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2Cir Affirms Icahn Victory In Options Disgorgement Case
August 4, 2017
In John Olagues,
Plaintiff/Appellant, V. Carl C. Icahn, High River Limited Partnership, Icahn
Partners L:, Icahn Partners Master Fund
LP, Icahn Partners Master Fund II LP, and Icahn Partners Master Fund III LP,
Defendants/Appellees (Opinion, United States Court
of Appeals for the Second Circuit, 16-CV-1255, 16-CV-1259, 16-CV-1261 / August
3, 2017) the Second Circuit ("2Cir") provides us with the following
synopsis:
John Olagues, a shareholder in three public companies-Herbalife, Ltd., Hologic Inc., and Nuance Communications, Inc. (together, the "Companies")- seeks disgorgement of "short‐swing" profits under Section 16(b) of the Securities 20 Exchange Act of 1934 from investment entities controlled by Carl C. Icahn (together, "Icahn" or the "Icahn Entities"). In contracts with various third parties, Icahn sold put options based on the stock price of the Companies and collected cash premiums as consideration. Because the put options were cancelled unexercised within six months of their sale, Section 16(b)'s implementing regulations required Icahn to disgorge the amount of the premiums to the Companies, which he did. In addition to the cash consideration already disgorged, Olagues contends that Icahn also should have disgorged the "value" of alleged discounts that Icahn received on purchases of related call options. The United States District Court for the Southern District of New York (Woods, J.) dismissed Olagues's actions on behalf of the Companies under Rule 5 12(b)(6) of the Federal Rules of Civil Procedure. On appeal, we AFFIRM the District Court's dismissal because Olagues has not plausibly alleged that Icahn failed to disgorge all of the premiums received for writing (that is, selling) the put options.Pages 2 - 3 of the 2Cir Opinion
In dismissing Olagues's appeal,
2Cir concedes that Rule 16b-6(d) requires an insider to disgorge the entire
premium received for writing an option, which would cover the disgorgement of
the actual amount paid to Icahn for the sold Puts. Appellant argued that the
"disgorgement" should further include not merely the 1 cent short-swing profit
on the Put sales but also any so-called "discount" received by the Icahn
entities when they purchased Call options. In addressing this threshold issue,
2Cir explains that [Ed: Footnotes
omitted]:
[I]cahn wrote only "European style" put options, which permitted the counterparty to exercise the put option only on a specific expiration date. By contrast, Icahn bought only "American style" call options, which permitted Icahn to exercise the call option at any time through an expiration date. For each option pair, the expiration date of the put option matched the expiration date of the call option, and the options shared the same "exercise price" -- that is, the price paid per share upon exercise of the option. According to the governing option contracts, the exercise of a call option automatically cancelled the corresponding put option. If Icahn exercised call options for 500 shares, for example, the corresponding put options for 500 shares would immediately be cancelled.Pages 5 - 6 of the 2Cir Opinion
As such, we are
confronted with two distinct options transactions: The Put sale a la European
Style; and the Call purchases a la American Style. In knitting together the
differing options styles yet taking cognizance of Icahn's apparent cohesive
strategy, 2Cir noted
that:
Pages 9 - 10 of the 2Cir OpinionOlagues argues that the premiums associated with these open‐market option contracts demonstrate that Icahn charged too little for the put options and did not pay enough for the call options, and that the discounts Icahn received on the call option premiums were consideration for writing the put options. See id. at 21-22. The District Court rejected Olagues's comparison to the open‐market contracts, concluding that the structure of the corresponding put and call option contracts at issue did not result in short‐swing profits beyond what Icahn had disgorged. . .
In addressing the
above issue on appeal, 2Cir found that:
[F]irst, the open‐market contracts were all standalone "American style" option contracts: they were exercisable at any time up through the expiration date and could expire unexercised if the buyer so chose; they were not combined with any corresponding options that ensured an exchange of shares by the expiration date; and they could be independently priced and sold to third parties. By contrast, Icahn transacted in paired option contracts with counterparties in which Icahn sold put options exercisable only on the expiration date and bought call options exercisable up to the same expiration date, thereby binding the parties to an exchange of shares at a fixed price on or before the expiration date. Olagues does not allege that structuring the transaction in this way was fraudulent or otherwise illegal. Second, the complaint fails to allege the available volume of these open‐market contracts or that option contracts covering 3,230,606 shares of the Companies were available on the open market at the prices alleged.
Pages 12 -13 of the
2Cir Opinion READ the FULL-TEXT: John Olagues,
Plaintiff/Appellant, V. Carl C. Icahn, High River Limited Partnership, Icahn
Partners L:, Icahn Partners Master Fund
LP, Icahn Partners Master Fund II LP, and Icahn Partners Master Fund III LP,
Defendants/Appellees (Opinion, United States
Court of Appeals for the Second Circuit, 16-CV-1255, 16-CV-1259, 16-CV-1261 /
August 3, 2017).