Adam Frank

Managing Director, Head of Wealth Planning and Advice, J.P. Morgan Wealth Management

What is a 10b5-1 plan?

A 10b5-1 plan is a written agreement between a corporate insider and a brokerage firm by which the insider details the number of company shares to sell at particular prices (e.g., limit prices or market price) or at particular times. Such a plan usually lasts for between six and 18 months. Because you can only sign a 10b5-1 plan during open trading windows when you have no material non-public information, it provides an affirmative defense to potential charges of insider trading, even if the shares are ultimately sold at a time when you do have material non-public information. And because sales might occur when you have inside information, it is a best practice for your brokerage firm to have a separate group executing your 10b5-1 trades, so you can continue to have regular conversations with an advisor without risking an accusation that you were trying to influence the planned sales.

Setting limit prices

If you want to set minimum prices to sell shares as part of your 10b5-1 plan, consider the following:

  • The market will not adjust to accommodate the limit prices you’ve set, so set your prices accordingly. For example, if your stock is trading at $32 and you set a minimum price of $35 (nearly 10% higher), the stock could reach $34.99 and then decline – and none of your stock would be sold. Limits are inflexible, so think about how much stock you absolutely want to sell and consider revising your minimum prices downward. If the stock is trading higher, you will receive the higher price, but a lower minimum makes it more likely you’ll sell at least some shares.
  • There are occasions on which the stock price of a company becomes untethered from the underlying fundamentals of a company, whether as a result of a market dislocation, a sector decline, loss of analyst coverage, or some other circumstance out of your – and the company’s – control. If your first sale through your plan is your worst sale (meaning sold at your lowest limit), you’ll probably still be inclined to participate in the plan as the stock price goes up. But if the stock price continues to decline, at least you will have sold some stock at what you initially thought were lower prices but in fact were higher ones.

Note that when you are dealing with expiring in-the-money options, you face deadlines that limit how long you can wait to allow the stock price to improve to a more acceptable level before you must exercise; sales are usually contemplated to raise at least the cash necessary to pay the strike price and any associated taxes.

Incorporating holding requirements

If your board of directors imposes holding requirements for officers and directors, make sure you incorporate those requirements into your 10b5-1 plan and your calculations of how much stock to sell. Often, companies have internal policies that are more restrictive than what might otherwise be allowed by law.

Be familiar with your company’s insider-trading policies

Make sure you understand how the company’s insider trading policy could impact your plan. Some policies require that sales occur during open trading windows even through a 10b5-1 plan, while others prohibit planned sales entirely.

How will the market perceive your sales?

In many cases, you’ll be required to file forms publicly (Form 144 and/or Form 4) with the Securities and Exchange Commission announcing your sales (generally at the time of the sale or within days afterward). To institutional shareholders, sales by senior executives in accordance with a 10b5-1 plan (often indicated by a footnote on Form 4) can be a non-event.

Some companies, however, prefer to issue a press release (Form 8-K) to let the market know that sales are anticipated and that those sales do not reflect a negative view of the company, but are instead being done for personal planning purposes. Even with this, if you are a senior executive in the company, sales of company stock might indeed be viewed negatively by individual shareholders – especially if you are selling a large amount of stock and volume is relatively low. In the latter case in particular, you should consider alternatives such as a block sale or a secondary offering.

Often, the desire to sell frequently (especially if volume is limited) creates tension with filing requirements because most companies prefer to limit the number of filings. It’s important to coordinate with your company’s counsel when creating a plan to sell your stock.

J.P. Morgan has extensive resources to help senior corporate executives and board members deal with issues around their company stock. A J.P. Morgan represetative can help you think through these issues and put together a plan to divest from your stock, through a 10b5-1 plan or otherwise.

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