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. Revive alleged that FBC, described as a 10% beneficial owner of Sphere 3D Corp., engaged in short-swing transactions by selling Sphere stock in February 2018 and acquiring Sphere stock between March and May 2018. Section 16(b) generally requires certain corporate insiders to give profits from purchases and sales, or sales and purchases, occurring within six months to the corporation.

FBC had lent Sphere $19.5 million under a convertible debenture. A March 2018 amendment required interest and an extension fee to be paid, while allowing Sphere to choose payment in cash or common stock. FBC reported four acquisitions of Sphere stock through this arrangement between March and May 2018.

After shareholder demands, Sphere investigated the alleged trades and decided not to sue FBC. In November 2018, FBC, Sphere, and two Sphere shareholders entered a settlement agreement. The agreement purported to settle Sphere’s short-swing-profit claim for $300,000, paid by forgiving $300,000 of Sphere’s debt, and released FBC from liability for the identified transactions and other transactions through which FBC received Sphere shares in connection with paying down loan debt. Revive later brought this action after Sphere did not respond to Revive’s demand letters.

Report and Recommendation and Objections

FBC moved for summary judgment, which asks whether the undisputed admissible evidence shows that one side is entitled to judgment without a trial. Magistrate Judge Gabriel W. Gorenstein recommended granting FBC’s motion. He concluded that the settlement release covered the alleged transactions, that a Section 16(b) settlement must be fair, reasonable, and adequate, and that the settlement met that standard. He also found that FBC’s potential defense under the statute’s prior-debt exception helped justify the settlement amount.

Revive objected on two grounds. First, it argued that the court had misunderstood the debt forgiveness and that FBC should have to prove what benefit the arrangement provided to Sphere. Second, it argued that the prior-debt exception’s requirement that the debt be independent of an obligation to transfer securities was not satisfied for the extension fee.

Court’s Analysis

The court rejected Revive’s first objection because Revive had not raised that argument before the magistrate judge, even though it had the opportunity to do so. The court therefore treated the argument as forfeited.

The court also rejected Revive’s challenge to the independence requirement. Section 16(b) does not apply to a security acquired in good faith in connection with a previously contracted debt. The court explained that the debt must be a fixed, matured obligation that existed independently of an obligation to transfer the securities. Here, the March 2018 amendment gave Sphere the option to pay interest and extension fees with stock; it did not require Sphere to acquire the same stock that it used to make the payments.

The court stated that it did not need to definitively decide whether FBC would prevail under the prior-debt exception. It was enough that the defense was strong enough to make Revive’s claim appear to have minimal value and to raise substantial questions that justified the relatively low settlement amount. The court therefore concluded that the settlement was fair, reasonable, and adequate and that it barred Revive’s Section 16(b) claim.

Disposition

The court found Revive’s objections meritless, reviewed the remaining portions of the recommendation for clear error, found none, and adopted the Report and Recommendation in full. The court consequently granted FBC’s motion for summary judgment.