The application of exemptions from the strict liability, short-swing profit recovery provisions of �16(b) of the Securities Exchange Act of 1934 has proved challenging. In 2005, the SEC amended Rule 16b-3 — which exempts transactions between an issuer and its officers and directors involving issuer equity securities — and Rule 16b-7 — which exempts transactions pursuant to certain mergers, consolidations, and share reclassifications — in response to a 3rd Circuit decision that imposed additional requirements for both exemptions. The SEC clarified that, subject to board or shareholder approval conditions, Rule 16b-3 exempts acquisitions of issuer equity securities by directors and officers from an issuer regardless of whether there is a compensatory purpose, and that Rule 16b-7 does in fact exempt transactions structured as reclassifications because the reclassification of shares from one form into another, where the shareholder’s economic stake in the company remains essentially unchanged, presents minimal risk of abuse of inside information. A Delaware federal court recently held in Levy v. Sterling Holding Co.[FOOTNOTE 1] that two amended SEC rules clarifying important exemptions to the short-swing profit recovery provisions of �16(b) are entitled to deference and should be applied retroactively. These clarifications and their subsequent application by a Delaware district court should come as welcome news to directors and officers of companies with a registered class of securities.
SECTION 16(b)
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