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Former Director's Section 13(d) Claim Not Actionable

In a matter of first impression, the 7th U.S. Circuit Court of Appeals affirmed a district court decision dismissing a complaint that alleged violations of Exchange Act Section 13(d). The court affirmed the lower court ruling on the ground that an implied private right of action under Section 13(d) exits only in the context of a tender offer or other contest for control of an issuer.

The plaintiff was a former non-management, independent director of an Internet company who had previously voiced objections to a share buyback plan and other corporate governance issues. The defendant, the CEO and vice chairman of the board of directors, allegedly planned to vote his shares against the re-election of the plaintiff as a director. Prior to the vote, the defendant did not file Schedule 13D and instead filed Schedule G stating that he had not acquired securities with the purpose or effect of changing or influencing the control of the company. The plaintiff was not re-elected and brought suit against the company and its officers and directors.

The 7th Circuit held that the plaintiff may not bring a private right of action against the defendant CEO and director of the company under Section 13(d) because the defendant's unannounced plan to vote his shares against re-election of the plaintiff did not constitute a tender offer or other contest for control. The court determined that the Congress did not intend to create a private right of action under Section 13(d) in the absence of a tender offer or other contest for control of an issuer. Congress demonstrated its intent to limit private rights of action by establishing share ownership thresholds that trigger the reporting requirements and by creating a dual reporting framework for share transactions that do not involve control of an issuer and those share transactions that involve a tender offer or other contest for control of an issuer.

‚ Edelson v. Ch'ien (7thCir) is reported at ¶93,230 .