Securities Regulation Daily Wrap Up, BENEFICIAL OWNERSHIP—2nd Cir.: Blocker provisions blocked short-swing liability, (Jul 8, 2026)

By Rodney F. Tonkovic, J.D.

A plaintiff must allege that an unambiguous and self-executing blocker has in fact failed in practice.

In an issue of first impression, the Second Circuit concluded that contractual blockers effectively shielded Bed Bath & Beyond investors from short-swing liability under Section 16(b). In this case, the blocker provisions prevented an investor from beneficially owning more than 9.99 percent of BBBY's stock. The court affirmed dismissal of a suit brought by the successor BBBY, rejecting claims that the blockers used by HBC Investments LLC and affiliated entities were illusory or part of a scheme to evade federal reporting requirements (20230930-DK-Butterfly-1, Inc. v. HBC Investments LLC, No. 25-2728-cv (2nd Cir. July 7, 2026)).

In the early 2020s, Bed Bath & Beyond ("BBY") suffered disruptions from the pandemic and from managerial missteps and was in dire need of case to continue operations. In 2023, BBBY turned to the markets and issued three new classes of derivative securities. The defendant investment manager and its client fund ("Hudson Bay") bought most of these derivatives, giving it the right to buy heavily discounted, tradable BBBY common stock.

Blockers. To avoid potential liability, Hudson Bay included "blockers" in the contracts governing the derivatives that prevented it from obtaining more than 9.99 percent of BBBY's common stock at one time. In the following months, from February 7, 2023, to April 18, 2023, Hudson Bay rapidly acquired BBBY stock at a discount and sold it at market value, obtaining profits of over $300 million. In the meantime, BBBY's situation worsened, and it filed for bankruptcy in April 2023.

District court. In May 2024, BBBY's successor, the plaintiff in this action, sued Hudson Bay, arguing that the blockers were "illusory" and that Hudson Bay consistently owned over 10 percent of BBBY and was thus liable for short-term profits under Section 16(b). The district court dismissed the complaint, finding that BBBY failed to plausibly allege that Hudson Bay owned more than 10 percent of BBBY outstanding shares which would have made them statutory insiders.

Shield from liability. The panel remarked that investors may employ "blockers" to shield themselves from liability under the "blunt instrument" that is Section 16(b). While investors may cumulatively acquire large amounts of stock in a short-term period, beneficial ownership is not determined cumulatively, and the blockers are designed to keep investors from acquiring more than ten percent at any one time.

The issue then was whether Hudson Bay's blockers were defective. The plaintiff argued that the blockers were illusory, and Hudson Bay used them in an improper attempt to evade regulatory reporting requirements. The panel disagreed.

The court first found that the blockers were not illusory under Second Circuit case law. First, Hudson Bay could not waive them without BBBY's consent. Next, the blockers not only prevented the acquisition of more than 10 percent of BBBY's stock, any acquisition above the 9.99 percent threshold was automatically nullified. Finally, there was no plausible allegation that Hudson Bay ever in fact exceeded the cap. In short, a plaintiff must do more than speculate and must show that a facially unambiguous and self-executing block has in fact failed in practice.

The court also found that the blockers were not part of a scheme by Hudson Bay to evade reporting requirements. Here, the plaintiff cited Exchange Act Rule 13d-3(b) which concerns plans to evade reporting requirements triggered by beneficial ownership while enjoying such ownership. The court pointed out that the plaintiff confused concealing ownership, which is covered by the rule, with contractual provisions to prevent such ownership, and there was no showing that Hudson Bay was concealing beneficial ownership.

The court accordingly affirmed the district court judgment dismissing the plaintiff's claim.

The case is No. 25-2728-cv.

Judge: Sullivan, R.

Attorneys: James Austen Hunter (Collyer Bristow LLP) for 20230930-Dk-Butterfly-1, Inc. f/k/a Bed Bath & Beyond Inc. Douglas A. Rappaport (Akin Gump Strauss Hauer & Feld LLP) for HBC Investments LLC.

Companies: 20230930-Dk-Butterfly-1, Inc. f/k/a Bed Bath & Beyond Inc.; HBC Investments LLC

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