August 19, 2019

Rule 16b-3 Exempts Acquisition of Stock In Reverse Sub Merger

Here’s something that Alan Dye recently posted on his Blog:

A judge in the Northern District of California has dismissed a complaint filed against Elon Musk and other Tesla insiders which alleged that their acquisition of Tesla common stock in Tesla’s reverse triangular merger with SolarCity was not a transaction with “the issuer” and therefore was not eligible for exemption under Rule 16b-3(d), making the insiders’ acquisitions matchable with their sales of Tesla stock within less than six months.

The plaintiffs in the case are John Olagues and Ray Wollney, who are part of the group that has been challenging (unsuccessfully, so far) the availability of Rule 16b-3(e) to exempt elective tax withholding transactions under equity compensation plans. The defendants are insiders of Tesla who were stockholders of SolarCity when SolarCity merged with a wholly owned subsidiary of Tesla, with SolarCity surviving the merger. The merger was approved by Tesla’s board of directors and by Tesla’s shareholders following a proxy solicitation. The merger closed four days after the shareholder vote, and the defendants reported their receipt of Tesla stock on Form 4, using transaction code “A” and stating in a footnote that the acquisitions were exempt under Rule 16b-3.

The plaintiffs argued that the defendants’ acquisition didn’t occur at closing, but instead occurred when shareholders approved the merger, giving the defendants a “right to receive” stock in the merger. That acquisition, the plaintiffs’ argued, was a transaction with the subsidiary, not Tesla, and therefore was not eligible for exemption under Rule 16b-3. The plaintiffs also argued that, even if the acquisition occurred at closing, the merger was with a subsidiary and therefore still didn’t involve a transaction with the issuer.

The court rejected both arguments, holding that, regardless of when the acquisitions occurred, they involved a direct issuance of stock by Tesla and therefore were with “the issuer.” The court also said that, even if the transaction were deemed to be with the non-surviving merger subsidiary, the SEC staff said in a 1999 interpretive letter to the American Bar Association that a transaction with a majority owned subsidiary is a transaction with the issuer for purposes of Rule 16b-3. While a staff interpretive letter isn’t binding on a court, the court said it found the staff’s position “persuasive.”

John Jenkins