Section 16(b) of the Securities Exchange Act of 1934 generally requires company insiders to return profits made from the purchase and sale of company stock if both transactions occur within a six-month period (so-called "short-swing" profits). The Second Circuit this month affirmed a district court's dismissal of a § 16(b) case filed against underwriters and "certain pre-IPO shareholders" involved in the Facebook IPO. The plaintiffs had alleged that the lead underwriters of the offering and certain pre-IPO shareholders constituted a "group" under § 13(d), which, if proven, would then obligate the group members to disgorge any short-swing profits they had made trading Facebook stock under § 16(b).
The plaintiffs based their claim on the theory that the defendants constituted a group under § 13(d) because each defendant was subject to a "lock-up agreement" that prevented the party from selling its Facebook shares prior to various deadlines. They argued that the existence of common lock-up agreements permitted aggregating the shares held by the defendants, thereby obligating the defendants to disgorge any profits they made during the six-month period following their acquisition of Facebook stock under § 16(b).
However, the Second Circuit agreed with the district court's ruling that standard lock-up agreements are not sufficient by themselves to establish a "group" as defined by § 13(d). The Second Circuit did note that "coordination in acquiring, holding, or disposing of securities may demonstrate the existence of a group," but ruled that signing lock-up agreements that are standard practice in IPOs does not rise to the level required to establish a group.