This month, we discuss Analytical Surveys v. Tonga Partners,1 in which the U.S. Court of Appeals for the Second Circuit affirmed the district court’s finding of liability for short-swing insider trading. The court’s opinion, written by Judge Debra Livingston and joined by Judges Peter Hall and Denny Chin,2 considered whether a statutory insider’s exercise of an option on a hybrid convertible security at a floating price constituted a “purchase” under Section 16(b) of the Securities Exchange Act and whether the “debt” or “borderline transaction” exceptions applied.
Background
In April 2002, Tonga Partners invested $2 billion in ASI, a digital mapping service, by acquiring a senior secured convertible promissory note (the 2002 note). Under the note’s terms, Tonga could, at any time prior to the maturity date, convert it into shares of ASI common stock, the quantity of which would be determined by a formula related to the then-current price per share. Under that formula, the conversion price per share would be the lesser of a fixed price or two possible floating prices that were linked to ASI’s average stock price during certain periods prior to conversion. Upon maturity, on April 2, 2005, the 2002 note would convert automatically into shares.
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