Roth v. Solus Alternative Assest Management LP et al
OPINION & ORDER re: 95 CROSS MOTION for Summary Judgment filed by Andrew E. Roth; 90 MOTION for Summary Judgment filed by Solus Core Opportunities Master Fund Ltd., Christopher Pucillo, Solus Opportunities Fund 1 LP , Solus Opportunities Fund 2 LP, Solus GP L.L.C., Solus Alternative Assest Management LP, Sola Ltd., Ultra Master Ltd. For the reasons stated above, Solus's motion for summary judgment is granted and Roth's motion for summary judgment as to liability is denied. The Clerk of Court is directed to close all pending motions and mark this case as closed. SO ORDERED. (Signed by Judge William H. Pauley, III on 6/30/2017) (anc)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X
ANDREW E. ROTH, derivatively on
behalf of YRC WORLDWIDE, INC
OPINION & ORDER
SOLUS ALTERNATIVE ASSET,
MANAGEMENT LP, et al.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -X
WILLIAM H. PAULEY III, United States District Judge:
Andrew Roth brings this shareholder derivative suit on behalf of YRC Worldwide
Inc. (“YRC”) against Solus Alternative Asset Management LP, Solus GP LLC, Sola Ltd., Solus
Opportunities Fund 1 LP, Solus Opportunities Fund 2 LP, Solus Core Opportunities Master Fund
Ltd., Ultra Master Ltd. and Christopher Pucillo (collectively, “Solus”). Roth alleges violations
of § 16 of the Securities Exchange Act and seeks disgorgement of short-swing profits. Both
parties move for summary judgment. For the following reasons, Roth’s motion for summary
judgment as to liability is denied and Solus’s motion for summary judgment dismissing this
action is granted.
This action arises from the 2013 restructuring of YRC, a Kansas-based trucking
company. (See Parties’ Joint Rule 56.1 Statement of Undisputed Facts (“56.1 Stmt.”) ¶ 1.)
Toward the end of 2013 YRC found itself in a precarious financial position, with more than $1
billion in debt due in February 2014. (56.1 Stmt. ¶¶ 14, 28, 29.) YRC launched a refinancing
plan that involved extending its labor agreement with the International Brotherhood of
Teamsters, the labor union to which most YRC employees belonged. (56.1 Stmt. ¶ 12.) In early
December, YRC and the union leadership reached an agreement to extend the contract through
2018 provided that, inter alia, (1) the union membership ratified the extension by January 8, 2014
and (2) YRC retired at least 90% of its outstanding Series A and Series B Notes. (56.1 Stmt.
¶ 48.) Both the Series A and Series B Notes were convertible into YRC common stock. As of
November 14, 2013, Solus held Series A and Series B Notes representing the equivalent of
5.32% of all outstanding YRC stock. (56.1 Stmt. ¶ 36.)
With the labor-contract extension in place, YRC developed a restructuring plan
that involved issuing new shares of common stock, selling those shares in a private placement,
and then using the proceeds of the sale to repurchase Series A Notes from the investors who
participated in the private placement. (56.1 Stmt. ¶ 49.) The company approached existing
noteholders in early December, asked them to sign non-disclosure agreements, and began
negotiating the terms of the private placement. (56.1 Stmt. ¶ 46.)
Between December 9 and 13 (but prior to signing the non-disclosure agreement),
Solus purchased additional YRC securities, which caused Solus to become a beneficial owner of
more than 10% of the outstanding YRC shares. (56.1 Stmt. ¶¶ 50–51.) Thereafter, Solus made
two purchases of Series A and Series B Notes with an aggregate principal amount of more than
$17.5 million and publicly reported these increases in beneficial ownership pursuant to Schedule
13D and § 16(a). (56.1 Stmt. ¶¶ 52, 56.)
The restructuring plan called for the issuance of a large block of YRC common
shares, creating a potential obstacle to the restructuring in the form of the company’s share cap—
that is, the maximum number of shares of common stock that YRC could issue without holding a
shareholder vote. (56.1 Stmt. ¶¶ 62–63.) YRC was obligated to hold enough shares in reserve to
cover conversion requests for all outstanding Series A and Series B Notes. (56.1 Stmt. ¶ 69.)
The stock issue required to complete the restructuring, when combined with those reserved
shares, would cause YRC to exceed its share cap. With the default date looming, however, YRC
did not have time to hold a shareholder vote on the share cap. (56.1 Stmt. ¶¶ 70, 73.)
Accordingly, YRC asked all potential investors in the restructuring who held Series A Notes to
waive the convertibility feature, thereby freeing up the corresponding reserved shares for issue in
the private placement. (56.1 Stmt. ¶ 73.) This conversion waiver was terminable in the event
that the restructuring did not close on or before February 13, 2014. (See Declaration of Michael
E. Swartz (“Swartz Decl.”), Ex. 74 at ¶ 7(a).)
On December 22, YRC set the final purchase price for the private placement and
notified the ten investors of their individual share allocations. (56.1 Stmt. ¶ 78.) Solus’s
allocation was worth $25 million. (56.1 Stmt. ¶ 80.) At the time, Solus was a beneficial owner
of 14.56% of YRC’s common stock through its holdings of stock and convertible Notes. (56.1
Stmt. ¶ 55.) Thus, Solus was concerned that any profits derived from its participation in the
restructuring would be subject to disgorgement as short-swing gains under § 16(b).
On advice of outside counsel, Solus requested that YRC modify the conversion
waiver in Solus’s Stock Purchase Agreement to make the waiver permanent and irrevocable
upon execution, regardless of whether the restructuring closed by February 13. (56.1 Stmt. ¶ 82.)
This change would, Solus believed, reduce its beneficial ownership to 8.43% of YRC common
stock prior to the stock purchase, thereby eliminating any § 16(b) liability for Solus’s
participation in the restructuring. (56.1 Stmt. ¶ 82.) To retain “protection” in the event that the
restructuring failed to close, however, Solus also requested that the permanent waiver apply only
to Solus and its affiliates, and not to any subsequent, unaffiliated purchaser of the Notes. (56.1
Stmt. ¶ 88; Swartz Decl. Ex. 53.) YRC agreed to these proposed changes, the parties executed
the revised Stock Purchase Agreement on December 23, and Solus filed an amended Schedule
13D disclosing the full structure of the transaction the following day. (56.1 Stmt. ¶ 92.) The
restructuring closed on January 31, 2014. (56.1 Stmt. ¶ 127.)
A. Summary Judgment
Summary judgment should be granted if the record shows that “there is no
genuine dispute as to any material fact and the movant is entitled to judgment as a matter of
law.” Fed. R. Civ. P. 56(a); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986).
The burden of demonstrating the absence of any genuine dispute of material fact rests with the
moving party. See Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970). Once the moving
party has made an initial showing that there is no genuine dispute of material fact, the nonmoving party cannot rely on the “mere existence of a scintilla of evidence” to defeat summary
judgment but must set forth “specific facts showing that there is a genuine issue for trial.”
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). “A dispute about a
‘genuine issue’ exists for summary judgment purposes where the evidence is such that a
reasonable jury could decide in the non-movant’s favor.” Beyer v. Cty. of Nassau, 524 F.3d 160,
163 (2d Cir. 2008) (quoting Guilbert v. Gardner, 480 F.3d 140, 145 (2d Cir. 2007)). “Where the
record taken as a whole could not lead a rational trier of fact to find for the nonmoving party,
there is no ‘genuine issue for trial.’” Scott v. Harris, 550 U.S. 372, 380 (2007) (citing
Matsushita, 475 U.S. at 586–87). The Court resolves all factual ambiguities and draws all
inferences in favor of the non-moving party. See Liberty Lobby, 477 U.S. at 255; see also
Jeffreys v. City of New York, 426 F.3d 549, 553 (2d Cir. 2005).
B. Section 16(b)
To establish liability under § 16(b), a plaintiff must show “that there was (1) a
purchase and (2) a sale of securities (3) by an officer or director of the issuer or by a shareholder
who owns more than 10% of any one class of the issuer’s securities (4) within a six month
period.” Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d 305, 308 (2d Cir. 1998). “Section
16(b) thus compels statutory insiders to disgorge profits earned on any purchase and sale (or sale
and purchase) made within six months of each other.” Magma Power Co. v. Dow Chem. Co.,
136 F.3d 316, 320 (2d Cir. 1998).
For the purpose of determining statutory-insider status, § 16(b) borrows the
definition of “10% beneficial owner” from § 13(d) of the Exchange Act. See 17 C.F.R. 240.16a1(a)(1). Rule 13d-3 defines “10% beneficial owner” as “any person who, directly or indirectly
. . . has or shares . . . the power to vote, or to direct the voting of, such security; and/or . . . the
power to dispose, or direct the disposition of, such security.” 17 C.F.R. 240 § 13d-3(a). In 1991,
the SEC amended Rule 13d-3 to capture holders of derivative and convertible securities. Under
Rule 13d-3(d)(1), a person is a “beneficial owner of a security . . . if that person has the right to
acquire beneficial ownership of such security . . . within sixty days.” 17 C.F.R. 240 § 13d3(d)(1)(i).
The Supreme Court has held that courts should interpret § 16(b) strictly so as to
“preserve its mechanical quality,” calling the statute “a relatively arbitrary rule capable of easy
administration.” Reliance Elec. Co. v. Emerson Elec. Co., 404 U.S. 418, 422–25 (1972).
Accordingly, § 16(b) requires disgorgement only where the defendant was a statutory insider
within the meaning of the rule “both at the time of the purchase and sale, or the sale and
purchase, of the security involved.” Foremost-McKesson, Inc. v. Provident Secs. Co., 423 U.S.
232, 235 (1976).
It is undisputed that Solus held more than 14% of YRC common stock, by virtue
of its ownership of stock and convertible notes, prior to execution of the Stock Purchase
Agreement. The issue is whether the conversion waiver effectively extinguished Solus’s “right
to acquire” the stock underlying the Series A Notes or, in the alternative, whether that waiver
constituted a matchable sale under § 16(b). Roth advances two theories of liability on this point:
the “ineffective/sham waiver” theory, and the “matchable sale” theory.
A. Ineffective/Sham Waiver Theory
Roth’s primary argument is that the conversion waiver was ineffective to remove
Solus’s statutory-insider status or, in the alternative, that the waiver was effective but should be
disregarded as a “sham” designed to evade § 16(b) liability.
The Supreme Court has endorsed the practice of designing financial transactions
specifically to avoid disgorgement under § 16(b). See Reliance, 404 U.S. at 422 (“Liability
cannot be imposed simply because the investor structured his transaction with the intent of
avoiding liability under § 16(b).”) “The question is, rather, whether the method used to ‘avoid’
liability is one permitted by the statute.” Reliance, 404 U.S. at 422. Investors in convertible
instruments commonly enter into contractual agreements not to convert past certain benchmarks
(5% or 10%) that could trigger liability under SEC rules, and these arrangements have been
upheld in the Second Circuit. See Levy v. Southbrook Intern. Inv. Ltd., 263 F.3d 10, 12 (2d Cir.
2001) (no § 16(b) liability where investor waived the ability to acquire more than 4.9% of total
outstanding shares through exercise of conversion rights). The Second Circuit has held that, for
the purposes of determining whether a defendant is a § 16(b) statutory insider, “where a binding
conversion cap denies an investor the right to acquire more than 10% of the underlying equity
securities of an issuer, at any one time, the investor is not, by virtue of his or her ownership of
convertible securities, the beneficial owner of more than 10% of those equity securities.” Levy,
263 F.3d at 12.
Roth argues first that Solus’s conversion waiver was ineffective because it was
not accomplished via amendment to the Series A Indenture, which would have required the
majority vote of Series A noteholders. (See Plaintiff’s Opposition and Cross-Motion (“Roth
Opp.”), ECF No. 96 at 10.) Because Solus merely agreed in an extraneous contract (the Stock
Purchase Agreement) not to convert its Notes, Roth claims, the conversion feature of the
Indenture remained intact and Solus never relinquished its right to acquire the underlying YRC
common stock. This argument is not persuasive. First, as Solus points out, binding contractual
agreements between issuers and noteholders (like the Stock Purchase Agreement) are quite
common and far more efficient than a wholesale amendment of the Indenture. Second, this
analysis simply leads back to the dispositive question: was the conversion waiver in the Stock
Purchase Agreement binding and enforceable? If it was, then the fact that YRC never amended
the Indenture is irrelevant because Solus had permanently and irrevocably waived its right to
convert the Notes.
In an amicus brief in Levy which this Court finds persuasive, the SEC offered a
list of non-exclusive factors indicative of whether a conversion cap is binding. Factors that
suggest a conversion cap is illusory include “whether the cap  is easily waivable by the parties
(particularly the holder of the convertible securities);  lacks an enforcement mechanism; 
has not been adhered to in practice; or  can be avoided by transferring the securities to an
affiliate of the holder.” Brief of the Securities and Exchange Commission, 2001 WL 34120374,
at *25 (2d Cir. Mar. 23, 2001). Here, it is undisputed that the Solus conversion waiver was
irrevocable, applied to all Solus affiliates, and was adhered to in practice. The parties disagree as
to whether an effective enforcement mechanism existed for YRC.
Roth asserts that the conversion waiver was not enforceable by YRC because the
Series A Notes were global securities, registered in the name of the Depository Trust Company
(“DTC”) and held by Solus through a broker. If Solus submitted a conversion request through its
broker, Roth claims, YRC would not know who was requesting the conversion and would issue
the shares in contravention of the waiver. (See Roth Opp. at 13.) While imaginative, this
argument appears to be pure conjecture. Roth cites to nothing in the record nor to any legal
authority for the proposition that issuers lack power over the issuance of shares held by the DTC.
Further, even if Solus could have accomplished this caper, YRC would have had rescission rights
under § 8(m) of the Stock Purchase Agreement, which allows “[a]ny person having any rights
under any provision of this Agreement” to sue for specific performance. (See Swartz Decl. Ex.
57, at 33.)
Roth’s remaining arguments on the illusory or “sham” nature of the conversion
waiver lack merit. There is no evidence to suggest that the negotiations between YRC and
Solus—or, rather, between their respective outside attorneys—were not bona fide. Roth’s
contention that YRC “needed” the restructuring to close, rendering them unable to push back
against Solus’s demands, ignores the fact that the YRC restructuring was oversubscribed by $100
million. When one of the largest investors demanded too many changes to the Stock Purchase
Agreement that delayed the closing, YRC threatened to re-allocate that investor’s shares to other
participants. (See Supplemental Declaration of Michael E. Swartz, Ex. B.) Taken as a whole,
the record suggests that the Stock Purchase Agreement was the product of bona fide negotiations
between sophisticated parties through their outside counsel.
Finally, Roth’s contention that the conversion waiver is void under § 29(a), which
prohibits parties from waiving compliance with the Exchange Act, is misplaced. The § 29(a)
cases cited by Roth are plainly distinguishable from the situation at issue here. See, e.g., Volk v.
Zlotoff, 285 F. Supp. 650, 658 (S.D.N.Y. 1968) (issuer’s attempted “ex post facto” rescission of
directors’ stock option exercise in violation of § 16(b) was void under § 29(a)). Solus and YRC
did precisely what the Supreme Court and the Second Circuit have previously approved—they
entered into a binding conversion waiver for the purpose of eliminating Solus’s statutory-insider
status, thereby precluding § 16(b) liability for Solus in the subsequent restructuring.
Accordingly, the conversion waiver was neither ineffective nor a sham. It was an enforceable
contractual agreement between Solus and YRC.
B. Matchable Sale Theory
Even if the conversion waiver was effective, Roth argues, Solus is still subject to
disgorgement under § 16(b) because the waiver constituted a matchable “sale” of the common
stock underlying the Series A Notes. Under Rule 16b-6, “[t]he establishment of or increase in a
call equivalent position . . . shall be deemed a purchase of the underlying security for purposes of
section 16(b) of the Act, and the . . . liquidation of or decrease in a call equivalent shall be
deemed a sale of the underlying securities.” 17 C.F.R. § 240.16b-6(a). Put more simply, for
§ 16(b) purposes “the acquisition or disposition of a derivative security with a fixed exercise
price is treated just as if the insider had traded the underlying security itself.” Magma Power,
136 F.3d at 322.
Roth’s argument on this point is that Solus’s waiver of the conversion feature
constituted a decrease in its call equivalent position and was thus a “sale” for § 16(b) purposes.
Solus counters that no sale occurred, but in any case that the transaction is covered by the “No
Value Exception,” which exempts from § 16(b) the “disposition or closing of a long derivative
security position, as a result of a cancellation or expiration . . . where no value is received from
the cancellation or expiration.” 17 C.F.R. § 240.16b-6(d). The parties dispute both whether
there was a “cancellation” in this transaction and whether Solus received “value” for the waiver.
Whether the Waiver Constituted a “Cancellation”
On this issue, Roth reiterates his arguments that there was no true “cancellation”
of the convertibility feature because YRC and Solus did not seek an amendment of the Series A
Indenture, and because Solus retained the ability to re-sell the Notes with the convertibility
feature intact. As discussed above, the first point is unavailing because it borders on the hypertechnical and ignores the fact that Solus (and its affiliates) permanently and irrevocably waived
the right to convert the Notes, regardless of what the Indenture might say.
As to Solus’s retention of the economic value of the convertibility feature despite
the waiver, Roth’s argument overlooks the purpose of § 16(b). The short-swing trading rules
focus on “beneficial ownership” (i.e. the right to vote and dispose of shares) because of “the
power over corporate affairs associated with significant equity ownership,” a power which “also
implicates access to inside information and the potential for insider trading.” Levy, 263 F.3d at
16. However advantageous an economic position Solus might have constructed for itself—Solus
could buy into the restructuring if it closed, or sell the Notes at face value (because a third party
would not be subject to the conversion waiver) if it did not close—there is no question that the
conversion waiver extinguished its right to exchange the Series A Notes for common shares and
vote those shares. Accordingly, there was a complete cancellation of Solus’s call equivalent
position in the shares underlying the Series A Notes.
Whether Solus Received “Value” for the Waiver
Next, Roth argues that Solus received “value” for the conversion waiver in the
sense that the waiver was an “integral” part of the agreement that allowed Solus to participate in
the YRC restructuring. Participation in the restructuring gave Solus the opportunity to sell its
Series A Notes at a substantial profit and purchase YRC common stock at a discount—thus, Roth
claims, Solus received significant “value” for waiving its conversion rights. As Roth
acknowledges, however, “it was a complete non-issue for YRC to agree to” changing the
conversion waiver to make it permanent and irrevocable rather than contingent on closing. (See
Plaintiff’s Reply Memorandum, ECF No. 102, at 3.) The parties had negotiated all material
terms of the Stock Purchase Agreement prior to Solus’s request—an amendment that only made
the conversion waiver more restrictive for Solus—and YRC gave no consideration whatsoever in
exchange for this strengthened conversion waiver. Any value that Solus can be said to have
received for waiving its conversion rights was not connected to its agreement to make the waiver
irrevocable. Thus, Solus received no value for permanently cancelling its call equivalent
position, and the “No Value Exemption” applies to this transaction.
For the reasons stated above, Solus’s motion for summary judgment is granted
and Roth’s motion for summary judgment as to liability is denied. The Clerk of Court is directed
to close all pending motions and mark this case as closed.
Dated: June 30, 2017
New York, New York
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?