An executive of a publicly-traded company would not have anticipated today's market volatility and depressed stock price when he or she entered into a 10b5-1 trading plan in 2019.  As a result, this executive will probably want to amend or terminate such trading plan.  The purpose of this Post is to provide a quick reminder of the applicable issues that should be considered.  This Post is Part 6 of a 7-Part series addressing compensation adjustments that Compensation Committees could consider in order to continue to incent and retain their executive officers in today’s economy.

Background

Insider trading is prohibited under Rule 10b-5, which imposes a presumption in favor of liability.  Under this presumption, if a person is “aware” of material non-public information at the time a security is bought or sold, such person is then presumed to be trading based upon such material non-public information.  This presumption causes a practical problem for some executives because many executives are constantly in possession of material non-public information, and as a result, they cannot trade employer securities.

A solution to the above problem is a properly designed 10b5-1 trading plan.  A 10b5-1 trading plan can provide an affirmative defense to the above presumption and switches the focus FROM whether the executive had material, non-public information at the time of the trade, TO  whether the executive had material, non-public information at the time he or she became committed to the trade (i.e., at the time the executive entered into the 10b5-1 trading plan).  As a result, and phrased a different way to drive the point, a 10b5-1 trading plan allows an executive to sell employer securities even if he or she possesses material, non-public information, but only if the trading takes place pursuant to a plan the executive entered into at a time when he or she did not possess such material, non-public information.

Amending or Termination a 10b5-1 Trading Plan

Many executives will be considering whether it makes sense to modify or terminate their existing 10b5-1 trading plans because the minimum sale price scheduled therein is likely higher than the company’s current stock price.  Thoughts to consider include:

• Amendments.  If the plan is to be amended, then the executive will need to verify compliance with the company’s insider trading policy and pre-clearance procedures prior to implementing any amendment.  Also, amendments should occur only during open windows and at a time when the executive does not possess material non-public information (reason is that entering into an amendment is deemed to be the adopting of a new 10b5-1 trading plan).  A waiting period (at least 30 days after the amendment) should be implemented before any trades could be reinstated.
• Terminations/Cancellations.  Cancelling a 10b5-1 trading plan could be effectuated even if the executive is in possession of material non-public information.  And given the circumstances associated with the market and the US economy, it is unlikely that any such cancellation would create a valid assertion that the 10b5-1 plan was not originally entered into in good faith (i.e., it is likely that any prior trades would remain covered by the affirmative defense to any allegations of insider trading).

Related Posts

Blog posts that are part of this 7-part series include:

• “Considerations with Respect to Upcoming Equity Grants” (Part 1 of 7)
• “Consider Changes to Increase Cash Flow” (Part 2 of 7)
• “Address Outstanding Performance-Based Equity Awards” (Part 3 of 7)
• “Retention Packages to Discourage Poaching” (Part 4 of 7)
• "Revisit Stock Ownership Policy Requirements" (Part 5 of 7)
• “Does It Make Sense to Consider a Secular Trust for Deferred Compensation” (Part 7 of 7)