The NASPP Blog

May 26, 2009

RSA Vesting During a Black-Out Period

I recently fielded a question from a member about a restricted stock award vesting during a black-out period. The member wanted to know if the company could make an exception to their trading policy to allow the insider holding the award to sell the vested shares to cover her tax obligations.

No Exceptions from the SEC

The company can make whatever exceptions it wants to its own policies, but the cold hard truth of the matter is that the SEC doesn’t make an exception to the prohibition on insider trading for employees that don’t have any other way to finance their tax payments. If the employee has material, non-public information (which presumably she does, since she is subject to the trading black-out), the only way for her to safely sell the stock is via a pre-established Rule 10b5-1 plan (see Rachel’s April 16 blog on Rule 10b5-1 Plans and our Rule 10b5-1 Portal for more information on trading plans).

When employees have material, non-public information, they have an advantage over investors that don’t have this same information. Employees aren’t allowed to use this advantage, no matter how badly they need the money. Even if their sick child is dying and they need the money to pay for an operation, they still can’t trade while in possession of material, non-public information.

Not only that, but when employees do violate insider trading laws, the company can sometimes be penalized for their trades as well–if the company didn’t create an environment that discouraged employees from trading on material, non-public information. So, making an exception to the company’s policy could have ramifications for the company as well as the employee.

The Alternatives

In this situation, where the employee doesn’t have cash readily available and a Rule 10b5-1 plan isn’t in place to cover the trade, I think you are left with the following alternatives to cover the taxes due upon vesting of the restricted stock award:

  • The employee liquidates another investment (not company stock) to come up with cash to pay the taxes.
  • The employee takes out a short-term loan to cover the taxes and then sells stock when the window opens to pay off the loan. Note that if the employee is an officer or a director of the company, the company cannot make this loan or arrange for it; the officer or director needs to arrange for the loan completely on his/her own.
  • Share withholding also might be permissible since it doesn’t involve an open market transaction. But it’s a risk, depending on how conservatively you view the laws prohibiting insider trading. Some securities lawyers believe that because the shares that are withheld are valued at the current market price, it is possible that this transaction would still be subject to insider trading laws. Unless your company’s insider trading compliance policy already specifically allows share withholding during a black-out period without a Rule 10b5-1 plan in place, I recommend that you check with your legal advisors before allowing this.

What About Allowing the Employee to Wait Until the Window Opens to Pay Her Taxes?

The company is going to have to deposit the taxes with the IRS within the week after the award vests, possibly even within one business day, so letting the employee wait until the window opens to pay the taxes probably won’t work. If the company makes the tax deposit on time, I think it could be viewed as a loan to the employee (which, at a minimum, would have to be subject to interest, and is prohibited for officers and directors). If the company doesn’t make the deposit on time, there’s no loan but the company will owe penalties to the IRS (see my May 11 blog on Seven-Figure Tax Penalties).

Avoiding This Trap in the Future

In the future, the company might want to consider either of the following alternatives:

  • Granting RSUs, where this sort of problem is easily resolved by reliance on the short-term deferral provisions under Section 409A, or
  • Having all employees holding RSAs enter into Rule 10b5-1 plans to sell stock to cover their tax obligations (the plan can even be built into the grant agreement for future grants). See the section on “Managing Tax Withholding Issues for Full Value and Performance Awards” in the article “Keeping Up with the Joneses: The Hottest Equity Compensation Issues Today,” available in the NASPP Document Library).

Everything You Need to Know About Restricted Stock and Units

For more information on managing restricted stock and unit plans, don’t miss this year’s NASPP pre-conference session, Restricted Stock Essentials. Register by June 26 for our “last-chance early-bird savings”!

Reason #26 to Renew Your NASPP Membership:  The NASPP Staff
The NASPP staff–Danyle Anderson, Rachel Murillo, Robyn Shutak, and I, are always happy to assist with your stock-plan related questions.  We often get questions like the one I’ve blogged about today and we do our best to answer them.  We’re also happy to help you find articles and other resources on the extensive, but sometimes unwieldy, NASPP website. Hearing from you helps us stay in touch with your needs, so email us today at naspp@naspp.com and we’ll get right on it!

“Last-Chance Early-Bird Savings” on the NASPP Annual Conference
The 2009 NASPP Annual Conference will be held in San Francisco from November 9-12. NASPP members that register by June 26 save $100 and then receive half-off all subsequent registrations from the same company/location. We haven’t offered the Conference at this price for a long time and it will be a long time before we offer a price like this again, so make this the year you attend!

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

– Barbara