Adoption of a Rule 10b5-1 Plan – To Disclose or Not to Disclose, Part 3


The two preceding posts in this series (1) 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, and (2) described reasons for not so disclosing the adoption of a Plan , which appears to be the prevailing practice notwithstanding recommendations to disclose in a number of articles by knowledgeable securities lawyers.

So what are some of the reasons that the CEO or the company should disclose the adoption of the Plan? Assuming (as is typical) that the Plan contemplates sales of shares by the CEO, I believe they include the following:

  • Compliance with Rule 10b5-1 does not afford a “safe harbor” from liability, but only provides an affirmative defense to a claim of liability. Therefore, the Plan will be significant only in the context of a claim of, or litigation regarding, possible insider-trading by the CEO in violation of SEC Rule 10b-5. An essential element of a Rule 10b-5 claim is that the plaintiff acted with scienter (i.e., an intent to deceive, manipulate, or defraud). As a few court decisions have indicated,[1] the disclosure of the adoption of a Plan may be a significant factor in defending against allegations of scienter. The CEO should take reasonable steps to make the defense of any Rule 10b-5 claim as strong as possible, and the disclosure of the adoption of a Plan would typically be considered an indication of the CEO’s good faith, which would be contrary to the plaintiff’s attempt to prove or convince a court to infer scienter.
  • Because the key purpose of a Plan is to avoid a violation of Rule 10b-5, the disclosure of the Plan would indicate the CEO’s awareness of, and his intent to avoid, any liability for violating Rule 10b-5. That indication might dissuade a potential claimant from even asserting a Rule 10b-5 claim against the CEO.
  • If the CEO or the company believes that shareholders or the securities market will be concerned about the CEO’s proposed sales under a Plan, then:
    • disclosure of the adoption of the Plan would give the CEO or the Company an opportunity to state the CEO’s reason or reasons for the potential sales under the Plan in order to anticipate and, to some extent, counteract the expected adverse reactions of the shareholders and the market; and
    • the adverse reactions of the shareholders and the market might be less unfavorable if they learn of the existence of the Plan in advance of sales rather than being disconcerted or “surprised” by the later reference to the Plan in a Form 144 or a Form 4 in the context of an imminent sale or a sale that has already occurred.

(In either event, the less unfavorable the reactions of the shareholders and the market are, the less selling would occur and the less the market price of the shares would decrease – which would benefit the CEO not only in his sales, but also in the value of the shares he retains.)

  • Unless there are no sales under the Plan, the existence of the Plan will be disclosed eventually in a Form 144 or a Form 4 anyway. Because the disclosure in either of those forms will typically not be conspicuous, however, making the disclosure only in that way might be interpreted as an attempt to “hide” the existence of the Plan as much as possible.

Although the reasons for separate disclosures of the adoption of a Plan before any trading begins under the Plan may appear to be fewer than the reasons not to disclose, the first two reasons for disclosure described in this post appear to be the most significant. In brief, disclosure is consistent with the key purpose of the Plan – to provide a defense against Rule 10b-5 claims. Nevertheless, there may not be a single, uniformly applicable answer to the question whether to publicly disclose the adoption of a Plan before any trading begins under the Plan. The answer may well depend on the circumstances and the CEO’s and the company’s evaluation of the reasons for and against such disclosure.


[1] See, e.g., In re Synchronoss Securities Litigation, 705 F. Supp. 2d 367, 410 (D. N.J. 2010); Wietschner v. Monterey Pasta Co., 294 F. Supp. 2d 1102, 1117 (N.D. Cal. 2003),44&as_vis=1.

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