The Inside Scoop on Insider Trading: US and Non-US Insider Trading Restrictions Valerie Diamond - Partner, Baker McKenzie, LLP Sinead Kelly - Partner, Baker McKenzie, LLP Rich Baker - Executive Director, CEP, Morgan Stanley Jon Stueve - General Counsel, Coupa Software 1
Agenda Introduction What is Insider Trading? US and non-us Considerations How are Equity Plans and Awards Impacted? Use of Rule 10b5-1 Trading Plans Best Practices and Tips for Equity Plan Sponsors and Administrators 2
Introduction: A Bird s Eye View How do insider trading laws impact equity plans? The legal team s and outside advisor s role The plan administrator s role Broker involvement with equity plans and trading Coupa Software recent IPO company 3
What is Insider Trading? Trading by Company insiders (or others with inside info) in equity securities of the Company Illegal insider trading: Insider s use of material non-public information (MNPI) to buy or sell securities in breach of a fiduciary duty or other relationship of trust and confidence Insider s tipping or making recommendations to others based on MNPI Liability based on antifraud provisions of Exchange Act Section 10(b) Rule 10b-5 s prohibition on trading on the basis of (i.e., when aware of) MNPI 4
What is Insider Trading (cont d)? Controlling Person Liability Potential liability for issuer company when person controlled by issuer engages in illegal insider trading SEC enforcement action Private plaintiff litigation Potentially severe penalties 5
Non-US Insider Trading Issues Liability under insider trading laws based on either: 1. Employee/insider s residency, or conduct of prohibited conduct, in the applicable country; Persons connected to corporation reputably presumed to have insider information in some countries 2. Trading of shares on local country exchange Consider impact of involuntary listing by broker Prohibited Trades Generally similar to the US, but some countries consider grant of award or exercise of option a trade Illegal insider trading MNPI may have broader definition than in US e.g., consider reasonably expected future events, intermediate steps in process which results in a prohibited transaction 6
Non-US Insider Trading Issues EU Market Abuse Directive (July 2016): 1. If premium voluntary listing on EU exchange, significant disclosure and additional restrictions apply Disclosure of insider information after the fact, insider list disclosure, special restrictions on trades and actions by senior managers 2. If involuntary listing on EU exchange, dealing restrictions apply with potentially broader definition of trades 3. UK considers Nasdaq transactions as subject to insider-trading and market-manipulation rules in the UK Criminal Justice Act Potentially severe civil and criminal penalties in many countries 7
US Rule 10b5-1 Affirmative defense under Rule 10b5-1(c) Pre-arranged trading plan Entered into when not in possession of MNPI Specifies the amount and price of securities to be traded, or formula No subsequent discretion over trade 8
Impact on Equity Plans & Awards Insider trading restrictions impact market purchases and sales of stock, including under equity plans Non-market transactions generally exempt - but consider non-us issues May structure market transactions to comply with 10b5-1 9
Impact on Equity Plans & Awards Employee Stock Purchase Plan (ESPP) Time enrollment period within an open window Purchase can occur even in blackout period 10b5-1 theory Consider restriction of participation election changes Shares issued from treasury no market purchase, avoids above issues Dividend reinvestment Automatic or voluntary? 10
Impact on Equity Plans & Awards Restricted Stock Units (RSUs) Main issue is tax withholding sell-to-cover Try timing vesting outside of blackout period Structure RSU agreement with mandatory sell-to-cover meet 10b5-1 rules Need to enter into RSU agreement in open window Consider broker issues with forced sale consents, etc. Address in formal 10b5-1 plan RSU agreement defers delivery of shares to end of blackout when sale can occur 409A considerations Use alternative withholding methods if vesting in a blackout withhold shares, from salary, etc. French tax qualified RSUs sales of shares prohibited in closed period 11
Impact on Equity Plans & Awards Restricted Stock Awards (RSAs) Issues with use of sell-to-cover withholding Similar to RSUs, but with potential tax at grant (83(b)) RSA agreement/10b5-1 approach more limited Need advance pre-grant consent to sale Standalone 10b5-1 plan Again, talk to your broker! Note RSAs generally not advisable outside US often taxed at grant (not elective) 12
Impact on Equity Plans & Awards Stock Options Cashless exercises via broker must be restricted unless scheduled under 10b5-1 plan Exercise via stock tender, net exercise, cash purchase generally okay Common issue option expiring during a blackout period (especially with off-schedule /special blackout) Consider drafting grants to automatically extend term in such case subject to 409A compliance Provide for auto-exercise of expiring options? Address permitted exercise methods in insider trading policy Need to minimize litigation risk French tax-qualified stock options no grants permitted in closed periods 13
Use of 10b5-1 Trading Plans Coupa 10b5-1 program through Morgan Stanley 10b5-1 specific appendix to insider trading policies Single broker implementation, separate from Stock Plan record keeper Collaborative adoption process between executives, Morgan Stanley, Coupa Stock Administrator, and Coupa legal Plans include common shares, options & net RSU sales ESPP shares preferred to be included after purchase 14
Use of 10b5-1 Trading Plans Key industry trends from survey by Morgan Stanley and Shearman & Sterling Company involvement 98% perform some review & approval Only 12% involve the Board in approvals Termination of plans 55% reported that they allowed early termination Modifications 40% allowed modifications, but 52% of those restricted the frequency of modifications Trades outside a plan 56% allowed open window trades during a plan term Need to verify shares aren t pledged to plan Rule 144 volume limits could cause issues 15
Best Practices & Tips Documentary Tips Plan prospectuses and communications should discuss trading restrictions and insider trading laws especially for ESPP Sub-plans, award agreements/country-appendices should address legal requirements, including non-us / France Address equity plan transactions in Insider Trading Policy Cover non-us laws in Insider Trading Policy 16
Best Practices & Tips (cont d) Operational Tips Plan ahead for withholding methods for RSUs/RSAs and work with brokers on sell-to-cover methods and any 10b5-1 plans Provide employee training on insider trading issues Don t forget Form 4, Rule 144 and other separate requirements re sale of shares Remember that short-swing profits rules continue to apply for executives and directors even if trade is permitted under Insider Trading Policy or trading plan 17
Best Practices & Tips (cont d) Operational Tips (cont d) Keep in mind non-us considerations re grants and sale of shares: Local insider trading laws China/SAFE requirements and other exchange controls Closed period restrictions under tax-qualified plans ensure grant policy considers when French qualified option grants are made Make sure broker is informed of restriction on sales for French qualified RSUs 18
Thank you! Valerie Diamond Partner, Baker McKenzie, LLP valerie.diamond@bakermckenzie.com; 415.576.3086 Sinead Kelly Partner, Baker McKenzie, LLP sinead.kelly@bakermckenzie.com; 415.591.3241 Rich Baker Executive Director, CEP, Morgan Stanley rich.baker@morganstanley.com; 646.536.0477 Jon Stueve Coupa Software, General Counsel jon.stueve@coupa.com 19