June 5, 2018

Adoption of 10b5-1 Plan Prior to Merger Closing?

Recently, a member posted this in our “Q&A Forum” (#402):

My client is a CEO of a public company that is being acquired by another public company in an all-stock transaction. The CEO will become a director of the acquiring company and has a desire to sell some of the CEO’s rather sizable equity holdings. The CEO would like to adopt a 10b5-1 plan to sell the shares and is wondering whether the plan can be adopted prior to closing.

I haven’t found any guidance on this issue – from off-the-shelf materials to SEC guidance – one way or another. The CEO’s broker hadn’t encountered this situation before, but the broker is with a small firm (vs. an investment bank), so the sample size is likely small. The legal argument against adopting before closing is that the SEC could view the closing in and of itself as a modification of the plan. I view the “closing as a modification” argument as quite conservative, especially if the trading triggers are straightforward (e.g., sell X shares per month, subject to a floor).

If anyone has encountered this situation before, have you found any sort of guidance on the issue? Or perhaps even have publicly-available examples (e.g., Section 16 notes, etc.)?

John responded with:

I’ve not seen anyone do something like this. The period between signing and closing a merger seems to me to be a very risky time for the CEO of the seller to adopt a 10b5-1 plan. There are simply too many moving pieces in a pending deal and it is easy to second guess whether the insider was in possession of MNPI at the time of the plan’s adoption.

Broc Romanek