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Roth v. Solus Alternative Asset, Management LP

United States District Court, S.D. New York

June 30, 2017

ANDREW E. ROTH, derivatively on behalf of YRC WORLDWIDE, INC Plaintiff,

          OPINION & ORDER

          WILLIAM H. PAULEY III, United States District Judge.

         Andrew Roth brings this shareholder derivative suit on behalf of YRC Worldwide Inc. (“YRC”) against Solus Alternative Asset Management LP, Solus GP LLC, Sola Ltd., Solus Opportunities Fund 1 LP, Solus Opportunities Fund 2 LP, Solus Core Opportunities Master Fund Ltd., Ultra Master Ltd. and Christopher Pucillo (collectively, “Solus”). Roth alleges violations of § 16 of the Securities Exchange Act and seeks disgorgement of short-swing profits. Both parties move for summary judgment. For the following reasons, Roth's motion for summary judgment as to liability is denied and Solus's motion for summary judgment dismissing this action is granted.


         This action arises from the 2013 restructuring of YRC, a Kansas-based trucking company. (See Parties' Joint Rule 56.1 Statement of Undisputed Facts (“56.1 Stmt.”) ¶ 1.) Toward the end of 2013 YRC found itself in a precarious financial position, with more than $1 billion in debt due in February 2014. (56.1 Stmt. ¶¶ 14, 28, 29.) YRC launched a refinancing plan that involved extending its labor agreement with the International Brotherhood of Teamsters, the labor union to which most YRC employees belonged. (56.1 Stmt. ¶ 12.) In early December, YRC and the union leadership reached an agreement to extend the contract through 2018 provided that, inter alia, (1) the union membership ratified the extension by January 8, 2014 and (2) YRC retired at least 90% of its outstanding Series A and Series B Notes. (56.1 Stmt. ¶ 48.) Both the Series A and Series B Notes were convertible into YRC common stock. As of November 14, 2013, Solus held Series A and Series B Notes representing the equivalent of 5.32% of all outstanding YRC stock. (56.1 Stmt. ¶ 36.)

         With the labor-contract extension in place, YRC developed a restructuring plan that involved issuing new shares of common stock, selling those shares in a private placement, and then using the proceeds of the sale to repurchase Series A Notes from the investors who participated in the private placement. (56.1 Stmt. ¶ 49.) The company approached existing noteholders in early December, asked them to sign non-disclosure agreements, and began negotiating the terms of the private placement. (56.1 Stmt. ¶ 46.)

         Between December 9 and 13 (but prior to signing the non-disclosure agreement), Solus purchased additional YRC securities, which caused Solus to become a beneficial owner of more than 10% of the outstanding YRC shares. (56.1 Stmt. ¶¶ 50-51.) Thereafter, Solus made two purchases of Series A and Series B Notes with an aggregate principal amount of more than $17.5 million and publicly reported these increases in beneficial ownership pursuant to Schedule 13D and § 16(a). (56.1 Stmt. ¶¶ 52, 56.)

         The restructuring plan called for the issuance of a large block of YRC common shares, creating a potential obstacle to the restructuring in the form of the company's share cap- that is, the maximum number of shares of common stock that YRC could issue without holding a shareholder vote. (56.1 Stmt. ¶¶ 62-63.) YRC was obligated to hold enough shares in reserve to cover conversion requests for all outstanding Series A and Series B Notes. (56.1 Stmt. ¶ 69.) The stock issue required to complete the restructuring, when combined with those reserved shares, would cause YRC to exceed its share cap. With the default date looming, however, YRC did not have time to hold a shareholder vote on the share cap. (56.1 Stmt. ¶¶ 70, 73.) Accordingly, YRC asked all potential investors in the restructuring who held Series A Notes to waive the convertibility feature, thereby freeing up the corresponding reserved shares for issue in the private placement. (56.1 Stmt. ¶ 73.) This conversion waiver was terminable in the event that the restructuring did not close on or before February 13, 2014. (See Declaration of Michael E. Swartz (“Swartz Decl.”), Ex. 74 at ¶ 7(a).)

         On December 22, YRC set the final purchase price for the private placement and notified the ten investors of their individual share allocations. (56.1 Stmt. ¶ 78.) Solus's allocation was worth $25 million. (56.1 Stmt. ¶ 80.) At the time, Solus was a beneficial owner of 14.56% of YRC's common stock through its holdings of stock and convertible Notes. (56.1 Stmt. ¶ 55.) Thus, Solus was concerned that any profits derived from its participation in the restructuring would be subject to disgorgement as short-swing gains under § 16(b).

         On advice of outside counsel, Solus requested that YRC modify the conversion waiver in Solus's Stock Purchase Agreement to make the waiver permanent and irrevocable upon execution, regardless of whether the restructuring closed by February 13. (56.1 Stmt. ¶ 82.) This change would, Solus believed, reduce its beneficial ownership to 8.43% of YRC common stock prior to the stock purchase, thereby eliminating any § 16(b) liability for Solus's participation in the restructuring. (56.1 Stmt. ¶ 82.) To retain “protection” in the event that the restructuring failed to close, however, Solus also requested that the permanent waiver apply only to Solus and its affiliates, and not to any subsequent, unaffiliated purchaser of the Notes. (56.1 Stmt. ¶ 88; Swartz Decl. Ex. 53.) YRC agreed to these proposed changes, the parties executed the revised Stock Purchase Agreement on December 23, and Solus filed an amended Schedule 13D disclosing the full structure of the transaction the following day. (56.1 Stmt. ¶ 92.) The restructuring closed on January 31, 2014. (56.1 Stmt. ¶ 127.)


         A. Summary Judgment

         Summary judgment should be granted if the record shows that “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986). The burden of demonstrating the absence of any genuine dispute of material fact rests with the moving party. See Adickes v. S.H. Kress & Co., 398 U.S. 144, 157 (1970). Once the moving party has made an initial showing that there is no genuine dispute of material fact, the non-moving party cannot rely on the “mere existence of a scintilla of evidence” to defeat summary judgment but must set forth “specific facts showing that there is a genuine issue for trial.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). “A dispute about a ‘genuine issue' exists for summary judgment purposes where the evidence is such that a reasonable jury could decide in the non-movant's favor.” Beyer v. Cty. of Nassau, 524 F.3d 160, 163 (2d Cir. 2008) (quoting Guilbert v. Gardner, 480 F.3d 140, 145 (2d Cir. 2007)). “Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no ‘genuine issue for trial.'” Scott v. Harris, 550 U.S. 372, 380 (2007) (citing Matsushita, 475 U.S. at 586-87). The Court resolves all factual ambiguities and draws all inferences in favor of the non-moving party. See Liberty Lobby, 477 U.S. at 255; see also Jeffreys v. City of New York, 426 F.3d 549, 553 (2d Cir. 2005).

         B. Section 16(b)

         To establish liability under § 16(b), a plaintiff must show “that there was (1) a purchase and (2) a sale of securities (3) by an officer or director of the issuer or by a shareholder who owns more than 10% of any one class of the issuer's securities (4) within a six month period.” Gwozdzinsky v. Zell/Chilmark Fund, L.P., 156 F.3d 305, 308 (2d Cir. 1998). ‚ÄúSection 16(b) thus compels statutory insiders to disgorge profits earned on any purchase and sale ...

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