SEC No-Action Letter to Skadden Arps, Slate Jan 12, 1999 regarding Section 16 (b) and Mergers

Below is the SEC's Response to a request by a well know law firm, Skadden, Arps, Slate, Meagher & Flom LLP, which asked the SEC how equity securities transactions in Mergers will be treated for Section 16 (b) purposes. The request from Skadden, Arps was designed to get an "Interpretive letter" which will expand the exemptions from Section 16 (b).

Instead of an "interpretive letter" the SEC gave a "No Action Letter" of Jan 12, 1999, which was later ordered by the SEC and the Second Circuit Court of Appeals as non applicable regarding possible exemptions from Section 16 (b).

Attorneys for Skadden Arps and other firms refer to the No-Action letter as an Interpretative letter to create the idea that it has a legal impact usable to defeat the enforcement of section 16 (b).

But apparently, followers of Skadden Arps, want to ignore the Second Circuit and the SEC itself in regard to their interpretation of the NO Action Letter of Jan 12, 1999.

The SEC's stated in their Amicus Curiae Brief in the Gryl v. Shire case that:

" The Commission does not have the authority to enforce Section 16(b), which is enforced solely through private actions. Thus, its staff does not issue no-action letters in connection with that provision."

and the Second Circuit in Gryl v. Shire case said:

"It is significant that, because the SEC's 1996 Release is connected to the agency's rule-making function while the Skadden No-Action Letter is not, only the former must be accorded weight by us."

So both the SEC and the Second Circuit Court of appeals rejected the No- Action letter to Skadden Arps as authority for the idea that acquisitions of issuer equity shares in Merger are exempt from Section 16 (b).

But there are prominent law firms today that try to overcome the SEC and the Second Circuit and promote the SEC No Action letter to Skadden Arps below as authority.

1999 WL 11540 (S.E.C. No - Action Letter) 

(SEC No-Action Letter)

Skadden, Arps, Slate, Meagher & Flom LLP

Publicly Available January 12, 1999


January 12, 1999
Publicly Available January 12, 1999

Re: Skadden, Arps, Slate, Meagher & Flom LLP

Re:Incoming letter dated January 11, 1999

You have asked the Division's views about the application of Rule 16b-3 under Section 16 of the Securities Exchange Act of 1934 ("Exchange Act") to transactions occurring in the context of corporate mergers.

1. Dispositions to the Target Issuer.
(a) Availability of Rule 16b-3(e). The conversion or cancellation of target equity securities (including target derivative securities) in each of the following transactions constitutes a disposition to the issuer of target equity securities eligible
for exemption under Rule 16b-3(e), if the conversion or cancellation is simultaneous with or immediately before the related merger:

(i) the conversion of target nonderivative equity securities into acquiror equity securities, debt, cash or a combination of different forms of merger consideration; and
(ii) the conversion of target derivative securities into acquiror derivative securities or acquiror nonderivative equity securities, or the cancellation of target derivative securities for cash.

The result is the same whether the target equity securities were acquired under employee benefit plans, on the open market or otherwise.

(b) Identity of Payor. The payment of consideration directly to target equity security holders by the acquiror (or a subsidiary of the acquiror) in the dispositions described in paragraph 1(a) above will not cause these dispositions of target equity securities to be viewed as made other than to the target issuer. This position applies only if the target equity securities are so converted or cancelled simultaneously with or immediately before the merger. The time of payment does not affect the result.

2. Acquisitions from the Acquiror Issuer: Availability of Rule 16b-3(d).

The acquisition of acquiror equity securities (including acquiror derivative securities) by officers and directors of the acquiror through the conversion of target equity
securities in connection with a merger constitutes an acquisition from the acquiror issuer eligible for exemption under Rule 16b-3(d). This position applies equally to employees and directors of the target who become officers and/or directors
of the acquiror before, or at the time of, the merger ("New Acquiror Insiders").

3. Approval Conditions.
(a) Approving Entity. The approval conditions of Rule 16b-3(e) for the dispositions described in pargraph 1(a) may besatisfied only by the target. The approval conditions of Rule 16b-3(d) for the acquisitions described in paragraph 2 may
be satisfied only by the acquiror.

(b) Timing. In either case, these conditions may be satisfied at the same time as, or following, approval of the merger agreement by the respective issuer's board of directors, as long as they are satisfied before consummation of the merger.

*2 (c) Specificity of Approval. If full board approval, or approval by a committee of two or more Non-Employee Directors, is to be relied upon to exempt the transactions, this approval must specify:

(i) The name of each officer or director;
(ii) The number of securities to be acquired or disposed of for each named person;
(iii) In the case of derivative securities acquired, the material terms of the derivative securities. Where target derivative
securities are converted into acquiror derivative securities, this test will be satisfied where price is determined based on the
merger consideration formula and non-price terms are determined by reference to the terms of target derivative securities
that are converted; and
(iv) That the approval is granted for purposes of exempting the transaction under Rule 16b-3.

(d) Insider Status at Time of Approval. Approval may be granted before a New Acquiror Insider becomes an officer or director of the acquiror, for either:
(i) the acquisition of acquiror equity securities through the conversion of target equity securities in a merger; or
(ii) the grant of acquiror equity securities to New Acquiror Insiders effective upon consummation of a merger.
(iii) In either case, the grant of approval will not adversely affect the acquiror's ability subsequently to determine that a New Acquiror Insider has not in fact become an officer or director of the acquiror.
Because these positions are based on the representations made to the Division in your letter, it should be noted that any different facts or conditions may require different conclusions.


Anne M. Krauskopf
Special Counsel
January 11, 1999


To achieve an exemption for a purchase or sale of equity securities from Section 16 (b) of the Securities Act of 1934, the transaction must be not comprehended within the purpose of Section 16 (b) and must be exempted by the Securities Exchange Commission by its Rules or Regulations.

Attorneys who attempt to stop the enforcement of Section 16 (b), will assert their interpretation of court rulings and a No-Action letter from a person from the SEC to overcome certain SEC rules which give limited exemptions for purchase or sale transactions between an officer or director of the issuer and the issuer for transactions involving issuer equity securities.

Below is SEC Rule 16 b-3(a):

§ 240.16b-3 Transactions between an issuer and its officers or directors.

(a)General. A transaction between the issuer (including an employee benefit plan sponsored by the issuer) and an officer or director of the issuer that involves issuer equity securities shall be exempt from section 16(b) of the Act if the transaction satisfies the applicable conditions set forth in this section.

Any exemption applies only to Transactions between the issuer and an officer or director of the issuer that involves issuer equity securities.

In addition to SEC Rule 16 b-3(a), there is also SEC Rule 16 b-3(d) which must be satisfied to achieve an exemption for a transaction between an officer or director and the issuer.

Below is SEC Rule 16 b-3(d)

 (d)Acquisitions from the issuer. Any transaction, other than a Discretionary Transaction, involving an acquisition from the issuer (including without limitation a grant or award), whether or not intended for a compensatory or other particular purpose, shall be exempt if:

(1) The transaction is approved by the board of directors of the issuer, or a committee of the board of directors that is composed solely of two or more Non-Employee Directors;

(2) The transaction is approved or ratified, in compliance with section 14 of the Act, by either: the affirmative votes of the holders of a majority of the securities of the issuer present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable laws of the state or other jurisdiction in which the issuer is incorporated; or the written consent of the holders of a majority of the securities of the issuer entitled to vote; provided that such ratification occurs no later than the date of the next annual meeting of shareholders; or

(3) The issuer equity securities so acquired are held by the officer or director for a period of six months following the date of such acquisition, provided that this condition shall be satisfied with respect to a derivative security if at least six months elapse from the date of acquisition of the derivative security to the date of disposition of the derivative security (other than upon exercise or conversion) or its underlying equity security.


So we have a No Action Letter from the SEC as defined by the SEC below:

No Action Letters

An individual or entity who is not certain whether a particular product, service, or action would constitute a violation of the federal securities law may request a "no-action" letter from the SEC staff. Most no-action letters describe the request, analyze the particular facts and circumstances involved, discuss applicable laws and rules, and, if the staff grants the request for no action, concludes that the SEC staff would not recommend that the Commission take enforcement action against the requester based on the facts and representations described in the individual's or entity's request. The SEC staff sometimes responds in the form of an interpretive letter to requests for clarifications of certain rules and regulations.

The no-action relief is provided to the requester based on the specific facts and circumstances set forth in the request. In some cases, the SEC staff may permit parties other than the requestor to rely on the no-action relief to the extent that the third party's facts and circumstances are substantially similar to those described in the underlying request. In addition, the SEC staff reserves the right to change the positions reflected in prior no-action letters.

You can find a compilation of Staff No Action, Interpretive, and Exemptive Letters from the Divisions of Corporation Finance, Investment Management, and Trading and Markets, and the Office of the Chief Accountant in the "Staff Interpretations" section of our website.


A No Action letter can not overrule an SEC Rule or Regulation, regardless of what law firms wish that it can. Nor can they twist the No Action letter to overcome the SEC Rules.

For example SEC Rule 16 b-3(a) requires that there be a transaction between the officer or director and the issuer of the equity security.

The sentence highlighted above requires something far different from a transaction between a non issuer and an officer or director of the issuer that  which involves a purchase or sale of issuer securities that is from the issuer.

As a example consider the following:

Assume a person goes to Whole Foods and purchases Avocados that are from Mexico. Is the transaction between the person and Whole Foods or is the transaction between the person and Mexico? The answer that most people would give is that the transaction was between the person and Whole Foods.

Let us assume that a large company in Mexico issues 1 million shares of its common stock to Amazon Inc, with Amazon Inc. then selling the shares of the Mexican company to top executives of Amazon.

Is the purchase of the shares  of Mexico Inc. by the top executives of Amazon a transaction between the top executives of Amazon Inc. and Amazon Inc. or is it a transaction between the top executives of Amazon Inc.  and  Mexico Inc.

Most people would answer that the purchase of the shares of Mexico Inc. was between the top executives of Amazon Inc. and Amazon Inc. and was not between the top executives of Amazon Inc. and Mexico Inc.

Edited Wed, Apr 10, 2019 11:00 AM

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