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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:
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.)
(a) 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.
(b) 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).
(c) 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 next post will describe reasons for disclosing the adoption of a Plan.
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