March 23, 2023

Rule 10b5-1 Plans: New Rules Throwing a Wrench in “Sell-to-Cover” Arrangements

One of the many practical difficulties in complying with the SEC’s new parameters for Rule 10b5-1 plans is navigating the fact that what may seem like “plain vanilla” transactions relating to equity awards can cause problems for your insiders and company. A member recently asked this question on our “Q&A Forum” (#11,532):

Our plan documents (like several other companies) permit the company to require award recipients to satisfy tax withholding obligations through sell to cover transactions at the time of award vesting (here, RSUs), and authorize the company to determine the means of the sell to cover transaction and even to arrange the sale on behalf of the award recipient without consent. In terms of amount of shares to be sold, the company is authorized only to sell shares in an amount necessary to satisfy tax withholding obligations.

The company is looking to exercise this right as a standing requirement for all award recipients going forward until further notice. Under the new 10b5-1 rules, (1) would the company’s exercise of this right typically have the benefit of being a 10b5-1 plan “eligible sell to cover transaction” by itself, (2) would the sell to cover transaction require a 90-day cooling off period and (3) can the company only force the sell to cover transaction when it is not in possession of MNPI? (I presume the sell to cover transaction would be matchable for any Section 16 officer participant, given it would still be a sale by the award recipient.)

John responded:

I suppose it’s possible that a properly structured plan like the one you’ve outlined might be able to fit within the confines of the “sell-to-cover” exemption, although as our panelists pointed out in our webcast on the 10b5-1 amendments, there are all sorts of issues that may make the sell-to-cover exemption extremely cumbersome in practice. I also discussed those issues in the most recent issue of The Corporate Counsel newsletter.

Since the sell-to-cover exemption only applies to the restriction on multiple plans, I believe the cooling off period would apply to transactions under that plan. However, even if you structure these plans to meet Rule 10b5-1’s requirements with respect to the executives, I think that the fact that the company would effectively control the sales made under this arrangement would compel it to either structure the plan in way that permitted the company itself to rely upon Rule 10b5-1 or to make sales only at times when it was not in possession of MNPI and otherwise in accordance with the provisions of its insider trading policies.

Suffice it to say, it is easy to get tripped up under these new rules. Make sure to think carefully about any transactions, and remember that Form 4 and Form 5 filings made after April 1st will need to have a checkbox that says whether a trade is made pursuant to a Rule 10b5-1 plan. Alan blogged the other day on that Edgar has been updated to accomodate that revision.

Liz Dunshee