Return to NASPP Blog
The NASPP Blog

Another Win on Section 16 Share Withholding Litigation

Subscribe to the NASPP Blog

April 23, 2019 | Barbara Baksa

Another Win on Section 16 Share Withholding Litigation

Good news: yet another court recently decided in favor of the defendant in a short-swing profits recovery suit brought by plaintiffs’ attorneys over a share withholding transactions.

What the Heck?

This is an issue that surfaced in 2016: plaintiff attorneys began challenging share withholding transactions, claiming that they are only exempt from the short-swing profits recovery provisions of Section 16(b) if shares are withheld automatically. If the share withholding is at the discretion of the insider, plaintiff attorneys allege that it is not exempt unless the specific transaction met the approval conditions of Rule 16b-3 (approved by Board, committee of nonemployee directors, or shareholders). See “Shareholder Challenging 16(b) Status of Share Withholding.”

Section 16 practitioners have long held that when an award is approved pursuant to Rule 16b-3, that approval covers subsequent transactions, such as share withholding, that are provided for in the award agreement. The SEC agrees with this position.

Last year, two lawsuits were settled in favor of the defendants (i.e., the insiders)—see “Two Wins on Share Withholding Litigation.” Now, the Tenth Circuit Court has decided in the favor of the insiders.

Summary of the Decision

Alan Dye summarized the decision in his blog entry “Tenth Circuit Affirms Dismissal of Challenge to Tax Withholding Exemption” on Section Here is what he says about it:

At the district court level, the parties disagreed regarding whether the RSU award agreements provided for “discretionary” withholding or “automatic” withholding. The district court concluded that the agreements provided for automatic withholding. On appeal, the plaintiff argued again that withholding was discretionary, and also argued that, even if withholding was automatic, the withholding was not exempt because the compensation committee approved only the award agreements, and did not approve the specific withholding transactions. The Tenth Circuit rejected both arguments. First, the court noted, the award agreements provided that the company “shall” withhold shares upon vesting to pay withholding taxes, making withholding automatic. Second, the award agreements provided that, upon vesting, the company would withhold a number of shares having a market value equal to the minimum required tax withholding. Because the agreements established a formula for the “time, manner and amount” of withholding, the court said, the committee’s approval of the award agreements constituted approval of the subsequent withholding by virtue of note 3 to Rule 16b-3(e).

More to Come

Unfortunately, this doesn’t resolve the matter. Alan notes in his blog that the decision can’t be relied on as a precedent and it doesn’t address share withholding that is at the discretion of the insider. But Alan does offer some hope that there may be a light at the end of this long tunnel:

Nevertheless, the holding helps with the developing case law under Rule 16b-3, and fortunately means the plaintiff hasn’t yet succeeded in any of his challenges to Rule 16b-3.

I will continue to keep you posted on developments on this matter.

- Barbara

P.S. - I need to write more blogs about litigation. There are so many great stock photo choices I had a hard time picking my favorite. So much easier than trying to find images that represent Item 405 disclosures.

About Us

The National Association of Stock Plan Professionals is the largest and oldest professional association for the stock and executive compensation community, with over two decades of leadership providing expert resources, education and other benefits for our more than 6,000 members across 32 affiliated chapters.


P.O. Box 21639 Concord, CA 94521-0639 Telephone: (925) 685-9271 Fax: (925) 930-9284

©NASPP 2019, All Rights Reserved.