Examples of Section 16 (b) violations

This article analyses violations pursuant to Section 16 (b). First of all, I will give a hypothetical example of a Section 16(b) violation .

Assume that a CEO is granted Restricted Stock on 100,000 shares of XYZ company when the stock is trading at $20.00 on Jan. 20, 2015. The vesting date is Jan 20, 2017.

Assume that on November 20, 2016, XYZ is trading at $25.00 and the CEO buys 200,000 shares in the market at $25.00.

Assume that on Jan 20, 2017, (i.e. the vesting date), the stock is trading for $35.00, and the CEO chooses to use shares to pay for an alleged tax liability as he has the choice of delivering cash or shares to pay the alleged tax liabilities. According to the grant agreement, the issuer XYZ must accept those 50,000 shares to pay for the possible tax withholding.

Is that disposition of the 50,000 shares to the issuer XYZ exempt on Jan 20, 2017 from section 16 (b) or is the disposition to the issuer of the 50,000 shares matchable to the purchase of 50,000 share at $25.00 on November 20, 2016 for section 16 (b) purposes.

The answer is that the purchase of 50,000 shares at $25. on Nov. 20, 2016 is matchable with the sale of 50,000 shares on Jan 2017 at $35.00 and the $500,000 profit is recoverable by the issuer.

There are two reasons that the profit is recoverable.

a) The transactions are "comprehended within the purpose of the section 16 (b)" and can not be exempt from section 16 (b) by any SEC Rule.

b) The second reason is that there was no income calculation and no tax liability on the day of vesting since IRC 83 (c)(3) defers the income calculation and tax liability until a time when a sale of the stock would not cause a section 16 (b) violation. And there is no approvals to achieve an exemption for a payment by delivering shares for a tax liability that has not yet occurred.

c) Of course the market purchase is a non exempt purchase matchable to the disposition on Jan 20, 2017


I will show in a later article a few real life examples of violations of section 16 (b), where the profits are recoverable.

Edited Wed, Jul 19, 2017 6:28 PM

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