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(This story, in slightly different form, originally appeared in Incisive Media’s Daily Business Review.)

BOCA RATON, FL-Locally based Bluegreen Corp. has warded off another hostile takeover attempt by timeshare competitor Central Florida Investments, based in Orlando. This time around, Bluegreen has won an $870,000 judgment in federal court.

CFI, the parent of Westgate Resorts, failed in a previous takeover attempt in 2006. Bluegreen passed a poison pill provision to ward off CFI, and that bad medicine still is costing CFI.

US District Court Judge Kenneth Marra in West Palm Beach ruled earlier this month that CFI violated the Securities and Exchange Act of 1934 when it received $870,000 in short-swing profits from call options it made when selling Bluegreen stock under a settlement agreement in litigation to resolve the failed merger. CFI said it was just trying to mitigate its losses with the sale of Bluegreen stock, which was required under the settlement agreement reached after federal courts backed Bluegreen’s poison pill provision.

CFI, one of the largest privately held timeshare companies in the world, argued an “unorthodox transaction” exception to the federal securities law should apply to 65 call options at issue. Call options give the holder the right to buy a security at a specified price for a fixed period of time.

Not so, said Marra, who ruled CFI entered into the settlement voluntarily. He ruled the premiums that CFI made while divesting Bluegreen stock are recoverable by Bluegreen.

“If you are an insider, you are prohibited from keeping profits on the purchase and sale, or sale and purchase, of shares made within a period of less than six months,” says Rodney H. Dusinberre, a partner with Assouline & Berlowe in Boca Raton. The firm served as local counsel in the shareholder derivative suit filed on behalf of Bluegreen against CFI. “If you do, any short-swing profits must be disgorged and provided to the issuer.”

The short-swing rule restricts company insiders from making short-term profits at the expense of the firm, and CFI was ruled an insider after its put options drove its stake in Bluegreen well above the 5% disclosure threshold set by the Securities and Exchange Commission in the buildup to the takeover attempt.

Marra reserved judgment on interest made on the profit that he found violated securities law. In granting partial summary judgment, the judge ruled CFI could not make a profit when it had to sell its Bluegreen stock because the company, by its stock purchases in the takeover attempt, had essentially become a corporate insider.

If its plan went through, CFI would have held a 32% stake in Bluegreen. Federal law precludes corporate insiders from making short-swing profits from transactions in a corporation’s equity securities.

Much of this bad news for CFI stems from its inability to defeat the poison pill provision passed by Bluegreen shareholders to tank CFI’s takeover bid. The poison pill exempted the controlling shareholder, Fort Lauderdale-based Levitt, at 31%. But it penalized any unrelated shareholder that amassed a 15% stake without Bluegreen board approval.

Other shareholders were authorized to double their holdings at a bargain price, diluting the stake held by CFI, the explicit target of the poison pill. The poison pill was triggered by previous options, which CFI was obligated to honor.

CFI, owner David A. Seigel and his affiliates started acquiring Bluegreen stock in 2001 and held 7.7% of its shares by July 2006 with contracts in the options market to buy even more shares, according to the ruling. CFI would have had the controlling interest in Bluegreen if the plan had been achieved, but instead the two parties ended up in federal court suing each other over the poison pill.

“The consensus was that they were trying to acquire a large block, a controlling block in the company,” Dusinberre says. “Poison pills are designed to avoid a hostile takeover.”

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