The preceding post in this series began to address the question whether a CEO’s adoption of a Rule 10b5-1 trading Plan should be publicly disclosed by the CEO or the company, such as through a press release or a Form 8-K, before any trading begins under the Plan. It was noted that, interestingly, a number of articles written by knowledgeable securities lawyers recommend such disclosure (though without disclosing any details of the Plan), while the prevailing practice appears to be not disclosing the adoption of a Plan.
So what are some of the reasons that the CEO and the company might give for not disclosing? Assuming (as is typical) that the Plan contemplates sales of shares by the CEO, I believe they include the following:
- Why disclose if there is no requirement to disclose? The CEO’s potential trading of his shares is generally a private matter, with only limited disclosure required when sales occur or are imminent. The SEC apparently does not consider the separate disclosure of the adoption of a Plan to be of real importance or benefit to shareholders or the securities market, or it would impose a disclosure requirement. We (i.e., the CEO and the company) are not in a position to disagree with the SEC in this regard.
This reason follows the general approach of disclosing only what is required, and nothing more. Also, the premise of this reason is that the mere adoption of the Plan is not sufficiently meaningful or material to shareholders or the market to warrant disclosure. (The other reasons for non-disclosure, set forth below, adopt the opposite premise.)
- Disclosure of the Plan might be misleading in a few ways:
- If the disclosure does not include the specific terms of the Plan or an extensive description of all of the CEO’s reasons for the Plan, the disclosure would be nothing more than an announcement to shareholders and the market that the CEO desires to sell some or all of his shares. The typical brief explanation of the CEO’s purpose (e.g., to diversify personal assets), even if true, will not be granted much credence. There is a reasonable likelihood that the adoption of a Plan itself will be interpreted as a reflection of the CEO’s negative view of the company’s performance or prospects or, perhaps, even the CEO’s relationship with the company; and the disclosure of that adoption may make that misinterpretation more likely.
- Unless the disclosure describes the number of shares subject to the Plan, the disclosure could be interpreted as the CEO’s desire to sell all or substantially all, rather than only some portion, of his shares – which would also lead to the misinterpretation described in the immediately preceding clause (a).
- The disclosure might be misinterpreted as an assurance that the CEO will actually sell or be able to sell shares under the Plan, even though the Plan may well not result in any, or in any significant, sales of the CEO’s shares.
In any one or more of these cases, because of shareholders’ or the market’s misinterpretation, the disclosure might result in a decrease in the market price of the shares.
- The disclosure of the CEO’s intention to sell any significant or potentially significant number of shares – even if the CEO’s reasons for selling are personal and do not reflect adversely on the Company – would constitute “selling pressure” or an “overhang” on the market for the shares, which could reasonably be expected to cause a decrease in the market price of the shares.
- Disclosure will be required as the Plan is implemented, in a Form 144 filing or a Form 4 report by the CEO, and that disclosure in context will be more meaningful than mere disclosure of the adoption or existence of a Plan. The required disclosure will include certain information that the general disclosure would not, such as, in the Form 144, the number of shares proposed to be sold in the next three months or, in the Form 4, the number or numbers of the shares actually sold and the price or prices at which they were sold.
- Disclosure of the adoption of a Plan may require corresponding subsequent disclosure when the Plan is terminated or if the Plan is ever modified or amended by the CEO. That subsequent disclosure would be too much of a burden, or too invasive of the CEO’s privacy in the potential trading of his own shares, for disclosure that is voluntary. Although the disclosure of the adoption of the Plan might include a disclaimer of the requirement to make any subsequent disclosures of that kind and such a disclaimer should be effective, there may be a concern that the SEC or a court will not agree that the disclaimer is effective.
- As described in Allan Horwich’s excellent article, The Origin, Application, Validity, and Potential Misuse of Rule 10b5-1, 62 BUS. LAW. 913, 941-42 (May 2007), disclosure could pose some “limited legal risk” to the CEO. Shareholders who sell their shares upon or after such disclosure, in anticipation of a decrease in the market price upon sales by the CEO, might subsequently discover that, because the CEO actually sold no or relatively few shares under the Plan, the market price of the shares did not decrease. It is permissible for the CEO to adopt a Plan that is, in effect, for speculative purposes without a practical expectation of sales (e.g., where the CEO might be prepared to sell at a future price that is very high and quite speculative). In that circumstance, those shareholders might claim that the disclosure of the adoption of such a Plan was a manipulative or deceptive act by the CEO. Although the disclosure might include a disclaimer to address this risk (i.e., to the effect that no or only limited sales may actually be made under the Plan), it may not be possible to completely eliminate this risk.