## Facts

- On March 11 and May 27, 1969, Albert and Karen Hoff invested in convertible subordinated debentures of Technical Tape, Inc., which gave them an option to convert the debentures into Technical Tape shares.
- The Hoffs exercised the conversion option on July 11, 1969, becoming Technical Tape shareholders.
- The Hoffs alleged that beginning in May 1969, Technical Tape directors Gerald Sprayregan and Lawrence Hurwitz engaged in a series of transactions in bad faith and with reckless disregard for the interests of Technical Tape and its shareholders.
- The Hoffs filed a shareholder derivative suit alleging violations of § 10(b) of the Securities Exchange Act of 1934 (and Rule 10b-5) based on the directors’ conduct.
- Defendants moved to dismiss, arguing the Hoffs could not sue derivatively because they were not shareholders at the time the challenged conduct began, as required by the contemporaneous-ownership requirement in derivative litigation.

## Issues

1. Whether investors who held convertible subordinated debentures (and later converted them into shares) satisfied the contemporaneous-ownership requirement to bring a shareholder derivative action alleging a § 10(b)/Rule 10b-5 violation for misconduct that began while they were debenture holders.

## Decision

- The court denied the motion to dismiss on contemporaneous-ownership/standing grounds.
- The court treated the plaintiffs’ convertible debentures as an “equity security” within the Exchange Act’s definition, making the Hoffs’ interest sufficiently shareholder-like during the period of the alleged wrongdoing to permit the derivative action to proceed.

## Legal Principles

- A derivative plaintiff ordinarily must have been a security holder at the time of the transaction complained of (the contemporaneous-ownership requirement reflected in derivative-suit practice and Rule 23.1).
- For federal securities claims, the Exchange Act’s definition of “equity security” is broad and includes convertible instruments; that classification can support derivative standing when the plaintiff held the convertible security during the challenged period and later became a shareholder through conversion.
- A court may refuse to dismiss at the pleading stage when the plaintiff’s security interest during the relevant period is within the federal statutory definition tied to the asserted § 10(b)/Rule 10b-5 claim.

## Conclusion

Hoff v. Sprayregan held that the Hoffs’ ownership of convertible subordinated debentures—later converted into Technical Tape stock—was enough to satisfy the contemporaneous-ownership requirement for a derivative § 10(b)/Rule 10b-5 action, so the court denied defendants’ motion to dismiss for lack of standing.


Hoff v. Sprayregan, 52 F.R.D. 243 (1971)