Editek, Inc. v. Morgan Capital, LLC
United States Court of Appeals for the Eighth Circuit
150 F.3d 830 (1998)
- Written by Heather Whittemore, JD
Facts
In February 1991, Editek, Inc. (plaintiff) issued convertible preferred stock to Morgan Capital, LLC (defendant). Morgan Capital could convert the preferred stock into common stock beginning 60 days after it was issued, making March 30 the beginning of the conversion period. The conversion rate for the preferred stock was floating, and at the time of and prior to Morgan Capital’s conversion, Morgan Capital could receive over 10 percent of Editek’s common stock. On May 1, Morgan Capital converted its preferred stock into common stock, receiving more than 10 percent of Editek’s common stock. Soon after, Morgan Capital sold its Editek common stock, making a profit of over $500,000. Editek filed a lawsuit in federal district court against Morgan Capital under § 16(b) of the Securities Exchange Act of 1934, seeking to recover Morgan Capital’s profits. Morgan Capital filed a motion to dismiss the case, arguing that it was not a 10 percent beneficial owner under § 16(b), because it did not own the common stock before the conversion of its preferred stock. The district court granted Morgan Capital’s motion. Editek appealed, arguing that the district court should have applied the definition of beneficial ownership from the rules explaining § 13(d) of the Securities Exchange Act of 1934.
Rule of Law
Issue
Holding and Reasoning (Fagg, J.)
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