Equity Incentive Plans targeted by Plaintiffs’ New Theory on Section 16 Short-Swing Profit Liability
September 19, 2017
Authored by: Steve Evans
Securities and executive benefits attorneys and public companies that maintain equity incentive plans should be aware of a new theory of recovery under the “short-swing profit rule.” Plaintiffs’ attorneys have recently asserted a new form of claim alleging liability under the short-swing profit rule when shares are withheld to satisfy applicable taxes upon the vesting of awards.
Overview of the Short-Swing Profit Rule
The short-swing profit rule generally provides for strict liability of Section 16 insiders (i.e. an executive officer, director or 10% or more shareholder) if they engage in purchases and sales, or sales and purchases, of issuer equity securities within a six-month period that are not exempt under Section 16. Pursuant to Section 16 of the Exchange Act, a suit to recover short-swing profits may be instituted by the issuer or a shareholder in the name and on behalf of the issuer if the issuer fails or refuses to bring suit within 60 days after request. In practice, a plaintiff’s attorney will frequently make a demand on an issuer to seek recovery of short-swing profits after the attorney identifies non-exempt insider purchases and sales of issuer equity securities within a six-month period and, if the issuer does not resolve the issue to the attorney’s satisfaction, the attorney may then bring suit against the insider. The potential liability to a Section 16 insider is the disgorgement of any profits earned between the purchase and the sale of the subject securities. While there is no direct liability on the