Alan Dye's views about Exemptions of Section 16 (B) and SEC Rule 16 b-3(e).

Here are the views of Alan Dye on a shareholder seeking recovery by companies of insider profits made by insiders in violation of Section 16 (b) of the 1934 Securities Act.

Alan Dye from Romeo and Dye

Shareholder Challenging Availability of Rule 16b-3(e) to Exempt Elective Exercise of Tax Withholding Right

"As some members already know, a shareholder (not represented by counsel) has submitted letters to a number of companies demanding that they seek to recover short-swing profits from insiders who elected to exercise a tax withholding right (or a right to have shares withheld to pay the exercise price of an option) within six months of an open market (or other non-exempt) purchase. The withholding transactions were reported on Form 4 using transaction code​ "D."​ indicating the dispositions were exempted by Rule 16b-3(e)" because the withholding right was a term of the initial award as approved by the board or a committee of non employee directors. The shareholder is taking the position, however, that Rule 16b-3(e) exempts withholding only if it is "automatic," and does not exempt an elective withholding, where the insider could have elected to pay the tax (or exercise price) with cash instead. The shareholder is basing this position primarily on Compliance and Disclosure Interpretation 123.16, which says that the "automatic" issuance of a new option upon the exercise of a reload option is exempt under Rule 16b-3 without further approval by the board or a committee, as is the "automatic" withholding of shares to pay tax withholding."

For what it's worth, Peter Romeo and I disagree strongly with the shareholder's position, as do the attorneys I've spoken with who are responding to similar demand letters. To my knowledge, the shareholder has not yet filed a complaint against any insider. In other Section 16(b) contexts, however, the shareholder has proven to be litigious.


Alan Dye makes a few serious errors :

He mistakenly claims that...1.The withholding transactions were reported on Form 4 using transaction code​ "D."​ indicating the dispositions were exempted by Rule 16b-3(e)"

I could find no "D" transaction Codes entered on column 3 Table I, of the SEC Form 4 filings which would have indicated that the insider claimed that the dispositions were approved in a manner for Rule 16 b-3(e) to exempt the transaction from Section 16 (b). It appears that all or nearly all of the codes were "F", which said nothing about the disposition for taxes or exercise price being approved under SEC Rule 16 b-3(e).

Code "F" says: F - Payment of exercise price or tax liability by delivering or withholding securities incident to the receipt , exercise or vesting of a security issued in accordance with Rule 16b-3.

Code "D" says: D - Disposition to the issuer of issuer equity securities pursuant to Rule 16b-3(e).

Now why did the insiders enter code "F" instead of code "D" in column 3 on Table I of the SEC Form 4?

Answer: They knew that there was a possibility of their being charged with a violation of Title 18 section 1001 if they entered "D" or they just did not understand what they were doing, and took advice from some attorneys.

Dye also does not understand Rule 16 b-3 (e) and the SEC's clarification of it in the 123.16 Q and A, which clearly says that when the issuer has discretion to withhold cash or shares, there is "no satisfaction of the specificity of approval requirements under Rule 16b-3(e)."

Below is something that Alan Dye apparently  stated as to how companies may adjust their grant Agreements to deal with the SEC Staff opinion expressed in the Q and A #123.16.

(6) Issuer Discretion To Disallow Stock Withholding, Surrender, Or Delivery May Call Into Question Availability Of Rule 16b-3(d).

The staff has taken the position that a net exercise or tax withholding transaction that is subject to issuer discretion would require specific approval of individual transaction in order for the Rule 16b-3(e) exemption to be available. See Compliance and Disclosure Interpretations, Exchange Act Section 16 and Related Rules and Forms, Q. 123.16 (May 23, 2007).

Apparently the staff is concerned that the issuer's discretion means the board or committee delegated to management the decision whether to approve withholding, rather than making the decision itself. Issuers might consider assuring the availability of the exemption by

(i) eliminating the discretionary feature and making the right entirely elective on the part of the insider,

(ii) having the administering committee adopt a resolution providing that withholding is permissible unless the committee (not management) concludes that it should not be permitted in a particular case, or

(iii) having the committee establish clear guidelines for management's disallowance of withholding, so that the decision by management is ministerial rather than discretionary.


Does Alan Dye really believe that when the insider has an entirely elective right to deliver shares or some other form of payment like cash for taxes or exercise withholding, the share disposition to the issuer is not comprehended within the purpose of section 16 (b) and satisfied the specificity requirement for an approval under SEC Rule 16 b-3(e)?


Edited Tue, Jul 25, 2017 6:54 AM

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