Legal Brief:
Securities and Exchange Commission vs.
Gryl v. Shire Pharmaceuticals Group

UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

On Appeal from the United States District Court
for the Southern District of New York

FRANK GRYL, for the benefit of Shire Pharmaceutical Group PLC
and BARBARA GRYL, for the benefit of Shire Pharmaceuticals Group PLC,

SHIRE PHARMACEUTICALS GROUP PLC, ZOLA HOROVITZ, RONALD NORDMANN and JOHN SPITZNAGEL,

BRIEF OF THE SECURITIES AND
EXCHANGE COMMISSION, AMICUS CURIAE

UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

No. 01-9139

FRANK GRYL, for the benefit of Shire Pharmaceutical Group PLC and
BARBARA GRYL, for the benefit of Shire Pharmaceuticals Group PLC,

SHIRE PHARMACEUTICALS GROUP PLC, ZOLA HOROVITZ, RONALD NORDMANN and JOHN SPITZNAGEL,

On Appeal from the United States District Court
for the Southern District of New York

BRIEF OF THE SECURITIES AND
EXCHANGE COMMISSION, AMICUS CURIAE

INTRODUCTION

The Securities and Exchange Commission submits this brief as amicus curiae in response to a May 3, 2002 request from the Court.

This case was brought under Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78p(b). The plaintiffs allege that defendants acquired options in Shire Pharmaceuticals Group PLC ("Shire") while the defendants were directors of Shire and then exercised some of their options and sold the resultingShire stock within six months of acquiring the options. The transactions, the plaintiffs allege, thus were subject to recovery under Section 16(b), which applies to directors and other specified insiders of issuers with a class of equity securities registered under Section 12 of the Exchange Act, 15 U.S.C. 78l. Section 16(b) provides the issuer (or shareholders suing on behalf of the issuer) a private right of action to recover from an insider any profit realized by the insider from any purchase or sale (or sale and purchase) of any equity security within any period of less than six months.

On August 31, 2001, the district court found that the transactions in question were not subject to Section 16(b). See Gryl v. Shire Pharmaceuticals Group PLC, Fed. Sec. L. Rep. ¶ 91,527, 2001 WL 1006628 (S.D.N.Y. Aug. 31, 2002). Plaintiffs appealed. On May 3, 2002, the Court wrote the Commission to request an amicus brief stating that the "panel which will hear argument in the above-entitled appeal believes that it would benefit from receiving an amicus Brief from the Securities and Exchange Commission." ¹

The Commission believes that certain of the parties' arguments, such as the plaintiffs' argument that the defendants were de facto directors prior to themerger, the defendants' argument that the option grants were exempt unorthodox transactions, and certain of the parties' arguments about the requirements for board approval of a grant to directors, can be rejected out of hand. Most of the issues in this case, however, turn on whether the Court concludes that there are issues of fact and, if there are not, what the undisputed facts are. The Commission expresses no view of the factual contentions in this case. It does, however, offer its views as to how the Court should rule depending on its view of the facts.

STATEMENT OF THE CASE

A. Background

On December 4, 2000, plaintiffs, Frank and Barbara Gryl, shareholders of Shire, brought this action under Section 16(b) of the Exchange Act against Shire and three of its directors, Zola Horovitz, Ronald Nordmann, and John Spitznagel, to disgorge profits each realized when he or she sold Shire stock within six months of acquiring options to buy the stock. ²

The defendants became directors of Shire and acquired options to purchase Shire stock on December 23, 1999, when Roberts Pharmaceutical Corporation ("Roberts") merged into Shire. Prior to that time, the defendants were directorsof Roberts and held Roberts' stock options. The merger agreement provided that any Roberts options would be converted into Shire options and that the defendants would become directors of Shire. Specifically, with regard to conversion of securities, the merger agreement, which was executed on July 26, 1999, in pertinent part provided:

At the Effective Time, by virtue of the Merger and without any action on the part of the Holders, each issued and outstanding share of [Roberts] Common Stock * * * together with the associated Right shall be converted into the right to receive from Shire a number of Ordinary shares (the "Merger Consideration") determined as set forth below [by the exchange ratio].

Merger Agreement at ¶2.5 (A39). ³ Thus, the defendants acquired their Shire options as soon as the merger became effective. Although it is agreed that the defendants became directors the same day they acquired their options, there is a dispute, as discussed below, whether they became directors upon effectiveness of the merger (and thus simultaneously with the acquisition of the options), or after effectiveness.

Within less than six months following the effective date of the merger, each defendant exercised some of his or her Shire options and sold the underlying Shire shares at a profit.

B. Decision of the District Court

The district court held that, for three independent reasons, the option acquisitions were not subject to Section 16(b). First, the court held that the undisputed evidence showed that although the defendants acquired their Shire options when the merger became effective, "they became directors only a short time, perhaps moments, after acquiring the [options]." 2001 WL 1006628, at *2 (A871-2). In support of this, the district court agreed with the defendants that "the Merger Agreement makes it clear that they became directors only after the merger as it lists them under the heading, `Directors of Shire Immediately Following the Merger.'" Id. (emphasis in original). The district court stated that the plaintiffs' argument, that defendants became directors upon effectiveness of the merger, ignored the plain meaning of the words "immediately following" 2001 WL 1006628, at *3 n.6 (A870-71).

The district court held that since the defendants were not directors at the time they acquired their options, the transactions were not subject to Section 16(b) by virtue of Rule 16a-2(a), 17 C.F.R. 240.16a-2(a). ⁴ It rejected theplaintiffs' argument that even if the defendants became directors "a short time" after acquiring the Shire options, the brief gap in time should be ignored. Id. Although the plaintiffs cited Blackstone's Commentaries for the proposition that the law ignores fractions of a day, the court held that "plaintiffs neglect to support application of this hallowed princip[le] in a strict liability context," while the defendants cited one Section 16(b) case where fractions of a day were not ignored. Lewis v. Bradley, 599 F. Supp. 327, 330 (S.D.N.Y. 1984). The court concluded: "Although there is an admitted dearth of case law supporting either side, defendants have the better argument" 2001 WL 1006628, at *3 (A872). The court also concluded that there was no support for plaintiffs' argument that defendants were de facto directors before the merger. ⁵

Second, the court held that the transactions were exempt because, at the time defendants acquired their options, Shire remained a foreign private issuer and transactions in its securities thus were exempt under Rule 3a12-3(b), 17C.F.R. 240.3a12-3(b). ⁶ It is not disputed that, before the merger, Shire was a foreign private issuer. Nor is it disputed that as a result of the merger, more than 50% of Shire's voting securities were owned by United States residents, so that the company no longer qualified for foreign private issuer status.

The district court agreed with the defendants, however, that Shire did not lose its foreign private issuer status upon effectiveness of the merger. Instead, the district court stated that Shire lost this status only once it reassessed, after themerger was complete, whether it still fit within the definition of foreign private issuer, by which time defendants already had acquired their Shire options. 2001 WL 1006628, at *4 (A874). To support this result, the court relied on two interpretive letters issued by the Commission's Division of Corporation Finance. ⁷ In one letter, Thelen, Marrin, Johnson & Bridges, SEC Interpretive Letter, Fed. Sec. L. Rep. (CCH) ¶76,953, 1994 WL 709723, at *4 (Dec. 23, 1994) (A548-52), the staff advised an issuer "as a general matter, that transactions effected by officers and directors of a foreign company before the loss of `foreign private issuer' status are not subject to Section 16." <sup>8</sup> Id. at *4 (A552). In the other letter, Reed, Elliott, Creech & Roth, SEC Interpretive Letter, Fed. Sec. L. Rep. (CCH) ¶ 76,667, 1993 WL 97704 (Mar. 30, 1993) (A553-56), the inquirer wanted to know if its client was obligated to assess its foreign private issuer status on a continuous, daily basis. The staff responded that "it is sufficient for an issuer to assess its status as a `foreign private issuer' at the end of each of the issuer's fiscal quarters and, in addition, upon completion of * * * any purchase or sale of assets by the issuer other than in the ordinary course of business" or "any purchase ofequity securities of the issuer in a public tender or exchange offer by a person unaffiliated with the issuer." Reed, Elliot, at *3 (A555).

The plaintiffs argued that certain documents indicate that Shire knew prior to the completion of the merger that it would lose its foreign private issuer status at the time of the merger. The district court, however, held that "[e]ven assuming that the plaintiffs are correct, such knowledge is insufficient to cause Shire to lose its status prematurely" 2001 WL 1006628, at *4 (A874). With apparent reliance on Reed, Elliott, the court went on to state that "[i]nstead, I find that, as the SEC suggested, Shire did not lose its status until its obligation to assess its status arose and that this followed completion of the merger." Id. at *4 (A874).

The court also held that the transactions were exempt from Section 16(b) because they involved grants of options from Shire that were approved by the Shire board. The court held that the transactions thus were exempt under Rule 16b-3(d)(1), which provides that a grant or award of securities from an issuer to an officer or director is exempt from Section 16(b) if the transaction is approved by the issuer's board of directors or a committee of the board composed solely of non-employee directors. 2001 WL 1006628, at *5 (A876).

Relying on interpretive advice provided by the Division of Corporation Finance in Skadden, Arps, Slate, Meagher & Flom, SEC Interpretive Letter, 1999 WL 11540 (Jan. 12, 1999) (A541-47), the plaintiffs argued that the defendants arenot entitled to rely on the approval by Shire's board because that approval did not specifically state it was given for the purpose of exempting defendants' acquisition of Shire options from Section 16(b). The district court rejected this argument, stating:

Although I have considered the reasoning in the Skadden letter, I find that it does not accord with the clear language of the statute and decline to follow it. Instead, I find the analysis in Atlantic Tele-Network v. Prosser, [151 F. Supp.2d 633] (D. Virgin Is. 2000), more convincing. There, the court held, in a fact pattern close to ours, that shares acquired in a corporate reorganization that was approved by the board of directors were covered by the 16b-3(d) exemption even if the board had not specified that the approval was for the purposes of 16(b) exemption. * * * I conclude that this decision, along with the plain language of the statute [sic], is persuasive and that the defendants' acquisition of the shares is exempt from 16(b) on this ground as well. ⁹

2001 WL 1006628, at *5 (A875-76).

Finally, in light of its ruling on the other three issues, the court held it did not have to reach defendants' fourth argument, that their acquisition of Shire options is not covered by Section 16 because it is an "unorthodox transaction," as discussed in Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582 (1973).

STANDARD OF REVIEW

This Court has held that it is "`bound by the SEC's interpretations of its regulations in its amicus briefs, unless they are plainly erroneous or inconsistent with the regulation[s].'" Levy v. Southbrook International Investments, Ltd., 263 F.3d 10, 15 (2d Cir. 2001), cert. denied, 122 S. Ct. 1911 (2002)(quoting Press v. Quick & Reilly, Inc., 218 F.3d 121, 128 (2d Cir. 2000), citing Auer v. Robbins, 519 U.S. 452, 461-63 (1997)). To the extent the Commission is construing an ambiguous statutory provision, its construction, if reasonable, is entitled to deference. See Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 865 (1984); City of New York v. Minetta, 262 F.3d 169, 177 (2d Cir. 2001). The Court construes judicially created doctrines de novo. Cf. DeWeerth v.Baldinger, 836 F.2d 103, 110 (2d Cir. 1987).

ARGUMENT

I. WHETHER DEFENDANTS WERE DIRECTORS OF SHIRE WHEN THEY ACQUIRED THEIR SHIRE OPTIONS TURNS ON WHETHER THE COURT CONCLUDES THERE IS AN ISSUE OF FACT AS TO WHEN THE DEFENDANTS BECAME DIRECTORS.

In order for Section 16(b) liability to attach to a transaction, so that for profit-recovery purposes it is subject to matching with an opposite-way transaction within any period of less than six months, the transacting party must be the beneficial owner of more than 10% of any class of equity security registered under Section 12 of the Exchange Act, or an officer or director of theissuer of such security (collectively, "insiders"). ¹⁰ The plaintiffs allege that the defendants in this case were directors at the times they both acquired and sold Shire securities.

Whether the defendants were Shire directors at the time they acquired their Shire options turns on two questions, one factual and one legal. The factual issue is when precisely did the defendants become directors of Shire. As noted, the district court, citing language in the merger agreement, agreed with the defendants that they became directors some time after the merger became effective, and thus after the options were granted. The plaintiffs, disputing the construction placed by the court on the merger agreement, and pointing to other evidence, claim that there is at least a factual issue, sufficient to preclude dismissal, as to when the defendants became directors. ¹¹

If the Court were to agree with the plaintiffs that there is a factual dispute on this point, and that a finder of fact could conclude that defendants becamedirectors at the same time they acquired their options, the defendants cannot rely on non-director status at that time as a reason to dismiss the claim. If the defendants became directors at the effectiveness of the merger, it would appear that they acquired the options simultaneously with their assumption of office. In such circumstances, the option acquisitions would have been by persons who were directors, and thus subject to Section 16(b), unless an exemption applied, as discussed below.

If, on the other hand, the Court agrees with the defendants and the district court that there is no issue of fact and that the defendants became directors after the merger became effective and the defendants acquired their options, Section 16(b) would not apply.

The plaintiffs argue that even if these events occurred in the sequence defendants allege, they should be deemed to have occurred simultaneously, since both events took place on the same day. We do not agree. The fact the defendants acquired their Shire options on the same day they became members of Shire's board would not require that both events be deemed to have happened simultaneously. Under that view of the facts here, the option acquisitions would not be subject to Section 16(b).

This position is appropriate in light of the strict liability nature of Section 16(b). The statute is designed to curb abuses of inside information by officers, directors, and major shareholders. Unlike insider trading prohibitions undergeneral antifraud provisions (e.g., 15 U.S.C. 78j(b); 17 C.F.R. 240.10b-5), however, Section 16(b) operates without consideration of whether an insider was actually aware of material non-public information, or acted with scienter. Section 16(b) operates strictly, providing a private right of action to recover all short-swing profits by persons to whom it applies, on the theory that short-swing transactions (a purchase and sale within six months) are those most likely to involve abuse of inside information. In view of the strict nature of the liability, the Supreme Court has cautioned, in Foremost- McKesson, Inc v. Provident Sec. Co., 423 U.S. 232, 252 (1976), that the section should be construed narrowly. It makes sense, therefore, to construe Section 16(b) to apply only where the person was an insider at the actual time the transaction occurred, and, in the circumstances of this case, not to conflate events occurring at separate times of the same day.

Finally, the plaintiffs argue that even if the defendants were not de jure directors at the time they acquired their securities, they were de facto directors. Specifically, plaintiffs contend that defendants were de facto directors "prior to the effective time of the merger in that they executed documents in those offices and performed other directoral acts" (Plaintiffs' brief, 18; see also Complaint, ¶17). Section 3(a)(7) of the Exchange Act, 15 U.S.C. 78c(a)(7), defines a "director" to be "any director of a corporation or any person performing similar functions with respect to any organization, whether incorporated or unincorporated." Individuals have been held to be directors where, for example, they hold the office of director "under claim and color" of an election later found to be defective, see Prickett v. American Steel and Pump Corp., 253 A.2d 86, 88 (Del. Ch. 1969); In re Salnor Realty Corp., 183 N.Y.S.2d 879, 881 (Sup. Ct. 1959), or where, while not holding the title of director, they carry out the functions of a director, see, e.g., Blau v. Lehman, 368 U.S. 403, 410 (1962) (holding that a partnership, although not formally holding the office, could be held liable under Section 16(b) as "director" of a corporation by acting through a "deputy" on a corporate board); accord Feder v. Martin Marietta Corp., 406 F.2d 260, 263 (2d Cir. 1969) (same).

Consistent with the Exchange Act's definition of "director," the Commission has stressed that "a person's title is not determinative" of whether he or she is a director. See Ownership Reports and Trading by Officers, Directors and Principal Security Holders, Exchange Act Release No. 28869, 48 S.E.C. Docket 234, 236, 1991 WL 292000, at *4 (Feb. 21, 1991). A person may be a director without holding the title, if he or she functions as a director. See, e.g., Interpretive Release on Rules Applicable to Insider Reporting and Trading, Exchange Act Release No. 18114, 23 S.E.C. Docket 856, 861, 1981 WL 31301, at *5 (Sept. 24, 1981). ¹²

The Commission recognizes that a person who functions as a director should be considered a director for purposes of Section 16, regardless of title. See Ownership Reports, Exchange Act Release No. 28869, 48 SEC Docket at 236, 1991 WL 292000, at *4; Interpretive Release, Exchange Act Release No. 18114, 23 SEC Docket at 862, 1981 WL 31301, at *5. But where a person does not have that title, he or she must have more than access to non-public information about the company, and must do more than assist the board in formulating policy. Were that alone sufficient to render persons de facto directors, attorneys, investment advisers, and others who help guide the board in its decisions would be deemed directors. ¹³ The defendants here, as directors of Shire's merger partner, may have had influence over the course the merged entity would take, and may have had access to non-public information. That, however, did not make them policy decision-makers for Shire prior to consummation of themerger. Further, it would be a considerable stretch to conclude that defendants were de facto directors based merely on their prospective appointments as directors of Shire.

II. SHIRE'S STATUS AS A "FOREIGN PRIVATE ISSUER" DEPENDS ON WHETHER SHIRE KNEW BEFOREHAND THAT IT WOULD LOSE THAT STATUS AS A RESULT OF THE MERGER.

The district court determined that Shire did not lose its foreign private issuer status until some time after the merger became effective. The court held that, following the merger, the company was entitled to assess the ownership of its outstanding voting securities and then determine whether, as a result of the merger, residents of the United States held more than fifty percent of its outstanding voting securities.

In reaching this holding, the district court relied on an interpretive letter to Reed, Elliott, Creech & Roth, SEC Interpretive Letter, Fed. Sec. L. Rep. (CCH) ¶76,667, 1993 WL 97704 (Mar. 30, 1993) (A553-556). ¹⁴ The requestor askedwhether a foreign private issuer must assume the expense and burden of reassessing its foreign private issuer status daily where routine market purchases and sales of its securities potentially could change its status at any time. ¹⁵ To lessen this burden, the Division of Corporation Finance staff stated that it is sufficient for an issuer to reassess its status at the end of each quarter, and

in addition, upon completion of: (i) any purchase or sale by the issuer of its equity securities (other than in connection with an employee benefit plan or compensation arrangement, a conversion of outstanding convertible securities, or an exercise of outstanding options, warrants or rights); (ii) any purchase or sale of assets by the issuer other than in the ordinary course of business; and (iii) any purchase of equity securities of the issuer in a public tender or exchange offer by a person unaffiliated with the issuer.

1993 WL 97704 at *3 (A555).

The staff thus qualified its general view by stating that a foreign private issuer may not postpone the reassessment until quarter-end if it completed any ofthese extraordinary transactions during the quarter. Instead, a reassessment would be necessary upon completion of any of these events.

The plaintiffs claim, however, that the merger in this case was different. They argue that before the merger Shire knew with certainty that upon consummation of the merger more than fifty percent of its voting securities would be held by U.S. residents. ¹⁶ For example, they note that the Roberts Proxy Statement explicitly stated that "Given that Shire anticipates that more than 50% of the combined company's shareholders will be U.S. residents, Shire is likely to lose its foreign registrant status" (A108) and that "after the merger, Shire will have the status of a full SEC registrant and will not benefit from foreign private issuer status" (A154). Thus, they argue, there was no basis for allowing Shire a period of time after the merger to reassess its foreign private issuer status.

The defendants, for their part, argue that Shire did not "know" it would lose foreign private issuer status, that Shire only said such a result was "likely," and that until the final exchange ratio numbers were set, Shire could not know how much stock U.S. residents would hold (Defendants' Brief, p. 48).¹⁷

If the Court concludes that Shire actually knew before the merger that its status would change after the merger, its foreign private issuer status ceased as soon as the merger became effective. There is no policy basis for allowing a period of reassessment following a transaction where the effect of the transaction is obvious.

On the other hand, should the Court conclude that before the merger Shire did not know the effect of the merger with certainty, Shire's obligation was to reassess its foreign private issuer status immediately upon the consummation of the merger. This period for reassessment, however brief, would mean that foreign private issuer status was not lost until after the options were granted, and would be sufficient to render the option grants exempt from Section 16(b) based on Rule 3a12-3(b).

Finally, if the Court concludes that there is a factual issue as to whether Shire did or did not know the effect of the merger beforehand, the complaint cannot be dismissed on this ground since it is impossible to say, as a matter of law, that the foreign private issuer exemption applied at the time the options were granted.

III. THE AVAILABILITY OF THE RULE 16b-3(d) EXEMPTION FOR CERTAIN GRANTS OF SECURITIES APPROVED BY THE ISSUER'S BOARD TURNS ON WHETHER THE BOARD APPROVED THESE DIRECTORS' SPECIFIC ACQUISITIONS, BUT DOES NOT REQUIRE THAT THE BOARD STATE ITS PURPOSE IN APPROVING THE TRANSACTIONS.

The plaintiffs contend that there was no board approval of defendants' option grants, within the meaning of the rule, because the Shire Board's approval was expressly conditioned upon further approvals of the merger by shareholders and a committee composed in part of employees, whose subsequent approval did not provide an exemption under the rule. The plaintiffs further contend that the Shire Board's approval was deficient in that it did not state that it was for the purpose of exempting the transactions from Section 16(b). The plaintiffs also contend that the Board's July 22 action could not, in fact, approve option grants that were described in a schedule dated July 26. Defendants counter that the "Shire Board ratified its approval of the Merger on multiple occasions after signing the Merger Agreement, but in advance of the Merger's consummation" (Defendants' Brief, p. 26). In this regard, defendants cite several references to the Board's July 22 action in subsequent Shire documents, such as press releases and filings with the Commission, as separate Board approvals that would confer the exemption.

Rule 16b-3(d) exempts an officer's or director's grant, award, or other acquisition of issuer securities from the issuer, provided that any one of three independent, alternative conditions is met:

(1) The transaction is approved by the board of directors of the issuer, or a committee of the board composed solely of two or more Non-Employee Directors; ¹⁸

(2) The transaction is approved or ratified by the affirmative vote or consent of a majority of the shareholders; ¹⁹ or

(3) The officer or director holds issuer equity securities for a period of six months following the date of acquisition. ²⁰

Note 3 to the rule further provides that the approval conditions require the approval of each specific transaction, and are not satisfied by approval of a plan in its entirety, unless the plan fixes in advance the terms and conditions of each transaction.

As to plaintiff's contention that the Board's approval was conditional, and hence ineffective, the rule does not require that board approval be the finaldefinitive event in the grant of securities to an officer or director. This approval procedure seeks to assure that these transactions are used for legitimate purposes, and not as a subterfuge for insider trading. As the Commission stated in proposing the rule, "the purpose of [the approval conditions] is to ensure that appropriate company gate-keeping procedures are in place to monitor any grants or awards and to ensure acknowledgment and accountability on the part of the company when it makes such grants or awards." Ownership Reports and Trading by Officers, Directors, and Principal Security Holders, Exchange Act Release No. 36356, 60 Fed. Reg. 53832, 53835, 60 SEC Docket 1393, 1396, 1995 WL 597472 at *7 (Oct. 11, 1995).

However, once the board has served this accountability function, it is irrelevant that the grant or award it approved may become final and effective only upon approval by others or the occurrence of other subsequent events. For example, a merger commonly requires not only board approval but also shareholder approval, but this does not mean that board approval is ineffective to grant the exemption. The rule clearly provides that board approval and shareholder approval are independent, alternative means of securing the exemption. Similarly, once the board has performed its accountability function by approving a specific transaction, the fact that other events may need to occur before the transaction becomes effective is irrelevant. Nor does the fact that the board recognizes, as appears to be the case here, that a grant or award will onlybecome final and effective upon further approval or upon the occurrence of future events mean that its own approval is ineffective for exemptive purposes.

As to the argument that the Shire Board failed to state its purpose in approving the transaction, a board can, but need not, specify that it is approving the transaction in order to exempt the grant or award from Section 16(b). The rule does not contain such a requirement. However, Note 3 to the rule requires that each specific transaction be approved to assure that the board focuses on each particular grant or award, and is accountable for authorizing each one. Since the basis for the exemption is that approved grants of securities are likely to be motivated by legitimate corporate objectives, and not by an attempt to profit from inside information, it is important that the board actually consider each specific transaction, and that it evidence "acknowledgment and accountability" as to what it is doing, rather than merely authorize an open-ended plan. This acknowledgment and accountability is critical because board approval, standing alone, provides the exemption. ²¹

The plaintiffs point to a 1999 Division of Corporation Finance interpretive letter, which they argue requires that board approval state that it is given for thepurpose of exempting the transaction from Section 16(b). See Skadden, Arps, Slate, Meagher & Flom, SEC Interpretive Letter, 1999 WL 11540 (Jan. 12, 1999) (A541-547). This letter addressed the staff's view on various interpretive issues as to the application of Rule 16b-3 in the context of mergers. ²²

Responding to these interpretive issues, the letter advised that, if full board approval, or approval by a committee of two or more Non-Employee Directors, is to be relied upon to exempt the transactions, this approval must specify:

(i) The name of each officer or director;

(ii) The number of securities to be acquired or disposed of for each named person;

(iii) In the case of derivative securities acquired, the material terms of the derivative securities. [...]; and

(iv) That the approval is granted for purposes of exempting the transaction under Rule 16b-3.

Id. at *5.

The specifics required by the staff in items (i), (ii) and (iii) above are consistent with the requirements of Note 3 to the Rule 16b-3. However, a statement "[t]hat the approval is granted for purposes of exempting the transaction under Rule 16b-3" is not required as a condition to the exemption, although such a statement can be helpful, to confirm that the board or Non-Employee Director committee has approved the transaction with the specificity required by the rule. ²³

As to plaintiffs' contention that the Shire Board's July 22 approval was ineffective under Rule 16b-3(d) to exempt the transactions listed on the schedule dated July 26, if the court concludes that there is a factual issue, the complaint cannot be dismissed on this ground because it is impossible to say, as a matter of law, whether the Rule 16b-3(d) exemption applied.

Finally, as described earlier, defendants' argue that Shire's Board ratified its July 22 approval on separate occasions after the signing of the Merger Agreement, but before the consummation of the merger, as evidenced, they contend, by subsequent Shire documents (such as press releases and filings with theCommission). While there can be more than one approval, mere references to a prior board approval alone do not constitute separate board approvals for Rule 16b-3 exemptive purposes.

IV. THE DEFENDANTS' ACQUISITION OF SHIRE OPTIONS DOES NOT FALL WITHIN THE JUDICIAL DOCTRINE EXCLUDING CERTAIN "UNORTHODOX" TRANSACTIONS FROM SECTION 16(b).

Defendants contend that their acquisitions of Shire options were "unorthodox" transactions that were not intended to be subject to Section 16(b). The defendants rely on Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582 (1973), which involved competing tender offers followed by a forced sale of securities within six months after purchases in a failed takeover bid.

As described by this Court, the primary emphasis of the Supreme Court's decision in Kern County was on two factors: "(1) The unlikelihood of actual access to inside information in an atmosphere of hostility by a party adverse in interest; and (2) the utter inability of the unsuccessful party to control the course of events." American Standard, Inc. v. Crane Co., 510 F.2d 1043, 1054 (2d Cir. 1974). In this case, on the other hand, there is no evidence of a forced sale or other transaction that would preclude an insider's opportunity to profit from non-public information. To the contrary, the subject transactions were the result of negotiations between Shire and Roberts. The defendants, former officers ofRoberts, appear to have voluntarily engaged in, and indeed negotiated for, the transactions in question in order to consummate the merger. It is also possible that in this context the defendants may have had the opportunity to profit from non-public information about Shire gained during the merger negotiations.

Accordingly, the subject transactions in this case do not appear to come within the judicial doctrine exempting transactions from Section 16(b) as unorthodox. See, e.g., Colan v. Mesa Petroleum Co., 951 F.2d 1512, 1521 (9th Cir. 1991) (holding that the sale of securities under voluntary conditions does not fall within the scope of the Kern decision).

CONCLUSION

For the foregoing reasons, the Court should decide this case consistent with the principles articulated above.

June 21, 2002

Endnotes

¹ The Court originally requested the brief by May 23, 2002, but at the Commission's request agreed to give the Commission until June 21, 2002 in which to file.

² While Shire is a nominal defendant in this action, the term "defendants" as used in this brief denotes Horowitz, Nordmann and Spitznagel.

³ "A__" refers to the page number in the joint appendix submitted by the parties.

⁴ That rule states that a transaction by an officer or director in the six months before becoming subject to Section 16 will be subject to Section 16 if, among other conditions, the director or officer became subject to Section 16 solely as the result of the issuer registering a class of equity securities pursuant to Section 12 of the Act. That was not the case here.

⁵ Specifically, the court stated, "In fact, it appears that the `de facto' director concept is usually employed in the case of a person who possesses and exercises the power of a corporate office under the claim and color of an election, but, in fact, is not a de jure director because of a technical deficiency. * * * Not the case here." 2001 WL 1006628, at *3 n.7; (A872, n.7) (citing Prickett v. American Steel & Pump Corp., 253 A.2d 86 (Del. Ch. 1969))

⁶ Under Rule 3a12-3(b), "Securities registered by a foreign private issuer, as defined in Rule 3b-4 (§240.3b-4 of this chapter), shall be exempt from section[] * * * 16 of the Act." Rule 3b-4(c) defines a "foreign private issuer" to mean "any foreign issuer other than a foreign government except an issuer meeting the following conditions:

(1) More than 50 percent of the issuer's outstanding voting securities are directly or indirectly held of record by residents of the United States; and

(2) Any of the following:

(i) The majority of the executive officers or directors are United States citizens or residents;

(ii) More than 50 percent of the assets of the issuer are located in the United States; or

(iii) The business of the issuer is administered principally in the United States."

⁷ The Commission does not have the authority to enforce Section 16(b), which is enforced solely through private actions. Thus, its staff does not issue no-action letters in connection with that provision.

⁸ The Thelen letter noted one exception, where the loss of foreign private issuer status also involves the company's initial registration of equity securities under Section 12. This exception is not relevant to the case at hand.

⁹ The Atlantic Tele-Network case involved events that took place before the staff issued the Skadden interpretive letter.

¹⁰ Under Section 16(b), a person whose insider status turns solely on beneficial ownership of more than 10% of the class of equity securities must have that level of beneficial ownership at the time of both matched transactions. Under Rule 16a-2(b) a person whose status as an officer or director has ceased may, in certain circumstances specified in the rule, also be liable with respect to post-termination transactions.

¹¹ Most notably, the plaintiffs point to a Shire board resolution from six weeks before the merger became effective, which states that "conditional upon completion of the Merger and admission of the Consideration Shares to the Official List, [the defendants] are hereby appointed as non-executive directors of the Company" (A785).

¹² Conversely, a person may hold the title director and yet, because he or sheis not acting as such, not be deemed a director for Section 16(b) purposes: "In general, honorary directors need not be treated as directors for purposes of section 16, because they usually do not take part in formulating and deciding policy issues concerning the issuer, and do not have general access to material, non-public information." Ownership Reports and Trading by Officers, Directors, and Principal Stockholders, Exchange Act Release No. 26333, 42 SEC Docket 570, 574, 53 Fed. Reg. 49997-02, 50001, 1988 WL 268999 (Dec. 2, 1988) (A447-540).

¹³ Such persons may, however, be insiders for purposes of general antifraud prohibitions on insider trading. See Dirks v. SEC, 463 U.S. 646, 654 n.14 (1983).

¹⁴ Commission staff no-action and interpretive letters are not expressions of the Commission's views and do not have the force of law. See New York City Employees' Retirement System v. SEC, 45 F.3d 7, 12-13 (2d Cir. 1995) (discussing nature and effects of no-action letters). However, these letters do "represent the views of persons who are continuously working with the provisions of the statute involved," 17 C.F.R. 202.1(d), and as such they are frequently relied on by interested persons for guidance on the application of the securities laws and rules thereunder. The Commission is, in this case, addressing the views articulated by our staff in several interpretive letters cited by the parties and the district court. In doing so, we are not thereby adopting these letters as formal Commissionpolicy. However, the public and the courts may appropriately continue to refer to staff interpretive letters for guidance, as noted above, unless the Commission expresses differing views on the same subjects.

¹⁵ Whether an issuer loses foreign private issuer status has significant consequences to the issuer beyond whether its insiders lose the exemption from Section 16. Among other things, loss of foreign private issuer status would subject the issuer to the proxy rules and to Exchange Act reporting under the domestic filing regime, including quarterly reporting and a shorter deadline for annual reports.

¹⁶ Plaintiffs further contend that before the merger Shire knew that more than half of its assets would be located in the United States and that more than half its board would be U.S. citizens as a result of the merger and related agreements made prior to the merger.

¹⁷ The defendants also would rely on the interpretive letter in Thelen, Marrin, Johnson & Bridges, SEC Interpretive Letter, 1994 WL 709723 at*4 (Dec. 23, 1994). There, as noted, the Division of Corporation Finance staff advised an issuer "as a general matter, that transactions effected by officers and directors of a foreign company before the loss of `foreign private issuer' status are not subject to Section 16." Id. at *4. The letter did not address when loss of foreign private issuer status would occur.

¹⁸ "Non-Employee Director" is defined in Rule 16b-3(b)(3).

¹⁹ With respect to shareholder, Board and Non-Employee Director approval, the rule requires approval in advance of the transaction. In contrast, shareholder ratification would exempt a transaction if the ratification occurs no later than the date of the next annual meeting of shareholders following the transaction.

²⁰ With derivative securities, such as options, an officer or director could satisfy the six-month holding period if at least six months elapse between the date of acquiring the derivative security to the date of disposing of the underlying equity security received upon exercise or conversion.

²¹ Before the 1996 revisions to Rule 16b-3, the rule required satisfaction of multiple concurrent conditions for the exemption to apply. The 1996 revisions simplified the rule and broadened its application beyond transactions under traditional employee benefit plans.

²² Before 1996, Rule 16b-3 did not apply in the merger context, and no rule adopted by the Commission was available to exempt merger transactions from Section 16(b). The staff's response addressed: (a) the application of Rule 16b-3(e), which exempts dispositions of issuer equity securities to the issuer, to the disposition by target officers and directors of target equity and derivative securities in a merger; (b) the application of Rule 16b-3(d) to the acquisition by acquirer officers and directors of acquirer equity and derivative securities in a merger; and (c) the approval conditions that apply in either case. 1999 WL 11540 at *4-5; (A546-47).

²³ However, a statement of purpose is required where shareholder approval is the basis for the exemption. See Ownership Reports and Trading by Officers, Directors and Principal Security Holders, Exchange Act Release No. 37260, 62 SEC Docket 131, 135, 61 Fed. Reg. 30376 at 30382, 1996 WL 324486 (June 14, 1996) (A387-446) (release adopting Rule 16b-3(d)).

http://www.sec.gov/litigation/briefs/shire062102.htm