There are many challenges facing executives in selling their company stock. Executives serve the needs of their company and its stakeholders. Section 16 reporting executives are often required to hold a particular value of their company stock to show their commitment, but it doesn’t end there. Analysts and others review the company’s filings to see when stock is sold by the company’s top executives.
When executives sell stock, it creates questions: Have they lost confidence in the company? Do they think the stock price is too high? Do they know something the public does not know that would adversely affect the stock price?
Companies have addressed the concern of executive trading on non-public inside information by creating “Open Trading Windows.” The Open Trading Window is a period of time (typically two weeks during each quarter) that is deemed safe to trade by the Corporate Secretary or designated compliance officer after the company has reported its earnings. A couple of weeks out of each quarter is not much time for an executive to act and raises several questions:
- What if the executive could accomplish a specific life goal if the stock gets to a certain price, but can’t sell the stock at the price because it reached it outside of a trading window?
- What if the executive has a systematic diversification program of selling their company stock to reduce their concentrated position in the company, but they do not want to look like they are making a judgment of the company’s prospects?
- What if they don’t want to exercise a stock option during an open window, but run the risk of the option expiring due to insider information?
So, what can an executive do? During one of the “Open Trading Windows,” they can establish a 10b5-1 plan to sell securities outside of the trading windows.
What is a 10b5-1 Plan?
It is a written plan for trading securities conforming to Rule 10b5-1 of the Securities Exchange Act, in which the person executing the plan at the time was unaware of material non-public information. Plans can be drafted for purchases, sales, the exercise of options, and the subsequent sale of the shares received through the option exercise.
Our Guidelines for Establishing a 10b5-1 Plan
- A plan should only be established during an open trading window and the executive is deemed not to have any material non-public information. The plan must define the number of shares, price, and the time period of the transaction(s) or provide a written formula in the plan.
- After the plan is signed, it is recommended to have a “cooling off period,” usually a minimum of 30-days before the plan goes into effect.
- There are no minimum and maximum time periods for 10b5-1 plans, but the standard is six months to a year, with some going out 18-24 months in length.
- A price can be a specific limit price or market price on a specific date.
- There should be no communication between the administrating broker and trading party of the shares in the plan.
- Trades can be placed outside of the plan for non-plan shares during Open Windows.
- It is permissible but not advisable to terminate a plan. It may take away an affirmative defense.
Things to consider in drafting a 10b5-1 Plan
- Could you be locked out of exercising an option and it expires?
- Make sure your plan ending date plus the “cooling off period” does not run past the next open window.
- Do you want all the shares to be bought, sold, or exercised at the designated price or as many as can be executed?
- How can you structure the plan in length and price that will minimize analyst questions?
Are you interested in speaking with someone about selling, exercising, or buying company stock outside of the trading window? Contact SignatureExecutive, dan.dubay@signaturefd.com.
