October 18, 2021

Volume XI, Number 291

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October 18, 2021

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Securities Claim Fails Because Option Exercise Is Not A Sale

A recent decision by the Nevada Supreme Court highlights the definition of "sale" in Section 25017 of the California Corporations Code.  The suit arose from the plaintiff's claim that certain facts were not disclosed to him before he exercised his stock options.  He alleged that had he known these facts, he would not have exercised his shares.  Because the plaintiff brought his claim under Section 25401, the trial court considered whether the exercise of the options constituted a "sale" of securities.

The defendants pointed out that Section 25017(e) provides:

Every sale or offer of a warrant or right to purchase or subscribe to another security of the same or another issuer, as well as every sale or offer of a security which gives the holder a present or future right or privilege to convert the security into another security of the same or another issuer, includes an offer and sale of the other security only at the time of the offer or sale of the warrant or right or convertible security; but neither the exercise of the right to purchase or subscribe or to convert nor the issuance of securities pursuant thereto is an offer or sale.

The plaintiff argued that this statute covers only warrants and convertibles.  The trial court disagreed and the Nevada Supreme Court affirmed, holding that the statute plainly refers, at least inclusively, to call options.  Wolfus v. Brunk, 2021 Nev. Unpub. LEXIS 506, 2021 WL 2753248.  Because the plaintiff alleged injury only upon exercise of the option (and not when the option was awarded), the plaintiff was out of luck.

I won't say that I am surprised by the courts' holding.  This was something that I pointed out 11 years ago in this post.

© 2010-2021 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume XI, Number 253
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
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Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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