Rule 16b-3(d) Board Approval Needs Facts, Not Formal Labels: Second Circuit Clarifies Knowledge Standard for Deputized Directors in Roth v. Armistice Capital

Introduction

In Roth v. Armistice Capital, LLC, the U.S. Court of Appeals for the Second Circuit affirmed summary judgment in favor of Armistice Capital, its master fund, and its CIO Stephen Boyd in a Section 16(b) short-swing profits action arising from high-profile trades in Vaxart, Inc. stock during the 2020 race for a COVID-19 vaccine. The case presented a classic Section 16(b) setup—an investor with board representation, warrant amendments increasing its permissible ownership, and rapid exercises and sales yielding substantial profits—paired with an equally classic defense: the issuer board’s prior approval under SEC Rule 16b-3(d).

The central issue on appeal was not whether the transactions, if “matched,” would otherwise generate short-swing liability. Instead, the dispute turned on the scope of Rule 16b-3(d)’s safe harbor in the unique context of “directors by deputization”—where a firm installs its representative on an issuer’s board. The Second Circuit clarified that the board-approval exemption applies so long as the issuer’s board had advance approval and was aware of the material facts of the relationship (i.e., that the involved directors were acting as the investor’s representatives). The board need not have been formally advised—by label or legal conclusion—that the investor itself was a “director by deputization.”

This commentary unpacks the background, the court’s reasoning, the authorities that shaped it, and the decision’s practical consequences for Section 16(b) litigation and corporate compliance.

Summary of the Judgment

• The Second Circuit affirmed the Southern District of New York’s grant of summary judgment to Armistice, Boyd, and related appellees.
• The court assumed without deciding that a short-swing transaction could be “matched,” but held the transactions exempt under SEC Rule 16b-3(d) because:
  • Appellees acquired issuer equity securities from the issuer (via warrants exercised for Vaxart shares),
  • Appellees were directors at the time (Boyd and Maher served on Vaxart’s board and Armistice was an insider by deputization), and
  • The issuer’s board approved the relevant transaction in advance (amendments raising the warrant “blockers” to 19.99% were adopted by unanimous written consent).
• Critically, the court rejected the shareholder-plaintiff’s proposed “knowledge” requirement that the board must have been expressly told and must have recognized the investor’s formal status as a “director by deputization.” Awareness of the underlying facts sufficed.
• Because Rule 16b-3(d) applies, disgorgement under Section 16(b) is unavailable regardless of whether the trades would have been otherwise matchable.

Factual and Procedural Background

Armistice Capital, an investment manager, and its master fund invested in Vaxart in 2019, at one point holding more than half of Vaxart’s outstanding common shares. In April and September 2019, Armistice received two series of warrants subject to “blocker” provisions that capped its aggregate beneficial ownership at 4.99% and 9.99%. In October 2019, Stephen Boyd (Armistice’s CIO) and Keith Maher (an Armistice managing director) joined Vaxart’s board; two additional independent directors were also added.

In May–June 2020, Boyd and Vaxart’s CEO discussed increasing the blocker caps to 19.99%. The non-Armistice directors conferred with outside counsel on June 1, 2020, and on June 5 the board approved amendments via unanimous written consent (executed June 8). The board documented that Boyd and Maher were “Interested Parties,” and stated that the transactions were fully disclosed to all directors as interested-party transactions.

On June 26, 2020, Vaxart announced its oral COVID-19 vaccine candidate had been selected for a federal non-human primate challenge study. Armistice exercised the warrants on June 26 and 29 and sold 27,612,053 shares (including 20,612,053 newly issued upon exercise), allegedly realizing over $87 million in profit. Shareholder Andrew Roth sued under Section 16(b), seeking disgorgement for Vaxart. The district court granted summary judgment for defendants, holding the Rule 16b-3(d) exemption applied because the board approved the transaction with knowledge of all material facts. The Second Circuit affirmed.

Analysis

Precedents and Authorities Cited

• Section 16(b) strict liability purpose and mechanics:
  • Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582 (1973): Section 16(b) aims to prevent the “unfair use of information” by insiders.
  • Credit Suisse Securities (USA) LLC v. Simmonds, 566 U.S. 221 (2012): Clarifies that Section 16(b) imposes strict liability for short-swing profits, without requiring proof of scienter or use of inside information.
• Directors by deputization and insider status:
  • Rubenstein v. International Value Advisors, LLC, 959 F.3d 541 (2d Cir. 2020): An investor becomes a statutory insider when it deputizes a representative to serve on the issuer’s board.
  • Roth ex rel. Beacon Power Corp. v. Perseus L.L.C., 522 F.3d 242 (2d Cir. 2008): Rule 16b-3(d)’s exemption extends to “directors by deputization.”
• Rule 16b-3(d) board-approval safe harbor:
  • Gryl ex rel. Shire Pharmaceuticals Group v. Shire, 298 F.3d 136 (2d Cir. 2002): Articulates the three conditions for the exemption: issuer-to-insider acquisition of equity, insider is a director/officer at the time, and advance approval by the issuer’s board. Gryl also rejects a requirement that approval be expressly “purpose-specific” to a Rule 16b-3 exemption.
  • SEC Adopting Release, “Ownership Reports and Trading by Officers, Directors and Principal Security Holders,” 61 Fed. Reg. 30,376, 30,377 (June 4, 1996): Explains the policy rationale—the board’s informed approval means any profit is not at the expense of uninformed shareholders.
• Other cited standards:
  • Celotex Corp. v. Catrett, 477 U.S. 317 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986): Summary judgment standards applied de novo.
  • Dreiling v. American Express Co., 458 F.3d 942 (9th Cir. 2006): The Second Circuit referenced an SEC amicus in Dreiling only to note it did not support the appellant’s proposed, heightened “formal knowledge” requirement in this context.

Legal Reasoning

The court’s analysis proceeds in two steps: first, setting the Section 16(b)/Rule 16b-3(d) framework, and second, applying it to the undisputed record.

1. Framework.
   • Section 16(b) creates strict liability for short-swing profits realized by statutory insiders—directors, officers, and 10% beneficial owners—within six months of matched purchases and sales.
   • Congress authorized the SEC to exempt transactions “not comprehended within the purpose” of Section 16(b). Rule 16b-3(d) is such an exemption: it shields insider transactions with the issuer if the issuer’s board approves them in advance (among other alternative pathways like shareholder approval or non-employee director committee approval).
   • Under Gryl, the exemption applies where (1) the transaction involves acquiring issuer equity from the issuer, (2) the acquirer is a director/officer at the time, and (3) the board approved in advance.
   • Per Perseus, the exemption is available to “directors by deputization.”
2. Application.
   • Insider status: The court agreed Armistice was a statutory insider by deputization because Boyd and Maher served on Vaxart’s board as Armistice’s representatives. Boyd was independently an insider as a director.
   • Issuer-to-insider acquisition: The relevant sequence included Vaxart’s board-approved amendments increasing Armistice’s blocker caps to 19.99% and the subsequent warrant exercises for new Vaxart shares. That is an acquisition of issuer equity from the issuer.
   • Director at the time: Appellees were directors during the relevant events.
   • Advance board approval: The Vaxart board approved the blocker amendments in advance via unanimous written consent. The record shows the board recognized Boyd and Maher as interested parties and understood that they were Armistice representatives; non-Armistice directors discussed the amendments with outside counsel before approval.
   • Knowledge requirement clarified: The appellant urged a new rule: that the board’s approval is insufficient unless the board explicitly knew and the investor expressly disclosed its precise legal status as a “director by deputization.” The Second Circuit rejected that view. The text of Rule 16b-3(d) contains no such formalistic requirement, and Gryl disavows similar efforts to layer on extra-textual, “purpose-specific” approval mandates. The governing question is whether the board had advance approval with knowledge of the material facts—not whether the board received or recited legal labels.
   • Result: Because all three Gryl conditions were satisfied and the board was fully aware of the relevant relationships and interests, Rule 16b-3(d) exempted the transactions. Summary judgment for defendants was therefore proper, and the court did not reach the separate question whether the warrant amendments, exercises, and sales could be “matched” to establish a violation absent the exemption.

Impact and Forward-Looking Consequences

The decision meaningfully clarifies the knowledge standard for Rule 16b-3(d) in the deputization setting and provides practical guidance on how boards and insider investors can structure transactions to fit the safe harbor.

• Clarified knowledge standard under Rule 16b-3(d): Issuer boards need not be told, nor must they recite, that an investor is a “director by deputization” to validly approve a transaction for Rule 16b-3(d) purposes. It is enough that the board knows the material facts—that the relevant directors are the investor’s representatives and that the transaction is an interested-party transaction involving an insider.
• Broader comfort for activist and sponsor-backed board representation: Funds and sponsors that place representatives on public company boards can obtain 16(b) protection for issuer-facing equity transactions through well-documented, advance board approvals that capture the material facts of their relationships. The court’s approach resists technical traps based on labels, reducing litigation risk where the board process is robust.
• Heightened importance of process and paper: Minutes, unanimous written consents, and contemporaneous disclosures stating that the directors are representatives of the investor—and that the board is aware of the interested-party nature of the transaction—will be powerful evidence supporting the exemption. The Vaxart board’s explicit identification of “Interested Parties” and attested director understanding were decisive.
• No invitation to abuse—other guardrails remain:
  • Rule 16b-3(d) exempts insider transactions approved by the board; it does not immunize fiduciary breaches under state law. Transactions remain subject to Delaware or other corporate law duties of loyalty and care, disclosure obligations, recusal norms, and broader federal antifraud rules.
  • The exemption also does not reach non-issuer transactions or trading in the market unaffiliated with an issuer-approved acquisition.
• Pleading and proof in future Section 16(b) suits: Plaintiffs challenging insider trades will need to allege and prove either that:
  • there was no advance board approval,
  • the transaction was not an issuer-to-insider acquisition, or
  • the board lacked knowledge of material facts (e.g., did not know the director was acting as the investor’s representative).
  Efforts to defeat the exemption by claiming the board was not advised of the investor’s formal deputization status are unlikely to succeed after Roth.
• Transactions involving warrants and “blockers”: The court’s straightforward acceptance that board-approved adjustments to warrant blockers, followed by exercises for issuer shares, fit within Rule 16b-3(d)’s issuer-to-insider prong reinforces practical structuring pathways for capital raises and restructurings involving insiders.

Complex Concepts Simplified

• Short-swing profits (Section 16(b)): If an insider buys and sells, or sells and buys, the issuer’s equity within six months, any profit is recoverable by the company. The rule is strict liability; intent or use of inside information is irrelevant.
• Matching transactions: Courts “match” the highest sale price against the lowest purchase price (and vice versa) within the six-month window to compute profits subject to disgorgement.
• Director by deputization: When an investor places its designee on a company’s board to represent its interests, the investor itself is treated as a statutory insider. The designee is the investor’s “eyes, ears, voice, and vote.”
• Rule 16b-3(d) board-approval exemption: A safe harbor exempting transactions between an issuer and an insider if the issuer’s board approves them in advance. In the Second Circuit, the exemption applies if:
  • the insider acquires issuer equity from the issuer,
  • the insider is a director or officer at the time, and
  • the issuer’s board approved the transaction in advance, with knowledge of material facts.
  The board need not invoke Rule 16b-3(d) by name or recite formal legal labels; awareness of the operative facts is sufficient.
• Blocker provisions: Caps embedded in warrants or other instruments limiting how much of the issuer’s outstanding equity the holder may own (e.g., 4.99%, 9.99%, 19.99%). Blockers serve various regulatory and strategic purposes, including avoiding automatic insider thresholds or other regulatory triggers.
• Warrants and exercises: A warrant is the right to buy a company’s stock from the company at a set price. Exercising a warrant is an acquisition directly from the issuer, which can qualify a transaction for Rule 16b-3(d) if properly approved in advance.

Practical Takeaways and Compliance Pointers

• For issuer boards:
  • Use formal, advance approvals for any insider-facing equity issuances or amendments (including blocker revisions, repricings, or re-grants).
  • Document that the board knows the specific relationships at issue—e.g., that certain directors are investor representatives—and treat the matter as an interested-party transaction.
  • Consider engaging independent counsel and ensuring that non-interested directors deliberate outside the presence of interested representatives. While not required by Rule 16b-3(d), robust process bolsters both 16(b) and fiduciary-duty defenses.
  • Record approvals by unanimous written consent with clear recitals of material facts; retain contemporaneous evidence (SEC filings, attestations) identifying the representative capacity of deputized directors.
• For funds with board designees:
  • Before participating in issuer-facing transactions, secure advance board approval that expressly identifies the representative nature of your designees and the interested-party character of the transaction.
  • Coordinate compliance calendars to track six-month windows and safe-harbor approvals; do not assume market trades are exempt merely because a prior issuer issuance was approved.
• For plaintiffs evaluating Section 16(b) claims:
  • Focus discovery and pleadings on the absence of advance approval, lack of board knowledge of material facts about the insider relationship, or on transactions that were not issuer-to-insider acquisitions.
  • Challenges premised solely on the board not being told the investor was a “director by deputization” in those exact words are unlikely to overcome Rule 16b-3(d) after this decision.

Conclusion

Roth v. Armistice Capital crystallizes an important, practical point in Section 16(b) jurisprudence: the Rule 16b-3(d) safe harbor turns on advance board approval grounded in knowledge of the material facts, not on the board’s incantation of formal legal status. The Second Circuit’s approach harmonizes the exemption’s text with its purpose as explained by the SEC—empowering informed boards to serve as gatekeepers so that any insider profit derived from issuer-approved transactions is not extracted at the expense of uninformed shareholders.

By rejecting a novel, formalistic “deputization label” requirement, the court reduces unnecessary friction for companies and investors that maintain obvious, well-documented representative relationships. At the same time, the decision underscores the importance of careful process: clear identification of interested-party dynamics, advance approval, and robust documentation. Going forward, Section 16(b) litigants should expect courts to focus on those practical indicia of informed board action, rather than on technical deficiencies in how insider status was described.