% beneficial owner of ImmunoGen's outstanding common stock by virtue of Southbrook's ownership of ImmunoGen convertible preferred stock. The complaint further alleges that between January 1 and February 4, 1997, Southbrook acquired ImmunoGen common shares through conversion and sold them presumably at a profit. Southbrook allegedly repeated this process between January 27 and August 4, 1997, and again in October 1997.

On December 28, 1998, plaintiff-appellant demanded that ImmunoGen's Board of Directors bring an action to cause Southbrook to disgorge its alleged, short swing profits. See Levy v. Southbrook International Investments, Ltd., No. 99 Civ. 1480 NRB, 2000 WL 567008, at *2 (S.D.N.Y. May 10, 2000). By letter dated February 18, 1999, the Board refused, and this suit followed. See id.

Plaintiff-appellant, Mark Levy, derivatively on behalf of ImmunoGen, brought this action for disgorgement pursuant to Section 16(b) of the Exchange Act, claiming that Southbrook improperly profited from its investment in ImmunoGen because it was a more than 10% beneficial owner of ImmunoGen's common stock. See id. at *1. Southbrook filed a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), for failure to state a claim, on the ground that the conversion cap prevented it from being a more than 10% beneficial owner of ImmunoGen common stock. See id. Southbrook's motion to dismiss was accompanied by an affidavit and copies of various documents referred to in the complaint.³

The district court, in a written opinion, granted Southbrook's motion to dismiss. See id. It found plaintiff-appellant's beneficial ownership argument inconsistent with precedent in this Circuit. See id. (citing Levner v. Saud, 903 F. Supp. 452 (S.D.N.Y. 1994), aff'd, Levner v. Prince Alwaleed, 61 F.3d 8 (2d Cir. 1995)). Additionally, the district court concluded that "it is clear that only those holders of derivative securities, who could acquire ownership, by conversion or otherwise, of more than 10% of the common stock, at one time, are subject to § 16(b) liability." Id. at *10 (emphasis in original).

Finally, in response to plaintiff-appellant's alternative grounds for relief, the district court held that: (1) because conversion caps are legitimate the sham transaction doctrine was inapplicable; (2) since there was no plan or scheme to evade, and the plaintiff did not allege such in his complaint, the conversion cap was not void pursuant to Rule 13d-3(b); and (3) Section 29(a) applied only to express waivers of non-compliance, and there was no such waiver here. See id. at *4-5.

Plaintiff-appellant filed a timely notice of appeal on May 17, 2000. On appeal, he challenges the district court's grounds for dismissing his complaint. After hearing oral argument in this case on December 14, 2000, the panel requested and received an amicus curiae brief from the Securities and Exchange Commission which provided support for defendant-appellee's position.

II. DISCUSSION

This Court has jurisdiction pursuant to 28 U.S.C. § 1291.

We review a district court's dismissal of a complaint pursuant to Fed. R. Civ. P. 12(b)(6) de novo. See Feder v. Frost, 200 F.3d 29, 32 (2d Cir. 2000). Issues of statutory interpretation are also reviewed de novo. See United States v. Proyect, 989 F.2d 84, 87 (2d Cir. 1993). Although on a motion to dismiss a court must accept all factual allegations as true and draw all inferences in the plaintiff's favor, see Sheppard v. Beerman, 18 F.3d 147, 150 (2d Cir. 1994), dismissal is appropriate if the plaintiff can prove no set of facts that would entitle him to relief. See Cooper v. Parsky, 140 F.3d 433, 440 (2d Cir. 1998).

Additionally, this Court is "bound by the SEC's interpretations of its regulations in its amicus briefs, unless they are plainly erroneous or inconsistent with the regulation[s]," Press v. Quick & Reilly, Inc., 218 F.3d 121, 128 (2d Cir. 2000) (citation and internal quotation marks omitted).

Section 16(b) of the Exchange Act compels corporate insiders to disgorge profits earned on purchases and sales of securities made within six months of each other. See Securities and Exchange Act of 1934 § 16(b), 15 U.S.C. § 78p(b). "[L]iability under § 16(b) does not attach unless the plaintiff proves that there was (1) a purchase and (2) a sale of securities (3) by an officer or director of the issuer or by a shareholder who owns more than 10% of any one class of the issuer's securities (4) within a six month period." Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d 305, 308 (2d Cir. 1998) (emphasis added). In other words, only officers, directors, and persons who beneficially own more than 10% of an issuer's common stock are subject to Section 16(b) short swing trading liability. Inasmuch as Southbrook is neither an officer nor a director of ImmunoGen, Section 16(b) liability can attach only if it is a more than 10% beneficial owner. Therefore, the issue presented is whether Southbrook, despite the existence of the 4.9% conversion cap, is a more than 10% beneficial owner of ImmunoGen's common stock.

A. An Investor Subject to an Effective, Binding Conversion Cap of 4.9% is Not a More Than 10% Beneficial Owner of the Underlying Equity Stock

Section 16(b)...