The opinion of the court was delivered by: William H. Pauley III, District Judge
Deborah Donoghue ("Plaintiff") brings this shareholder derivative action on behalf of nominal Defendant Centillium Communications Inc. ("Centillium") against Kamran Elahian ("Elahian") pursuant to Section 16(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78p(b). Plaintiff seeks disgorgement of alleged short-swing profits realized by Elahian through transactions involving Centillium stock. Plaintiff and Elahian move for summary judgment. For the reasons set forth below, Elahian's motion is granted and Plaintiff's motion is denied.
On November 9, 2001, Elahian, a director of Centillium, entered into a "variable prepaid forward" transaction with CSFB Cayman International LDC ("CSFB") (the "Forward").*fn1 A variable prepaid forward "is a contract entered into by an insider with a counterparty under which the insider contracts to sell a fixed number of shares of stock of the insider's company on a fixed future date (usually at least a year in the future) at a fixed price (typically the market price on the date of entering into the contract)." Peter J. Romeo & Alan L. Dye, Section 16 § 10.05[a] at 942-43 (2d ed.). Variable prepaid forwards are used to convert stock assets into cash before the stock is transferred.
Pursuant to the Forward agreement, Elahian deposited 300,000 Centillium shares into a trust account for CSFB in November 2001. (Confirm. at 2.) In return, CSFB paid Elahian $1,593,479.85, or $5.3115995 per share. (56.1 Stmt. ¶ 2; Confirm. at 2.) The shares were to be transferred from the trust account to CSFB on January 12, 2005 (the "Settlement Date"). (Confirm. at 4.) Because Elahian was paid up front, he was protected from the downside risk of Centillium once the price of $5.3115995 per share was set. However, the Forward agreement granted Elahian a limited upside participation in the 300,000 shares ending on January 7, 2005. If the stock price exceeded $6.5173 (the "Floor") on that date, Elahian could withhold from delivery to CSFB the number of shares equal in value to the amount by which the value of the 300,000 shares exceeded $6.5173 per share. (Confirm. at 4.) For example, if Centillium's share price closed at $7.5173 on January 7, 2005, Elahian would be entitled to withhold $300,000 in Centillium stock ($7.5173 minus $6.5173 multiplied by 300,000 shares) from the 300,000 shares owed to CSFB on the Settlement Date. Because the share price in this hypothetical is $7.5173, Elahian would withhold 39,908 shares ($300,000 divided by $7.5173 per share) and deliver the remaining 260,092 Centillium shares to CSFB.
Elahian's upside participation in the 300,000 shares was capped at $11.4053 per share. (Confirm. at 2, 4) That is, regardless of the extent to which the stock price exceeded $11.4053 on January 7, 2005, Elahian would be entitled to withhold a maximum of $1,466,400 in Centillium stock ($11.4053 minus $6.5173, or $4.8880, multiplied by 300,000 shares). For example, if Centillium closed at $20 on January 7, 2005, Elahian would withhold 73,320 shares ($1,466,400 divided by $20 per share) and tender the remaining 226,680 shares to CSFB.
As an alternative to settling the transaction in shares, the Forward agreement gave Elahian the option of settling the transaction in cash. (Confirm. at 4-5.) So, if Elahian wished to retain all 300,000 shares, the Forward agreement permitted him to pay CSFB the fair market value of the shares owed in lieu of delivering those shares to CSFB.
Centillium stock closed at $2.38 on January 7, 2005. (56.1 Stmt. ¶ 3.) This obligated Elahian to deliver all 300,000 shares to CSFB, because the share price was below the Floor. Elahian chose not to exercise his cash settlement option, and the 300,000 shares were delivered to CSFB on January 12, 2005. (56.1 Stmt. ¶ 3.)
On February 28, 2005, Elahian executed an open-market purchase of 162,814 Centillium shares at an average share price of $2.01. (56.1 Stmt. ¶ 4.) These purchases were unrelated to the Forward. (56.1 Stmt. ¶ 4.) Plaintiff alleges that Elahian recognized a short-swing profit in violation of Section 16(b) through the combination of the January 12, 2005 "sale" of Centillium stock at $2.38 per share and the February 28, 2005 purchase of Centillium stock at $2.01 per share. Defendant contends that he is not liable under Section 16(b) because the settlement of the Forward cannot be considered a sale and therefore, he sold no Centillium stock within six months of any purchase.
Summary judgment is warranted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986). Here, the parties agree ...