## Facts

- Facebook, Inc. conducted an initial public offering in May 2012 using Morgan Stanley & Co. LLC, Goldman Sachs & Co., and J.P. Morgan Securities LLC as lead underwriters.
- In connection with the IPO, the underwriters, acting through Morgan Stanley as agent, entered into customary lock-up agreements with pre-IPO shareholders.
- The lock-ups barred shareholders from selling or otherwise disposing of Facebook stock for limited post-IPO periods unless the underwriters consented to an early release.
- A Facebook shareholder brought a derivative action on Facebook’s behalf seeking disgorgement of alleged “short-swing” profits under § 16(b) of the Securities Exchange Act of 1934.
- The theory was that the lock-ups and underwriting arrangements created a § 13(d) “group” between the underwriters and locked-up shareholders, making the underwriters “beneficial owners” of more than 10% of Facebook’s stock.
- The district court dismissed under Rule 12(b)(6), concluding the complaint did not plausibly allege a § 13(d) group or 10% beneficial ownership by the underwriters.

## Issues

1. Whether customary IPO lock-up agreements and routine underwriting/syndicate arrangements, without additional facts, plausibly allege a § 13(d) “group” between underwriters and shareholders.
2. If no § 13(d) group is plausibly alleged, whether the underwriters can be treated as 10% “beneficial owners” subject to § 16(b) short-swing profit liability.

## Decision

- The Second Circuit affirmed the dismissal.
- Standard-form IPO lock-up agreements and ordinary underwriting arrangements, standing alone, do not establish a § 13(d) group between underwriters and shareholders.
- Because no group was plausibly alleged, the underwriters were not beneficial owners of more than 10% of Facebook stock and were not subject to § 16(b) disgorgement on the pleaded facts.

## Legal Principles

- Section 16(b) imposes strict disgorgement liability for matched purchases and sales (or sales and purchases) within six months by corporate insiders, including beneficial owners of more than 10% of a registered class.
- For § 16(b), beneficial ownership is determined using § 13(d) concepts incorporated by SEC rules, including “group” ownership.
- A § 13(d) group requires an agreement to act together for the purpose of acquiring, holding, voting, or disposing of issuer securities.
- An agreement that temporarily restricts shareholder sales to support an orderly IPO aftermarket, without further coordinated plan regarding ownership or disposition, is insufficient to plead group formation.
- Courts construe the class of persons subject to § 16(b) narrowly and do not extend 10% beneficial ownership based on routine market practices absent facts showing the required agreement.

## Conclusion

The court held that customary IPO lock-up agreements and related underwriting arrangements do not, by themselves, create a § 13(d) group, so the lead underwriters were not 10% beneficial owners and could not be held liable under § 16(b) on the complaint’s allegations.


Lowinger v. Morgan Stanley & Co. LLC, 841 F.3d 122 (2d Cir. 2016)