10b5-1 Plans

A class-action lawsuit was recently filed against Novatel by two pension funds that had invested in Novatel stock alleging that several executives engaged in insider trading. Each executive named in the suit claims to have been trading exclusively under a Rule 10b5-1 trading plan, so what went wrong? Although there were Rule 10b5-1 trading plans in place, these plans were allegedly modified to increase the sale of shares prior to a public disclosure of the loss of Novatel’s contract with Sprint (which resulted in a sharp decline in share price).

Sound familiar? Last October, I blogged on Rule 10b5-1 trading plans. I stressed the fact that entering into a Rule 10b5-1 plan does not inherently protect an individual from the risk of prosecution for insider trading. The most prominent illustration of this at the time was the ongoing SEC investigation of Countrywide CEO, Angelo Mozilo, who is also accused of modifying his Rule 10b5-1 trading plan to increase sale amounts prior to a sharp decline in share price.

Remember that Rule 10b5-1 trading plans must be properly administered in order to provide protection to the individual. The top ways Rule 10b5-1 plans may be misused are:

1. Entering into a plan with transactions that take place immediately
2. Cancelling a plan to prevent a transaction from taking place
3. Modifying an existing plan to increase or decrease sales

Take some time now to review your company’s policy on Rule 10b5-1 trading plans.

Getting Shareholder Approval

In other news, the CEO of Keynote Systems, Umang Gupta agreed to cancel his 400,000 share option grant (currently underwater) in exchange for a ‘yes’ vote from shareholders to extend the expiration date for Keynote’s equity incentive plan. In the original appeal to shareholders, Gupta attempted to assuage misgivings stemming from the ISS/RiskMetrics recommendation against the extension. The main concern voiced by ISS/RiskMetrics was the high number of options outstanding. Gupta explained that the reason so many options remain outstanding is that 90% of the grants are currently underwater–and that the company cannot do an option exchange without shareholder approval. Shareholders originally took ISS/RiskMetrics’ advice and rejected the extension. However, after Gupta agreed to relinquish his grant, shareholders voted to extend the equity plan expiration date. Ultimately, the 400,000 share grant wasn’t the only option cancelled by Umang Gupta. He also cancelled an additional grant for 300,000 shares; one that was even more underwater than the negotiated grant. Obtaining this expiration extension from shareholders means that Keynote can continue to offer equity compensation to current (or potential) employees without having to ask for shareholder approval on a completely new plan.

If this down market finds your company courting shareholder approval for a new plan or additional shares under an existing plan, consider what you can do to improve your odds for shareholder approval. Maybe your CEO isn’t ready to cancel his or her outstanding grants, but you can still take steps to help garner shareholder approval. For the top ways to improve your stock plan proposal, check out this article by Compensia.com on the NASPP Practice Alerts, “Five Tips for a Successful Employee Stock Plan Proposal”.