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A Reminder for Departing Officers and Directors

12.03.14

Public companies occasionally must deal with officer or director departures, and when that occurs, the company would be well-served by reminding the departing insider of his or her obligations under applicable securities laws. At a minimum, the reminder should cover insider trading and, if applicable, compliance with Section 16 of the Securities Exchange Act of 1934. It might also cover the application of Rule 144 to public share resales, as well as other items specific to the company (such as directives from the human resources department), depending on the desired scope of coverage and the company's prior guidance to insiders.

The form of the reminder will depend on the company's preference, but many companies typically deliver a simple exit memorandum to the departing insider.

In respect of insider trading, the deliverable should remind the departing insider that he or she cannot buy or sell the company's securities based on any material non-public information involving the company, whenever obtained, and that the insider is prohibited from "tipping" that information to others. If the company has an insider trading policy, it might ask the departing insider to confirm in writing his or her compliance with that policy.

If the departing insider was a Section 16 filer before his or her separation, he or she should be reminded that Section 16 reports generally still must be filed for any transactions in the company's securities that are not otherwise exempt under Section 16(b). These would include any purchases or sales occurring within a period of less than six months of any "opposite-way transaction" involving the company's securities entered into while such person was a Section 16 insider.

For example, if the former insider departed the company effective May 1 and purchased shares of the company a couple weeks before departing, the insider still must report on Form 4 (or, if available, Form 5) any sales of those shares through the date that is 6 months after the share purchase date, even though the insider ceased being a Section 16 insider as of his or her departure date. Any Form 4 (or Form 5) filed after the insider's departure date should include a checked "exit" box on the form to reflect the insider's updated status.

On a related matter, the departing insider will still be liable under Section 16(b) for any "short-swing" profits from certain purchases and sales, or sales and purchases, of the company's securities within six months of the insider's last transaction while serving as a Section 16 insider, unless exempt under that section.
The reminder might state that Section 16 and its corresponding regulations are broad in scope, and that those rules would attribute to the insider certain transactions with the insider's close relatives and/or partnerships, trusts, corporations and estates.

If the company decides to cover Rule 144, which provides a safe harbor for public resales of certain of the company's securities, it should remind the insider that some of the conditions of Rule 144 turn on whether the insider was an "affiliate" for the 90-day period before the share transaction. An insider generally would be an "affiliate" under Rule 144 if, while an insider, he or she had the power to control or direct the company's management and policies.

As a concluding matter, many reminders attempt to hedge the company's exposure for violations by asking the insider to consult with the company's compliance officer, the company's counsel or the insider's securities counsel, as appropriate, in connection with any transactions (or proposed transactions) in the company's securities for a period of time after the insider's departure.

OUR TAKE: The securities laws at play for departing insiders are complex, and violations of them may result in civil or criminal liabilities for the former insider. In addition, non-compliance with the Section 16 reporting rules may necessitate disclosure of the violations in the company's proxy statement or Annual Report on Form 10-K, which can be embarrassing for the company and the former insider. In 2014 alone, the Securities and Exchange Commission has announced numerous actions taken by it against insiders for Section 16 and insider trading violations, as well as actions against companies for contributing to insiders' filing failures and for failure to report Section 16 violations. Given this environment, public companies should take care to avoid potential violations by a simple reminder to the departing insider of his or her ongoing obligations under applicable securities laws.

The publications contained in this site do not constitute legal advice. Legal advice can only be given with knowledge of the client's specific facts. By putting these publications on our website we do not intend to create a lawyer-client relationship with the user. Materials may not reflect the most current legal developments, verdicts or settlements. This information should in no way be taken as an indication of future results.

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