Revive Investing LLC v. FBC Holdings S.A.R.L.

Background

Revive Investing LLC sued FBC Holdings S.A.R.L. under Section 16(b) of the Securities Exchange Act of 1934. Section 16(b) generally requires certain corporate insiders, including owners of at least 10% of a company’s stock, to give the company any profit from buying and selling the company’s stock within six months. Revive alleged that FBC violated this rule through sales of Sphere 3D Corp. stock in February 2018 and acquisitions of Sphere stock between March and May 2018.

FBC had lent Sphere $19.5 million through a convertible debenture. A 2018 amendment required payment of interest and an extension fee, and allowed Sphere to pay those amounts in cash or common stock. FBC reported receiving Sphere stock in this manner. After shareholder demands, Sphere investigated the alleged short-swing trades and decided not to sue FBC. FBC, Sphere, and two shareholders then entered into a settlement agreement. Under that agreement, FBC forgave $300,000 of Sphere’s debt, and Sphere released FBC from liability relating to specified transactions and other transactions through which FBC received Sphere shares in connection with paying down loan debt.

Report and Recommendation and Objections

FBC moved for summary judgment, which asks whether the evidence shows that one party is entitled to judgment without a trial because no genuine dispute of important fact exists. Magistrate Judge Gabriel W. Gorenstein recommended granting FBC’s motion. He concluded that the release covered the alleged transactions, that the settlement had to be fair, reasonable, and adequate, and that it met that standard. He also found that FBC’s potential defense under Section 16(b) supported the settlement amount.

Revive objected on two grounds. First, it argued that the magistrate judge misunderstood how the $300,000 debt reduction benefited Sphere because the underlying loan involved Overland Storage, Inc., a wholly owned Sphere subsidiary, and Sphere was a guarantor. Judge Carter held that Revive forfeited this argument by not presenting it to the magistrate judge when it had the opportunity to do so. Second, Revive argued that the “prior debt” exception did not apply to the extension fees because the obligation to pay them was not independent of the obligation to transfer stock.

Court’s Analysis

Section 16(b) excludes transactions involving a security acquired in good faith in connection with a debt previously contracted. The court explained that the debt must be a fixed, matured obligation that existed separately from an obligation to transfer the securities. Revive did not dispute that the maturity requirement was met for the interest and extension fees. It disputed only whether the extension-fee obligation was sufficiently independent.

Judge Carter concluded that the cases cited by Revive did not support its position. The court distinguished a transaction in which a buyer acquires stock under a contract requiring the seller to deliver that stock from this case, where Sphere had the option to pay its debt with stock. The court stated that it did not need to decide conclusively whether FBC would prevail under the debt exception. It was enough that the defense was strong enough to create substantial questions about the value of Revive’s claim and to justify the settlement amount.

Disposition

The court found Revive’s objections without merit, found no clear error in the remaining portions of the report and recommendation, and adopted the report and recommendation in full. The report and recommendation had recommended granting FBC’s motion for summary judgment, and the adopted ruling treated the settlement as fair, reasonable, and adequate and as barring Revive’s Section 16(b) claim.