Securities Regulation Daily Wrap Up, BENEFICIAL OWNERSHIP—W.D. Tenn.: Reacquisition of shares through annuity was exempt from short-swing liability under 16(b), (Apr 16, 2025)

By R. Jason Howard, J.D.

The transaction effected only a change in the form of beneficial ownership without changing the individual defendant’s pecuniary interest in the subject equity securities.

The Western District of Tennessee has granted in part and denied in part motions for summary judgment filed by Nosirrah Management, LLC, and an individual defendant in response to a complaint brought against the individual defendant and nominal defendant, AutoZone, to recover short-swing profits pursuant to Section 16(b) of the Securities Exchange Act (Nosirrah Mgmt., LLC v. AutoZone Inc., No. 2:24-cv-02167-JPM-atc (W.D. Tenn. Apr. 14, 2025)).

Short-swing profits. Nosirrah, an AutoZone shareholder, alleged in its complaint that between December 2021 and January 2024, the individual defendant purchased shares of AutoZone stock and then sold the stock, thereby attaining over $1 million in short-swing profits.

AutoZone revealed it would not pursue disgorgement from the individual defendant because the purchases were from the individual defendant’s grantor retained annuity trusts (GRATs). GRATs exist for a specified time-period with annuity payments made to the individual defendant, after which the assets, if any, are transferred to the residual beneficiaries.

Nosirrah sued to recover the short-swing profits on behalf of AutoZone, which AutoZone would retain following recovery.

The individual defendant asserted that he was the settlor, trustee and sole lifetime beneficiary of the GRATs at issue; the transactions were not purchases of defendant company stock but rather in-kind annuity payments under the GRATs terms; as GRAT annuities, they were exempt from 16(b) under SEC Rule 16a-13; and his acquisition of the stock from the GRAT’s “merely changed the form of his beneficial ownership over the stock, from indirect to direct, without changing his pecuniary interest in the securities.”

Motions to dismiss. Nosirrah and the individual defendant disputed two issues: (1) whether Nosirrah had standing to bring its claim; and (2) whether the individual defendant was liable under Section 16(b).

Standing. The court addressed whether Nosirrah had standing and explained that Nosirrah brought the Section 16(b) claim on behalf of AutoZone alleging that the individual defendant, a corporate insider, violated his fiduciary duty and engaged in short-swing trading. The deprivation of those profits inflicted an injury sufficiently concrete to confer constitutional standing, the court ruled.

Rule 16(b). The court then addressed Section 16(b) liability, explaining that “Section 16(b) provides that officers, directors, and holders of more than 10 percent of the listed stock of any company shall be liable to the company for any profits realized from any purchase and sale or sale and purchase of such stock occurring within a period of six months.”

Liability under Section 16(b) does not attach unless the plaintiff proves 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 percent of any one class of the issuer’s securities (4) within a six-month period. The parties did not dispute that the individual defendant: (1) was an officer or director under Section 16(b); (2) sold AutoZone stock; and (3) sold the AutoZone stock within six months of receiving it from the GRATs.

The main dispute was whether the exemption under SEC Rule 16a-13 applied to the transaction at issue. Rule 16a-13 provides an exemption for “a transaction . . . that effects only a change in the form of beneficial ownership without changing a person’s pecuniary interest in the subject equity securities.”

The court then examined whether there was no change in the individual defendant’s pecuniary interest in AutoZone stock and whether there was a change in the form of the individual defendant’s beneficial ownership of AutoZone stock.

The court determined that the transaction by the individual defendant in which he reacquired AutoZone stock through GRAT annuity payments was a transaction that effected only a change in the form of beneficial ownership without changing the individual defendant’s pecuniary interest in the subject equity securities and was thus exempt.

Conclusion. The court determined that Nosirrah had standing to bring its case and that the individual defendant’s transfer involving GRATs fell within the Rule 16a-13 exemption. Because the Rule 16a-13 exemption applied, Nosirrah’s case was dismissed with prejudice. All other requests and motions were denied as moot.

The case is No. 2:24-cv-02167-JPM-atc.

Judge: McCalla, J.

LitigationEnforcement: BeneficialOwnership FedTracker Securities GCNNews TennesseeNews