This article appears in Charlotte Business Journal.
In the ever-evolving landscape of corporate governance, executives often find themselves navigating a complex web of regulations and expectations when it comes to selling their company stock. As stewards of their organizations who are accountable to stakeholders, these executives must balance demonstrating commitment and managing their financial portfolios. Section 16 reporting executives, in particular, face heightened scrutiny as analysts and investors closely monitor their transactions.
The sale of company stock by top executives can trigger a cascade of questions: Does it signify a loss of confidence in the company’s future? Are they capitalizing on an overvalued stock price? Or, do they possess critical insider information that could adversely impact the stock’s value? To address these concerns and provide executives with a structured approach to trading, many companies have introduced “open trading windows.” Yet, these windows can present executives with unique challenges and dilemmas, raising questions about the timing and strategy of their stock transactions. In this article, we delve into the concept of 10b5-1 plans, offering executives a tool to navigate the intricacies of trading securities within the confines of these 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.
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?
When establishing a 10b5-1 plan, executives can regain control over their financial future within the bounds of legal and ethical considerations. Executives can confidently execute stock transactions during open trading windows by adhering to guidelines, considering various factors and seeking to minimize analyst questions. These plans offer a prudent and strategic approach, protecting executives from potential legal pitfalls and helping them achieve their financial goals without compromising their commitment to their companies and stakeholders. In a world where transparency and compliance are paramount, 10b5-1 plans emerge as a powerful tool, allowing executives to balance personal financial objectives and corporate responsibilities.
Are you interested in speaking with someone about selling, exercising or buying company stock outside of an open trading window? Contact us today.
