Corporate Spinoff: Part 5 - Insider Status Change, Trading Restrictions & Privacy

October 06, 2017

Welcome to the fifth part of the Spurstone Executive Wealth Solutions 6 part series discussing executive compensation negotiations and benefit considerations during a corporate spinoff. Through this series we are covering topics to help you get a solid understanding of how your risks could increase or decrease, where you may become more "handcuffed" and major issues to understand and evaluate.

Let us know what you think,

Thanks in advance.

Part 5 - Insider Status Change, Trading Restrictions & Privacy

According to Investopedia, the definition of an Insider is as follows: "A director or senior officer of a company, as well as any person or entity that beneficially owns more than 10% of a company’s voting shares. For purposes of insider trading, the definition is expanded to include anyone who trades a company's shares based on material non-public knowledge. Insiders have to comply with strict disclosure requirements with regard to the sale or purchase of the shares of their company."

While at your original employer, you may or may not have been classified as an Insider but it is important to be aware that your classification may change with the new Spinco. A great example is a Vice President or Director of a division within a large multi-national company. While that person may not have been considered an insider at the larger company, if a spinoff occurs, their position may change or they may have access to “inside information” that subjects that person to additional restrictions and requirements in regards their company stock. Stringent securities laws are in place to prevent insiders from taking advantage of inside information and their position at the company so it is absolutely crucial insiders recognize and abide by these rules.

Most publicly traded companies will have strict, written guidelines as to how and when insiders can trade in company stock. Typically they will be limited to trading during "open widows" approved by the company usually lasting two to four weeks immediately following an earnings release. Depending on your position within the company or how your company manages insider trading, you may still be required to get specific legal approval prior to trading. One strategy often used to address these issues is the implementation of a 10b5-1 trading plan. While too lengthy of a topic to dig into today, a 10b5-1 plan allows you to sell a predetermined number of shares at fixed intervals, and diversify your holdings over time in a legal and compliant manner.

Another important issue for consideration is Privacy. Privacy is of enormous importance to our executive clientele and is an issue that must be evaluated when going through a spinoff that may result in you having a more senior or publicly elevated position at the new spinco. According to the SEC, "The federal securities laws require clear, concise and understandable disclosure about compensation paid to CEOs, CFOs and certain other high-ranking executive officers of public companies. Several types of documents that a company files with the SEC include information about the company’s executive compensation policies and practices." Why is this critical to understand? If you were the CFO of a division within a multi-national corporation, it is unlikely your compensation has been publicly disclosed. Now that you are the CFO of the new publicly traded spinco, your compensation will be released for the entire world to see. This means more good and bad people can have knowledge of your wealth and could put you and your family in any number of undesirable situations in the future. There may be no way to avoid this but there are ways to ensure you are protecting your family and also compensated for these facts. Ultimately, there will be many changes with the new spinco and your ability to adjust and be flexible with those changes may be limited due to your new role. Be sure you understand the complexities of these new opportunities and have the right team of advisors to capitalize whenever possible.

Check back next week for part six in which we will be discussing preparing to negotiate for your unique needs and family goals.

If you would like to privately discuss your personal executive compensation planning, including ways to potentially reduce risk or mitigate taxes, contact our team today.


Tim Golas
Spurstone Executive Wealth Solutions

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.