476 Making Key Strategic Decisions
will be a monthly management meeting designed to control his budget and to
narrow areas of research into the development of products with short test cy-
cles so as to drive for ward current earnings.
John Dough and Mary Manager meet for coffee a few weeks later. Each
has sold a modest number of shares as part of the IPO. John has purchased a
small sailboat, and Mary has made a down payment on a ski house. On paper,
each is worth millions of dollars, although the remaining balance of their
shares cannot now be resold because of the lockup for 180 days, and thereafter
can be resold only pursuant to specific SEC regulations because they are “af-
filiates” of an issuer of publicly traded securities.
They have to be careful what they say to reporters, investors, and securi-
ties analysts. They even have to be careful about what they say casually in con-
versation with friends and relatives, lest they inadvertently leak nonpublic
information which results in illegal insider trading profits. Someone who acci-
dentally “tips” or leaks material information to someone who improperly profits
from it is personally liable for that act.
Within 10 days of the IPO, Mary and John had filed with the SEC their
personal report on Form 3, disclosing the amount of company stock that each
owns of record and beneficially. Mary reminds John that these forms will have
to be updated periodically by filing other forms, Forms 4 and 5, with the SEC
whenever there is a material change in ownership. Section 16(b) of the Securi-
ties Exchange Act of 1934 will also require John and Mary to forfeit any profit
they make in so-called “short swing trading”; the law requires automatic dis-
gorgement of any profit made by corporate insiders who both buy and sell se-
curities of their company within six calendar months as an automatic
disincentive to trading by insiders based on their possible possession of mate-
rial inside information.
If John and Mary do go to sell their shares, they will always possess much
more information than the investing public. How can they protect themselves
against a claim that they abused that information by, for example, selling just
before the price of the stock fell based on poor earnings or excessive warranty
claims? They may be able to sell their shares of stock only in prespecified time
“windows” which follow immediately and brief ly after the systematic an-
nouncement of public information by the company, such as immediately fol-
lowing the filing of SEC Form 10-K or SEC Form 10-Q. Alternately, they may
adopt a preexisting Sales Plan under SEC Rule 10b5-1, which operates like a
doomsday machine: The stockholder who wishes to trade in shares of stock of
his or her company will set up in advance a program for purchasing or selling
stock on a certain date or at a certain price, and then the brokerage firm will
effect those transactions without the insider making any specific buy or sell de-
cisions at the point in time that the transaction actually occurs.
Finally, John and Mary must avoid acting together in the purchase, sale or
voting of stock, or joining together with others in that regard; the mere forma-
tion of such a “group” with respect to the stock of the company, if involving
persons owning 5% or more of the company’s stock, will trigger a requirement
that such event be reported by the filing of a Form 13D with the SEC.