Donoghue v. Hearst Communications, Inc.

SUMMARY ORDER Plaintiff filed this derivative action on behalf of Local.Com Corporation (“Local.Com”) under section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), seeking to require Hearst Communications, Inc. (“Hearst”) to disgorge short-swing profits that Hearst allegedly earned as a result of a series of transactions that culminated on August 1, 2007. Hearst cross-claimed against Local.Com, pleading claims for breach of contract, breach of warranty, and unjust enrichment. The United States District Court for the Southern District of New York (Sand, J.) granted summary judgment in favor of Hearst and subsequently dismissed Hearst’s cross-claims as moot. Plaintiff appeals. We presume the parties’ familiarity with the underlying facts, the procedural history of the case, and the issues on appeal. We review de novo a grant of summary judgment. Loeffler v. Staten Island Univ. Hosp., 582 F.3d 268, 274 (2d Cir.2009). “Congress enacted § 16(b) ‘[fjor the purpose of preventing the unfair use of information’ by corporate insiders trading securities issued by the company ... in which they hold a significant ownership interest.” Bruh v. Bessemer Venture Partners III L.P., 464 F.3d 202, 205 (2d Cir.2006) (quot *522 ing 15 U.S.C. § 78p(b)). Section 16(b) only applies to individuals who are “presumed to have access to inside information.” Foremost-McKesson, Inc. v. Provident Sec. Co., 423 U.S. 232, 243, 96 S.Ct. 508, 46 L.Ed.2d 464 (1976). More specifically, as relevant here, the statute prohibits short-swing transactions by “beneficial owner[s] of more than 10 percent of any class of [non-exempt] equity security” of the issuer in question. 15 U.S.C. § 78p(a)(l). The material facts are not in dispute. In February 2007, Hearst obtained a series of convertible notes and warrants from Local. Com. Pursuant to the agreement relating to the transaction, Local.Com was prohibited from issuing additional securities for ninety days. After that transaction, Hearst was the beneficial owner of more than 10% of Local.Com’s securities. During July 2007, Hearst converted its notes and sold some of LocaLCom’s stock to the public. Following those sales, so long as Hearst retained an ownership interest in Local.Com of greater than 10%, it was prohibited from reaping short-swing profits relating to LocaLCom’s securities for at least six months. See 15 U.S.C. § 78p(b). On July 31, 2007, Local.Com’s Board of Directors approved a “Securities Purchase Agreement” (the “SPA”) with a group of investors (the “private placement investors”), which governed a private placement of securities that Local.Com had decided to issue in order to raise additional capital. Local.Com also entered into a consent agreement with Hearst that would allow it to conduct the issuance. However, because of the number of shares involved in the private placement, the effect of the offering, once completed, would be to dilute Hearst’s interest in Local.Com below 10% and to take it outside the ambit of section 16(b). Pursuant to the SPA, the private placement was to close on August 1, 2007. As of 4:06 p.m. on that day, the private placement investors had wired the full value of the purchase price of the securities directly into a bank account controlled by Local.Com. 1 At 4:32 p.m., Local.Com filed a Form 8-K relating to the private placement with the Securities and Exchange Commission. The parties agree for purposes of this appeal that, pursuant to the consent agreement between Hearst and Local.Com, the filing of the Form 8-K triggered a deemed purchase by Hearst of LocaLCom’s securities. The central issue is therefore whether the securities that Local.Com issued in the private placement diluted Hearst’s ownership interest below section 16(b)’s 10% threshold prior to 4:32 p.m. on August 1, 2007. The district court held that the privately placed shares were issued and outstanding as of 4:06 p.m., the time that Local.Com took control over the proceeds of the offering. Plaintiff seeks to attribute error to that conclusion by arguing that the private placement shares were not outstanding upon Local.Com’s receipt of the payment because there were unsatisfied conditions precedent to the completion of the issuance. Specifically, plaintiff argues that the consummation of the offering was conditioned upon the filing of the Form 8-K and the delivery of the stock certificates to the private placement investors. 2 *523 Simply put, we find these contentions unavailing. First, plaintiff has not identified any authority, under New York or Delaware law, that persuades us that the stock certificates had to be delivered to the private placement investors before the shares from the offering could be considered “outstanding” for purposes of section 16(b). Indeed, there is ample authority suggesting that the contrary is true. See, e.g., Joseph E. Seagram & Sons, Inc. v. Conoco, Inc., 519 F.Supp. 506, 513 (D.Del.1981); U.S. Radiator Corp. v. New York, 208 N.Y. 144, 149, 101 N.E. 783 (1913). Second, none of the provisions in the SPA upon which plaintiff relies created conditions precedent to Local.Com’s performance under the agreement. Rather, section 7 of the SPA set forth a series of (waivable) preconditions to the onset of the private placement investors’ payment obligations, which were included in the agreement for “each [private placement investor’s] sole benefit.” In the absence of any legal or contractual limitation on Local.Com’s obligation to issue the shares, the private placement investors obtained an ownership interest in those shares once Local.Com assumed control over the proceeds of the private placement. Plaintiff has not challenged the district court’s reasoning that the private placement investors’ resulting interest was sufficient to consider the shares to be outstanding at that time. Therefore, the district court did not err by holding that, as of 4:06 p.m. on August 1, 2007, Hearst’s interest in Local.Com had been diluted below 10%, and that Hearst was not subject to section 16(b) at the time of its 4:32 p.m. “purchase.” We have considered plaintiffs remaining arguments and find them to be without merit. Accordingly, the February 2, 2009 amended- order of the district court is hereby AFFIRMED. Footnotes [1] All times discussed herein are provided in Eastern Standard Time. [2] As stated above, the Form 8-K was filed with the SEC at 4:32 p.m. The record is less clear as to the time by which the stock certificates were delivered to the private placement investors, but there is no dispute that the delivery was completed at some point after 4:32 p.m. on August 1, 2007.