SW Legal studies in Business

Short-Swing Sales that Profited Directors Fell within Exemption on Prohibition of Such Sales
Description Appeals court held that short-swing sales of company stock for profit by directors of a company did not violate the rule against such sales because they qualified for an exemption. The sales were approved in advance as part of the terms of a merger of companies and the directors had no discretion as to the details of the sales.
Topic Securities Law
Key Words Short-Swing Sales; Profit-Taking; Exemption
C A S E   S U M M A R Y
Facts Gryl and other shareholders sued Shire Pharmaceuticals and members of its board of directors under Section 16(b) of the 1934 Securities Exchange Act, which allows directors to be sued for profits earned by purchase and sale of securities in less than six months, a short-swing sale, when such transaction is based upon unfair use of inside information. The district court dismissed the suit, holding that the short-swing sales were allowed by exemptions to the rule. Gryl appealed.
Decision

Affirmed. Such sales are legal if a director has permission of the board and the transaction involved the acquisition of securities from the issuer of the securities. That occurred in this case when the members of the board of Roberts Pharmaceutical, who held stock options in Roberts, converted their stock to Shire stock when the companies merged and then soon sold that stock. That sale was part of the merger formula, which fixed the details of the amount, price, timing and other terms of the stock offer.

Citation Gryl v. Shire Pharmaceuticals Group PLC, 298 F.3d 136 (2nd Cir., 2002)

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