By Rodney F. Tonkovic, J.D.
A Tenth Circuit panel affirmed a district court judgment that alleged short-swing profits were exempt from disgorgement. Because the tax-withholding transactions at issue were both non-discretionary and approved in advance, they satisfied an exemption from Section 16(b)'s general requirement that short-swing profits be disgorged. The decision was made on the briefs, without oral argument, and is not binding precedent (Olagues v. Muncrief, January 16, 2019, per curiam).
This derivative action was brought by a shareholder of WPX Energy, Inc. against the company and two of its officers. As part of a compensation plan, WPX executed restricted stock unit (RSU) agreements with the officers, with the right to receive the shares on predetermined vesting dates. When the shares vested, they triggered certain tax-withholding requirements outlined in the RSU agreements, and WPX withheld a portion of the officers' shares to pay the tax obligations associated with the awards.
Short-swing allegations. After discovering the tax-withholding transactions, the shareholder accused the officers of engaging in improper short-swing sales and demanded recovery of $384,924 in alleged short-swing profits under Section 16(b). The shareholder rejected WPX's explanation that the transactions were exempt. Instead, he offered the choice of resolving the matter by paying him a "consulting fee" or going to court. In a footnote, the court noted that the shareholder has filed similar lawsuits in California, Colorado, Delaware, Florida, Massachusetts, North Carolina, Ohio, Texas, and Washington.
The district court in Oklahoma agreed that the transactions were exempt from disgorgement under Rule 16b-3. The rule provides an exemption from disgorgement for, as relevant here, non-discretionary transactions that are "approved in advance" by the issuer's board or an independent committee. The shareholder argued that the payment of tax liability was discretionary because payment of the taxes was deferred under IRS rules. The court concluded, however, the dispositions of stock were non-discretionary tax withholding transactions that were specifically contemplated in the RSU agreements.
Exempt from disgorgement. On appeal, the shareholder again argued that the tax-withholding dispositions were purely discretionary. He also maintained that even if the dispositions were non-discretionary, they were not "approved in advance" because the board's compensation committee did not specifically approve each individual transaction. The panel disagreed on both points.
In arguing that the dispositions were discretionary transactions, the shareholder pointed to language in the RSU agreements that, he claimed, gave WPX unfettered discretion to refuse to hold the shares. This, the panel said, was a selective reading of the provision that omitted important qualifying language pertaining to taxes becoming due prior to a vesting date, which was not the case here. The applicable portion of the withholding provision made it clear that the tax-withholding transactions at issue (after vesting) were mandatory and thus non-discretionary under Section 16b-3(e).
Finally, the panel determined that the tax-withholding transactions were also "approved in advance" by the compensation committee. The panel explained that the withholding provision adequately identified a fixed time, manner, and amount of the withholdings. Since these terms and conditions were sufficient, the subsequent exercise of the withholding required no further approval. The panel accordingly affirmed the district court's grant of summary judgment in favor of WPX and the officers.
The case is No. 18-5018.