The Tenth Circuit has affirmed the district court’s dismissal of a plaintiff shareholder’s claim that withholding shares to satisfy taxes on a restricted stock unit (RSU) violated Exchange Act Section 16(b) (see Olagues v. Muncrief, No. 18-5018 (10th Cir. 2019)).  As we outlined last year in a blog on the lower court’s decision, the plaintiff’s claim was based on the non-exempt acquisition of shares by two executives within six months of the date that shares were withheld for taxes on vesting of RSUs. The plaintiff alleged that these “opposite way” transactions within six months generated a short-swing profit that the executives must disgorge. The withholding in shares was made pursuant to an RSU agreement approved by the company’s Compensation Committee and was therefore, intended to be exempt from the short-swing profits rules pursuant to Exchange Act Rule 16b-3(e). However, similar to the other many cases he has filed,* the plaintiff alleged that the exemption did not apply because (1) the withholding provisions were discretionary and (2) the Committee’s approval of the award agreement did not include approval of the specific terms of the tax withholding in shares.

The court made short work of both claims, dispensing of the case without oral argument:

  1. Discretionary Withholding Claim. The decision makes clear that the plaintiff misread or misunderstood the RSU agreement, which provided company discretion to withhold in shares only where FICA taxes were required to be withheld prior to payment of the RSUs (i.e., where the RSUs constituted deferred compensation under Code Section 409A). Where a tax withholding obligation arose at the regular vesting of the RSUs, as was the case with the two executives, the RSU agreement required the company to withhold in shares.  Because the challenged withholding was clearly nondiscretionary, like the district court, the appeals court did not need to address whether the company’s discretion to withhold shares might impact the availability of the Rule 16b3-(e) exemption.
  2. No Advance Approval Claim.  The court noted that the RSU agreement fixed the time (“upon conversion of RSUs into shares”), the manner (“in shares”) and the amount (“having a fair market value…equal to the minimum statutory withholding requirements”) of the tax withholding.  Therefore, the Committee’s approval of the RSU agreement adequately fixed in advance the terms and conditions of the withholding transaction to meet the requirements of the exemption (pursuant to note 3 of Rule 16b-3(e)).   The court confirmed that the Committee does not need to specifically approve each withholding transaction in order for the exemption to apply.

While it is helpful to see this case being thrown out (again), as before, we continue to wait for a court to squarely analyze the question as to whether company or participant discretion regarding withholding in shares in a duly approved award agreement jeopardizes the availability of the 16(b) exemption. Until a court finds that such discretion does not affect the exemption, companies should continue to draft their equity award agreements to limit discretion around whether shares will be withheld from Section 16 officers and directors – noting this court’s focus on the specificity with which the RSU agreement set out the time, manner, and amount of tax withholding that would occur.


*The court referenced similar cases filed in California, Colorado, Delaware, Florida, Massachusetts, North Carolina, Ohio, Oklahoma, Texas, and Washington.


Sinead Kelly is a partner in Baker McKenzie’s Compensation practice in San Francisco. She advises on U.S. executive compensation and global equity and has practiced in the compensation field since 2005. In her practice, Sinead counsels U.S. and non-U.S. public and private companies on all aspects of equity and executive compensation plans and arrangements, including plan design, drafting, administration and governance. In this regard, Sinead advises on and assists companies with compliance with U.S. federal and state securities and tax laws relating to compensation arrangements, as well as with preparing SEC disclosures, complying with stock exchange rules and addressing non-U.S. tax and regulatory requirements. She has been repeatedly recognized by Legal 500 as a leading lawyer for Executive Compensation and Employee Benefits.