Last week’s news that the CEO of Telsa Motors, Elon Musk, had exercised stock options with an estimated value of $100 million spread like wildfire. Picked up by the national news outlets – the news was well covered. It’s not every day that a CEO exercises $100M worth of stock options and pays cash for the taxes (yes, the company confirmed he paid cash for his taxes). This was a cash exercise with no sale involved. As I read several articles on this transaction, I realized there is still much taken for granted when an executive transacts in the company’s stock. I’ll cover highlight some of those areas in today’s blog.
The article that caught my rapid attention was Forbes’ “Elon Musk Exercising Stock Options Could Mean Tesla Will Disappoint Next Week.” Now, before I get too far down this path, I have to say I know nothing about Tesla’s inner-workings and nothing about their earnings. So anything I am saying IS pure speculation. The title of the article got me interested, though. I mean could the exercise of stock options really, single handedly foreshadow less than stellar earnings? If I had to dissect that assumption, my own thoughts went to something far more benign – I mean, what if the CEO had a 10b5-1 plan (after all, these options that were exercised were scheduled to expire in December 2016) that was merely acting on autopilot in an attempt to exercise these stock options before they expire? I have no idea whether Tesla’s CEO has a 10b5-1 plan or not. According to Tesla’s proxy statement, 3 officers do have 10b5-1 plans. And, according to the NASPP’s 2014 Domestic Stock Plan Administration Survey, co-sponsored by Deloitte, of the companies that do allow (but not require) 10b5-1 plans for insiders, 62% of CEOs of those companies were using the plans. Is it possible? Yes, it is. Do we know? No, we do not. That’s not even the point, though.
What does a 10b5-1 plan have to do with things taken for granted? These plans got some negative publicity a couple of years ago when the SEC looked into whether or not the plans, in principle, were being abused. There were some situations where it appeared that 10b5-1 transactions were well-timed around negative news – as in the company may have delayed or accelerated the timing of that news around the planned transactions. Nothing much ever happened from that speculation, and, for the most part, I’d venture to say these plans are not being abused. Rather, this type of plan works fairly well if used as intended, especially in aiding executives and other insiders to put distance between their decision making about their shares and the execution of those transactions. What worries me is that the possibility of a 10b5-1 plan’s existence still often seems to be overlooked when the media casts the spotlight onto these larger, high profile transactions. Not all of it is their fault, though. There is no present requirement for the existence of a 10b5-1 plan to be disclosed. Some companies voluntarily disclose the existence of plans and subsequently footnote their Form 4s noting transactions that occurred pursuant to a trading plan. Without disclosure, the media remains unaware that the executive may be operating under one of these plans. Does disclosure need to happen? The law firm of Morrison and Foerster summarized that consideration in an FAQ on 10b5-1 plans:
Should a Rule 10b5-1 plan be publicly announced?
A public announcement by any person of the adoption of a Rule 10b5-1 plan is not required. A company may choose to disclose the existence of certain Rule 10b5-1 plans in order to reduce the negative public perception of insider stock transactions. A company making such disclosu
re generally will disclose the existence of a plan but not the specific details. Typically, the disclosure will be for executive officers, directors, and 10%
shareholders required to file ownership forms under Section 16(a) of the Exchange Act (that is, Forms 3, 4,and 5). A company can choose whether to announce the existence of a Rule 10b5-1 plan by a press release followed by a Form 8-K or solely by a Form 8-K. The applicable Form 8-K item is Item 8.01, although Item 7.01 may be used under appropriate circumstances.
If a company decides to publicly announce the adoption of a Rule 10b5-1 plan, it is advisable to publicly announce changes to or termination of such plan as well. Under the Dodd-Frank Act, the SEC is required to implement a regulation prescribing disclosure by reporting issuers of their hedging policies. The proposed rule, if it becomes final in its current form, may result in more companies disclosing the existence of trading programs of executive officers.
While we await final hedging rules from the SEC, companies may consider proactively looking at their 10b5-1 disclosures and the potential positive potential such disclosures could have on mitigating public perception of their executive transactions. Disclosing the existence of a plan and attributing transactions related to an automatic plan in a Form 4 footnote may go miles in helping to ease some of the rampant speculation around transactions that could occur absent this information.
We won’t know anytime soon if CEO was operating under a 10b5-1 plan when he exercised his stock options, but if he did, a footnote on the Form 4 could have alleviated some of the speculation about the timing of the transaction and its relationship to earnings and other important company events.
-Jenn
Tags: 10b5-1 plan, hedging, stock option exercise
It’s a slow news day here at the NASPP. I don’t have anything pressing to blog about so I thought it would be a good time for a poll. Below are a few questions that were recently posted to the NASPP Q&A Discussion Forum that are largely unanswered at the moment. If they apply to you, please take a moment to indicate your answers so we can help these folks out. Thanks for indulging me!
If you can’t see the poll below, click here to participate in it. As always, if you are a contractor that works with multiple clients, please answer for just one of your clients (preferably one that won’t otherwise complete this poll).
– Barbara
Tags: broker, China, DWAC, employee communication, employee communications, exercise, RSU, RSUs, SAFE, share withholding, stock option exercise
I know many retirees look forward to starting a new, carefree life free of winter weather, the 9 to 5 grind, and high tax brackets. One such retiree in Connecticut with similar hopes encountered a setback and learned the hard way about state-to-state mobility nuances after the New York State Division of Tax Appeals upheld the assertion that his stock option related income (and other deferred compensation income) received after retirement should be partially allocated to the state of New York, even though he resides in Connecticut.
Hungry States
State-to-state mobility is not a new topic. We know that states are becoming more assertive in claiming tax revenues associated with wages and benefits earned during the period of time the employee worked in their state, regardless of when the benefit was actually realized or paid. In many states, the employee never needs to reside there – only work there – in order for allocation claims to surface. In the appeals case at hand, an American Airlines employee resided in Connecticut during his employment and after his retirement. During his period of employment with the airline, he worked both in and outside of New York. He was granted a variety of stock options during his employment relationship with the airline (grants were awarded from 1996 – 2001, and again in 2003). The employee retired in 2005 and exercised his stock options in 2006. The state of New York maintained that a portion of the income from the transaction should be allocated to New York, reflecting the employee’s time worked there. Like many other states, New York does have regulations requiring that non-residents pay income taxes on wages that are earned in the state (regardless of residency). There are a few exclusions on taxing non-residents mandated by federal law, such as that no non resident can be taxed on qualified retirement distributions. As a result, New York wanted the taxes from stock option gains based on the number of days worked in New York between the date of grant and the date of retirement. This translated to about two-thirds of the gains being taxable in New York.
The retired employee (who I’m guessing probably had no clue that he’d be taxed in New York, since he never lived there and was now well into retirement) challenged the New York Tax Division’s claim to his income taxes on a number of grounds, including that the regulations were unfair to non-residents. Predictably, the New York State Division of Tax Appeals upheld all regulations in question.
They Don’t Know What They Don’t Know
This story is a good reminder that state-to-state mobility is not something that is going away. Even more troubling than learning how to administer the nuances of tracking and allocating income between states is the fact that many employees (regardless of employment status) have no clue about these intricacies. I’m thinking about the retiree that heads off to a warmer state with no state income tax, believing they’ve finally settled into retirement bliss. Moving to a state with no tax rate does not mean the employee is going to avoid paying state income taxes. They could very well owe the state they just left behind. While this may logically be entertained by current employees, and perhaps even those recently terminated, there is an aura around retirement that may cause many retirees to miss this concept in their tax planning.
Tax season is just around the corner, and it may be a good time to take a fresh look at the pool of possible current or former employees who may be subject to these very types of mobility issues and, at minimum, recommend that they take a hard look at the details with their tax planners.
-Jennifer
Tags: new york taxes, retirement, state taxes, state-to-state mobility, stock option exercise, tax appeal