Treasury-Share Exception to Section 16(b): Excluding Issuer Repurchases from Short-Swing Profit Liability

1. Introduction

This commentary examines the new rule established by the Second Circuit in the consolidated appeals Roth v. LAL Family Corp. (No. 24-2464-cv) and Roth v. Drahi (No. 24-2761-cv), decided May 23, 2025. In both cases, plaintiff-appellant Andrew E. Roth, on behalf of nominal Delaware issuers Estée Lauder Companies Inc. and Altice USA, Inc., advanced a novel theory of indirect short-swing liability under Section 16(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78p(b)). Roth sought to pair insider sales by controlling shareholders with contemporaneous issuers’ share repurchases and to disgorge the resulting “profits” to the issuers. The Second Circuit rejected that theory, holding that state law conversion of repurchased shares into valueless treasury shares precludes (1) insider beneficial ownership of those shares, (2) pairing with insider sales of outstanding shares, and (3) realized profit that can “inure to and be recoverable by” the issuer.

2. Summary of the Judgment

The Second Circuit, in an opinion by Judge Jacobs with a separate concurrence by Judge Calabresi, affirmed two district-court dismissals of Roth’s Section 16(b) claims. It held that:

• Under Delaware corporate law, shares repurchased by an issuer automatically become treasury shares, divested of voting, dividend, or other ownership incidents.
• Because treasury shares are valueless under state law, insiders cannot have an indirect pecuniary interest in them and thus are not “beneficial owners” of those shares under SEC Rule 16a-1(a)(2).
• Treasury shares are substantively distinct from outstanding shares. Section 16(b) liability can only attach to paired purchases and sales of “any equity security” when the two legs involve the same type of security.
• No cost basis exists for an issuer’s repurchase of its own shares; hence no “profit realized” through an offsetting transaction can be calculated or disgorged.
• Disgorgement to the issuer of profits derived from the issuer’s own repurchases would yield the incongruous result of forcing an issuer to disgorge to itself.

Accordingly, the court concluded that Section 16(b) does not reach insiders’ pairing of their personal sales with repurchases undertaken by the issuers they control.

3. Analysis

3.1 Precedents Cited

The court relied primarily on leading Second Circuit and Supreme Court authorities interpreting Section 16(b):

• Foremost-McKesson, Inc. v. Provident Securities Co., 423 U.S. 232 (1976) – A caution against imposing Section 16(b) liability on unclear language given its strict, harsh nature.
• Gibbons v. Malone, 703 F.3d 595 (2d Cir. 2013) – Holds that Section 16(b) pairing requires "any equity security" in the singular and that pairing is limited to substantively identical securities.
• Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582 (1973) – Sets out a narrow “involuntary transaction” exception to Section 16(b) strictness.
• Feder v. Frost, 220 F.3d 29 (2d Cir. 2000) – Discusses the SEC’s dual-definition of “beneficial owner” and recognizes that portfolio securities differ from issuer-held treasury shares.

The court also cited Delaware corporate-law authorities (In re Coffee Associates, 1993 WL 512505 (Del. Ch.)) and foundational tax-law decisions establishing the valuelessness of treasury shares (E.R. Squibb & Sons v. Helvering, 98 F.2d 69 (2d Cir. 1938)).

3.2 Legal Reasoning

The court’s reasoning unfolds in five steps:

1. Beneficial Ownership Exclusion: Section 16(b) covers “beneficial owners.” SEC Rule 16a-1(a)(2) defines a beneficial owner as one with a direct or indirect pecuniary interest in the securities transacted. Treasury shares are rendered valueless and carry no incidents of ownership upon repurchase under Delaware law; therefore insiders cannot acquire an indirect pecuniary interest in those shares.
2. Pairing Requirement: Section 16(b) requires pairing a purchase and sale of “any equity security.” The singular usage and case law demand that the two trades be in substantively identical securities. Outstanding shares sold by insiders retain incidents of ownership; treasury shares repurchased by issuers do not. They are “readily distinguishable” in substance, so they cannot be paired.
3. Realized Profit: Section 16(b) liability hinges on a realized profit—defined as the excess of sale proceeds over purchase cost. No purchase of outstanding shares by insiders occurs when issuers repurchase and convert those shares into treasury stock. Without a cost basis, no profit is realized and nothing is recoverable.
4. Disgorgement Anomaly: The sole remedy for Section 16(b) violations is disgorgement to the issuer. Invalidating the repurchase-pairing theory avoids the incongruous result of an issuer’s suing itself to disgorge its own repurchase profits.
5. Strict Liability Limits: Section 16(b) is a strict, mechanical liability that must be narrowly construed. Extending it by inference to repurchase transactions would create traps for unwary insiders lacking notice of such coverage—contrary to the policy favoring clear statutory boundaries.

3.3 Impact on Future Cases and the Law

This decision clarifies that:

• Issuers’ share repurchases do not trigger Section 16(b) liability even when insiders control both the issuer and the repurchasing mechanism.
• Delaware’s treasury-share doctrine remains dispositive in determining the scope of federal securities liability for insider trading and short-swing profits.
• Shareholders and practitioners should not expect Section 16(b) claims based on pairing insider sales with corporate buybacks.

If Congress or the SEC wishes to regulate self-dealing through coordinated buybacks, they must do so expressly—this decision forecloses any implied expansion of Section 16(b) to issuer repurchases.

4. Complex Concepts Simplified

1. Section 16(b): A federal rule that makes certain corporate insiders give up any profits they make by buying and selling their company’s stock within six months.

2. Treasury Shares: When a company buys back its own stock, that stock becomes “treasury shares,” which by state law have no voting rights, dividends, or market value.

3. Beneficial Ownership: To be liable under Section 16(b), you must own or share in the economic benefits of the exact shares bought and sold.

4. Pairing Rule: Only identical kinds of shares can be matched for profit calculation under Section 16(b)—you cannot pair a sale of ordinary shares with a repurchase of treasury shares.

5. Realized Profit: Liability arises only when an insider’s sale proceeds exceed the amount paid in a matching purchase. No purchase of identical shares means no profit calculation is possible.

5. Conclusion

The Second Circuit’s rulings in Roth v. LAL Family Corp. and Roth v. Drahi establish a clear new precedent: Section 16(b) does not apply to insider sales paired with issuer share repurchases that convert outstanding shares into valueless treasury shares under state law. This decision preserves the mechanical integrity of the short-swing profit remedy, prevents incongruous self-disgorgement claims, and underscores the need for explicit legislative or regulatory action if indirect insider trading via corporate buybacks is to be curbed.