Roth ex rel. YRC Worldwide Inc. v. Solus Alt. Asset Mgmt. LP

• Decision Date: 20 August 2015
• Docket Number: No. 14cv9571.,14cv9571.
• Citation: 124 F.Supp.3d 315
• Parties: Andrew E. ROTH, derivatively on behalf of YRC Worldwide Inc., Plaintiff, v. SOLUS ALTERNATIVE ASSET MANAGEMENT LP, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

124 F.Supp.3d 315

Andrew E. ROTH, derivatively on behalf of YRC Worldwide Inc., Plaintiff,

v.SOLUS ALTERNATIVE ASSET MANAGEMENT LP, et al., Defendants.

No. 14cv9571.

United States District Court, S.D. New York.

Signed Aug. 20, 2015.

Glenn F. Ostrager, Roberto Legaspi Gomez, Ostrager, Chong, Flaherty & Broitman, P.C., Paul D. Wexler, Paul D. Wexler, Attorney at Law, New York, NY, for Plaintiff.

Antonia Marie Apps, Milbank, Tweed, Hadley & McCloy LLP, Renita Sharma, Richard Corey Worcester, Quinn Emanuel Urquhart & Sullivan LLP, Joseph Michael McLaughlin, Simpson Thacher & Bartlett LLP, New York, NY, for Defendants.

MEMORANDUM & ORDER

WILLIAM H. PAULEY III, District Judge:

Andrew E. Roth brings this shareholder derivative action on behalf of YRC Worldwide Inc. ("YRC") against Solus Alternative Asset Management LP, Solus GP LLC, Sola Ltd., Solus Opportunities Fund 1 LP, Solus Opportunities Fund 2 LP, Solus Core Opportunities Master Fund Ltd., Ultra Master Ltd., and Christopher Pucillo (collectively, "Solus"¹ ), seeking disgorgement of short-swing profits pursuant to Section 16 of the Securities Exchange Act. Solus, joined by YRC, moves to dismiss the Amended Complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b) (6). For the reasons that follow, Solus' motion is denied.

BACKGROUND

Section 16(b) of the Securities Exchange Act of 1934 imposes strict liability on insiders of a company whose purchases and sales of securities result in "short-swing profits." See 15 U.S.C. § 78p(b). Short-swing profits are those received from the purchase and sale (or vice versa) of a company's stock within a six-month period by persons deemed to be insiders. Insiders include directors, officers, and "beneficial owners" of more than 10% of a company's registered securities. See § 78p(a)(1) and (b). In the Amended Complaint, Roth alleges Solus made matchable, statutorily defined "purchases" and "sales" of YRC stock while it was a beneficial owner of more than 10% of YRC. Roth seeks disgorgement of the resulting short-swing profits.

A. Factual Allegations

The following facts are gleaned from the Amended Complaint and assumed to be true for this motion. While a beneficial owner of more than 10% of YRC's common stock, Solus purchased an aggregate of $15,100,000 principal amount of YRC's Series A Convertible Senior Secured Notes ("Series A Notes") on December 12, 2013, and an aggregate of $2,414,361 principal amount of YRC's Series B Convertible Senior Secured Notes ("Series B Notes") on December 13, 2013. (Am.Compl. ¶ 19.) According to their terms, the Series A and Series B Notes were convertible to 444,040 and 150,805 shares of YRC common stock, respectively. (Am.Compl. ¶ 20.) Under Securities and Exchange Commission ("SEC") rules, Solus was considered to "beneficially own" those shares of common stock.

On December 23, 2013, YRC entered into Stock Purchase Agreements and Exchange Agreements with investors, including Solus, as part of the company's financial restructuring. (Am.Compl. ¶¶ 21 & 22 n. 1.) These agreements provided that if certain conditions precedent were met,² Solus would purchase shares of YRC common stock, sell its Series A Notes to YRC in exchange for cash, and exchange its Series B Notes for shares of YRC common stock. (Am.Compl. ¶ 22 & n. 1.) In January 2014, YRC disclosed that it had entered into a series of confidentiality agreements relating to its financial restructuring, discussed its capital structure with investors, and provided them with confidential information regarding YRC as part of its December 2013 restructuring. (Am.Compl. ¶ 30.)

Under Solus' Stock Purchase Agreement, Solus agreed not to convert its Series A Notes into shares of common stock and agreed not to otherwise sell or transfer its Series A Notes (the "Blocker Provision"). (Am.Compl. ¶ 21.) The Blocker Provision (except its prohibition of sales, assignments, or transfers) purported to survive any termination of the Stock Purchase Agreement. And it purported to be irrevocable and effective upon execution of the Agreement. (Am.Compl. ¶ 21 (citing Stock Purchase Agreement, Ex. 5, Solus' December 23, 2013 Amendment No. 3 to the Schedule 13D [hereinafter "Stock Purchase Agmt."] ).) Specifically, it provided:

(1) Repurchase of Series A Notes: Conversion Limitation. Subject to receipt of the Financing Facilities Consents, the Company shall repurchase from each Buyer or any of its controlled Affiliates and each Buyer or any of its controlled Affiliates shall sell to the Company immediately following the Closing on the Closing Date all of the Series A Notes as listed on Annex III and any additional Series A Notes acquired by the Buyer or any of its controlled Affiliates after the date of this Agreement and prior to the close of business on the business day immediately preceding the Closing Date at a cash purchase price equal to 100% of the aggregate principal amount of such Series A Notes plus all accrued and unpaid interest thereof up to, but not including the dates such Series A Notes are repurchased.

Buyer irrevocably agrees not to convert, and shall not permit any of its controlled Affiliates to convert, any of the Series A Notes as listed on Annex III hereto into shares of Common Stock in accordance with Section 10.01 of the indenture governing the Series A Notes and shall not otherwise sell, assign or otherwise transfer any of its Series A Notes. This Section 4(1) shall survive termination of this Agreement except that the immediately preceding sentence shall not survive any such termination in respect of sales, assignments and transfers to any person that is not an Affiliate of such Buyer or fund or account managed or advised by such Buyer or an Affiliate of such Buyer.

(Stock Purchase Agmt. § 4(l ).) By holding convertible notes, Solus was deemed the beneficial owner of the underlying YRC stock which Solus had the right to acquire. And when Solus purported to give up its right to convert its Series A Notes in the Blocker Provision, it sought to divest itself of ownership of the underlying YRC stock. Roth alleges that the Blocker Provision failed to achieve its goal, and that Solus remained a 10% beneficial owner of YRC.

In January 2014, Solus engaged in several transactions that Roth alleges would trigger Section 16(b) liability if Solus were still a 10% owner of YRC. Specifically, Solus sold a total of 121,608 shares of YRC common stock; sold $29,589,922 aggregate principal amount of YRC's Series A Notes; and exchanged $12,819,310 aggregate principal amount of YRC's Series B Notes. (Am.Compl. ¶ 34.) Roth alleges the Blocker Provision is an improper attempt to divest ownership in YRC and exploit material nonpublic information while garnering unlawful short-swing profits through its various purchases and sales in December 2013 and January 2014. (Am.Compl. ¶¶ 27–29.)

In October 2014, Roth made a demand on YRC to commence this lawsuit. YRC declined Roth's request. Roth filed this action in December 2014, seeking disgorgement of alleged short-swing profits.

B. Roth's Legal Theories

The Amended Complaint asserts two different theories, which it characterizes as separate "claims" for violations of Section 16(b)—one that assumes the Blocker Provision is valid, and another that assumes it is not.

The first "claim" assumes the Blocker Provision is effective at reducing Solus' beneficial ownership to below the 10% threshold—a premise Solus urges this Court to adopt. Under that theory, Roth alleges that Solus is liable because the Blocker Provision itself constitutes a "sale"—i.e., a reduction in Solus' call equivalent position—that can be matched against an earlier purchase. Solus moves to dismiss on the basis that the Blocker Provision's reduction of beneficial ownership does not constitute a "sale" for purposes of Section 16(b), but rather amounts to the closing of a long derivative security position which is exempt under the statute. However, this exemption only applies if no "value" was received for the closing, a point which the parties dispute.

Roth's second "claim" assumes the Blocker Provision is not effective at reducing Solus' beneficial ownership of YRC because it is illusory or a sham in violation of Section 13d3(b)'s catchall evasion provision. According to Roth, Solus therefore continued to be deemed a holder of more than 10% of YRC's stock even after the Blocker Provision was executed. Under that theory, Roth alleges a different set of matchable transactions exist for which disgorgement is required. Solus disputes only the premise of this claim, namely that the Blocker Provision was ineffective. Solus does not appear to dispute the existence of subsequent transactions constituting matchable purchases and sales.

Although framed as separate claims, Roth's two legal theories are mutually exclusive, turning as they do on the effectiveness or ineffectiveness of the Blocker Provision. "[W]hen a claimant presents a number of legal theories, but will be permitted to recover only on one of them," there exists only a single claim for relief. Wright, Miller & Kane, 10 Fed. Prac. & Proc. Civ. § 2657 (3d ed.1998) ; see also Acumen Re Mgmt. Corp. v. Gen. Sec. Nat. Ins. Co., 769 F.3d 135, 143 (2d Cir.2014) (holding plaintiff's five theories of breach of contract represent a single claim for purposes of Rule 54(b) where resolution of each "ultimately bear[s] on the question of whether [Defendants'] calculations [of commissions] were correct"). Accordingly, for purposes of this motion, this Court evaluates whether Roth states a claim for relief under Section 16(b) on any single theory.

DISCUSSION

I. Legal Standard

A. Motion to Dismiss

To survive a motion to dismiss, "a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ " Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d...