Litigation of counsel Martin Flumenbaum and partner Brad Karp’s latest Second Circuit review column, “Contractual Blockers and Section 16(b) Liability: ‘20230930-DK-Butterfly-1, Inc. f/k/a Bed Bath & Beyond Inc. v. HBC Investments LLC,’” was published in the July 28 issue of the New York Law Journal. The authors discuss a recent Second Circuit decision holding that enforceable contractual “blockers” limiting an investor’s ownership stake can shield the investor from strict liability for short-swing profits under Section 16(b) of the Securities Exchange Act of 1934. The decision provides a framework that validates blocker provisions in derivative securities offerings.
Two Hudson Bay entities purchased Bed Bath & Beyond derivatives enabling them to acquire large amounts of the company’s common stock and realize more than $300 million in short-term profits. The offering documents contained contractual blockers prohibiting Hudson Bay from beneficially owning more than 9.99% of Bed Bath & Beyond’s stock. After the company filed for bankruptcy, its successor sued Hudson Bay in the Southern District of New York, arguing that the blockers were “illusory” and that Hudson Bay effectively had the right to acquire more than 10% of the company’s shares. The SDNY dismissed and the Second Circuit affirmed, concluding that the blockers could not be waived unilaterally, contained meaningful compliance mechanisms, had not been disregarded in practice, and were not part of a scheme to evade beneficial-ownership reporting requirements.
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