The Eleventh Circuit Court of Appeals has vacated the portion of its October 1998 opinion in Clay v. Riverwood International Corporation in which it held that certain stock appreciation rights ("SARs") were not "securities" for purposes of the insider trading laws of Sections 10(b), 20(d), and 20A(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder. Instead, the Eleventh Circuit affirmed the district court's decision dismissing the action on the ground that the plaintiff lacked standing to bring his claim. See Cadwalader Counsellor, Vol. 1, Issue 1, at 15 (Nov. 1998).
Senior management of defendant Riverwood International Corporation ("Riverwood") had received SARs pursuant to which they would be paid the difference between the grant value of the SARs and the fair market value of Riverwood's stock at the time they were exercised. Thereafter, Riverwood issued a press release announcing that it was soliciting buyers for a possible merger or sale. By the end of August 1995, Riverwood received only one bid, which it ultimately rejected, for $20 per share. Meanwhile, plaintiff purchased shares of Riverwood stock for $23 to $26 per share. On September 21, the Riverwood officers exercised their SARs at $25.25 per share. On October 25, 1995, Riverwood's board approved a proposed leveraged buyout at $20.25 per share and announced the deal to the public the next day.
Plaintiff sued, alleging, among other things, that the Riverwood officers had engaged in insider trading when they exercised their SARs by acting upon material, non-public information. In its initial affirmance of the district court's award of summary judgment to defendants, the Eleventh Circuit held that the SARs were not securities and thus were not subject to Section 10(b) of the Exchange Act. On May 27, 1999, however, the Eleventh Circuit vacated portions of its prior opinion and adopted in its place the prior concurring opinion of Judge Carnes, which argued for affirmance of the district court's award of summary judgment on the narrow ground that the plaintiff lacked standing to bring a claim under the plain language of Section 20A of the Exchange Act, and expressly declined to reach the question of whether SARs were securities. Judge Carnes noted that Congress limited standing under Section 20A to those who purchased or sold the "same class" of securities as the inside trader. He found that the SARs involved in the case could not give plaintiff such standing because plaintiff "purchased common stock in Riverwood, which is not the same class of security as the defendants' SARs."
In so finding, Judge Carnes rejected plaintiff's position that the SARs were "so fundamentally intertwined with Riverwood common stock that they must be considered the same class of security." Judge Carnes also rejected plaintiff's attempt to analogize the SARs to stock options because "the exercise of SARs" in this case "did not affect the market in common stocks as options would have, because Riverwood did not sell any of the reserve stock to make the cash payments to the holders."
Clay v. Riverwood Int'l Corp., 157 F.3d 1259 (11th Cir. 1998), vacated in part, 176 F.3d 1381 (11th Cir. 1999).