Securities Regulation Daily Wrap Up, BENEFICIAL OWNERSHIP—2d Cir.: Board does not need notice of ‘director by deputization‘ status, (Aug 28, 2025)

By Rodney F. Tonkovic, J.D.

It is enough that an issuer's board is aware that a member serves as the eyes, ears, voice, and vote of an investor when deciding whether to approve a transaction with that investor.

A Second Circuit panel affirmed that short-swing transactions were exempt from disgorgement because they were between the issuer and a "director by deputization." The shareholder bringing the suit argued that when it approved the short-swing transaction, the issuer did not know the investor's formal status as a director by deputization.

The panel disagreed, finding that there is no support for this requirement anywhere and that the board's function as a gatekeeper was satisfied because it was aware that two of its members were non-independent representatives of the investor and thus understood that it was approving a transaction with an insider (Roth v. Armistice Capital, LLC, No. 24-950 (2d Cir. Aug. 28, 2025)).

In most instances, an insider will be barred from profiting off of short-swing trading under Exchange Act Section 16(b). Rule 16b-3(d), however, provides an exemption for a director or officer who had advance board approval to acquire issuer equity securities directly from the issuer. And, in the Second Circuit, an exempt director can include a "director by deputization" when an investor deputizes an individual to serve as its representative on the issuer's board.

The exemption was at issue in this case. The appellant, Armistice Capital, had acquired a large stake in Vaxart, a publicly traded biotech company. Armistice then asked for, and was granted, two seats on Vaxart's board of directors: the two new board members were Armistice's Chief Investment Officer and a managing director.

Warrants to purchase. At the time, Armistice held warrants to purchase Vaxart common stock. Armistice's CIO asked the Vaxart board to amend the warrants to increase the amount that Armistice could own. This was unanimously approved.

In June 2020, Vaxart announced that its COVID-19 vaccine had been picked for a federal government-sponsored study. After this announcement, Armistice exercised its warrants, obtained more shares, and then liquidated its position in Vaxart, realizing an $87 million profit.

District court. The shareholder-appellee sued, seeking disgorgement of the $87 million back to Vaxart under Section 16(b). Armistice argued that it had purchased the securities directly from Vaxart and that the board had approved the short-swing transaction in advance. The district court agreed with Armistice, finding that Rule 16b-3(d) precluded liability and that Vaxart was aware that the Armistice board members sat on behalf of, and represented the interests of, the short-swing seller when the warrant amendments were approved.

On appeal, the panel agreed that Rule 16b-3(d) applied to shield the Armistice insiders from liability because the short-swing transaction had been approved by Vaxart's board. All three of the exemption's conditions were satisfied here: the transaction involved the defendant acquiring issuer equity securities from the issuer; the appellees were directors of the issuer at the time of the transaction; and the changes to the warrants were approved in advance by Vaxart's board.

The shareholder argued that the exemption did not apply because the Vaxart board did not know that Armistice was a "director by deputization." The district court rejected this proposed requirement that the board have formal knowledge of an investor's status as an insider director, and the panel agreed. In this case, the panel explained, there was no dispute that the board was aware that the two Armistice members were representatives of Armistice and were not independent by virtue of their positions with the investor.

The judgment of the district court was accordingly affirmed.

The case is No. 24-950.

Judge: Parker, B.

Attorneys: Roberto Gomez (Ostrager Chong Flaherty & Broitman P.C.) for Andrew E. Roth. Kaitlin Dabbert Shapiro (Akin Gump Strauss Hauer & Feld LLP) for Armistice Capital, LLC and Armistice Capital Master Fund Ltd.

Companies: Armistice Capital, LLC; Armistice Capital Master Fund Ltd.

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