Section 16 (b) of the Securities Act of 1934 and violations

Section 16 (b) was created to stop officers, directors and greater than 10% owners from unfairly using inside information to profit from trading shares in the issuer stock.

With the continuous expansion of equity compensation grants and dispositions of shares to the company, there is increased concern that these grants and these dispositions of shares may cause violations of section 16 (b) by the insiders.

The SEC is allowed to make Rules that exempt such transactions if the transactions are "not comprehended" within the purpose of the statute. The SEC can not exempt transactions that are "comprehended within the purpose of section 16(b)". This is confirmed by the American Bar Association, the N.Y. State Bar Association and the SEC.

These SEC Rules allow exemptions when the transactions are approved consistent with SEC Rule 16 b-3 and Note (3) and are not "comprehended within the purpose of Section 16(b)."

Questions arise as to whether particular transactions are comprehended within the purpose of of the statute and whether they have been approved consistent with the SEC required approvals.

For example when the issuer and the insider both have equal inside information and both can use the inside information in transactions between the issuer and the insider, a disposition by the insider to the issuer is generally exempt from Section 16 (b).

However; if both have equal inside information but the issuer can not use that inside information because a contract between the two allows discretion to just the insider, then the transaction is "comprehended within the purpose of Section 16 (b)" and the disposition is not exempt.

With the above in mind, why do issuers give discretion to top insiders to deliver shares or cash for tax liabilities or payment of exercise prices, which the issuer must accept, that arise from vestings of ESOs, RS or RSUs. This feature is often present in the Plan or Grant documents.

What benefit is there to the issuer, when the officer or director is given such discretion, which the issuer can not reject. If there is no benefit to the issuer, then why do they do it.

I invite any readers to comments on the above.

Regards;

John Olagues