Roth v. Armistice Capital, LLC

Background

Andrew E. Roth, a Vaxart, Inc. shareholder, sued Armistice Capital, LLC, Armistice Capital Master Fund Ltd., and Stephen J. Boyd under Section 16(b) of the Securities Exchange Act of 1934. Section 16(b) generally requires certain short-term profits from purchases and sales of an issuer’s stock to be returned to the issuer. Vaxart was named as the nominal defendant.

The Fund purchased Vaxart common stock and entered into two warrants that allowed it to acquire additional shares. The warrants initially limited the Fund’s beneficial ownership to 4.99% and 9.99%. On June 8, 2020, Vaxart and the Fund amended the warrants to raise both limits to 19.99% and removed a requirement that the Fund give Vaxart 60 days’ notice before increasing its beneficial ownership limit. On June 26 and 29, 2020, the Fund exercised the warrants and acquired 20,757,576 shares. During the same four-day period, it sold nearly all of its Vaxart holdings, including the newly acquired shares, and allegedly realized at least $87 million in profits.

The court had previously denied the defendants’ motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. The defendants then moved for reconsideration, arguing that the earlier ruling incorrectly understood the warrant amendments, overlooked the warrants and amendments, and misapplied Second Circuit precedent. They also relied on a Northern District of California decision that the court had previously considered.

Court’s analysis

The court explained that reconsideration before final judgment is appropriate when there has been an intervening change in controlling law, new evidence has become available, or correction is needed to prevent clear error or manifest injustice. It emphasized that reconsideration is not a chance to relitigate earlier issues or present new theories.

The court rejected the defendants’ argument that it had misunderstood the amendments. The court stated that changing the blocker provisions increased the amount of stock the defendants could hold when exercising the warrants. It also clarified that its earlier order had not suggested the defendants could not hold stock above the blocker limits when they were not exercising the warrants.

The court also concluded that it properly did not consider the actual warrants and amendments on the motion to dismiss. The complaint relied on Vaxart’s public filings describing those documents, and the complaint did not show that Roth had relied on the actual agreements when drafting it. The court further stated that it could not locate the specific warrants and amendments, or their formal amendments, in Vaxart’s filings and therefore would not take judicial notice of them.

The court added that even if it considered the documents, its analysis would not change. Roth had plausibly alleged that the amendments allowed the defendants to exercise the warrants more quickly. The court reasoned that faster exercise could allow an insider to exercise at a below-market price and sell at the market price sooner, potentially increasing the return. At the pleading stage, the court found it plausible that the change was important to the warrants’ value and could qualify as a new purchase for Section 16(b) purposes.

The court was not persuaded by the Northern District of California decision because that decision addressed a different issue involving control under Rule 10b-5, while this case concerned the materiality of the warrant amendments under Section 16(b). The court stated that it was not bound by that decision’s analysis.

Disposition and significance

The court concluded that Roth had adequately pleaded the required elements of a Section 16(b) violation: a purchase and sale of a security by an issuer’s director within six months. The court denied the defendants’ motion for reconsideration and directed the clerk to terminate that motion. This order left the earlier denial of the motion to dismiss in place; it did not determine whether the defendants were ultimately liable for a Section 16(b) violation.