The fallout continues for Intel Corp.—from class action suits to potential business losses—behind the news that there’s a security flaw in its computer chips. Part of the backlash centers around chief executive officer Brian Krzanich’s sale of millions of dollars’ worth of stock late last year, just months after the company learned of the chip problem.
Krzanich, like many executives, scheduled his stock sales with the U.S. Securities and Exchange Commission under a Rule 10b5-1 plan. These plans are meant to protect against insider trading accusations, so it’s typically a smart move to have company executives trade under them, said Sterling Miller, general counsel at marketing automation software company Marketo Inc., who approved stock sales in a previous GC role at Sabre Corp.
But from an outsider’s perspective, Miller added, when a company’s CEO makes several changes to a trading plan and dumps shares, all around the time when Intel certainly knew it had a problem, it doesn’t look good. “These are the types of optics that really give general counsel a lot to think about,” he said.
There are a number of ways that Miller and other attorneys said companies can manage their Rule 10b5-1 plans to avoid some of the criticism Intel’s CEO is now facing.
Financial filings from Intel show that its CEO has been trading pursuant to a 10b5-1 plan since at least June 2015. He adopted new 10b5-1plans in April 2016 and February 2017, before Intel was informed of the security vulnerabilities in June 2017. Krzanich again changed the terms of his plan on Oct. 30 of last year, and then on Nov. 29, he sold more than $39 million worth of stock, which brought him down to the minimum amount of shares the company requires him to hold.
It’s not clear which in-house attorneys and/or law firms were involved in the transaction, though the November filing was signed by attorney-in-fact Brian Petirs. Intel declined to provide information about Petirs and did not respond to a follow-up question about his connection to the company.
Despite the timeline, Intel maintains that Krzanich’s trades were “unrelated” to the security flaw in the chips. “[The sale] was made pursuant to a pre-arranged stock sale plan (10b5-1) with an automated sale schedule,” an Intel spokesperson said in an email to Corporate Counsel. “He continues to hold shares in-line with corporate guidelines.”
And on a Jan. 3 investor call, Stephen Smith, corporate vice president and general manager of data center engineering at Intel, said the company really doesn’t “anticipate any material impact” on Intel’s business or products from the chip issue.
Watch the Optics
With shareholders reportedly considering a suit against the company related to Krzanich’s stock sale and some lawmakers calling for an investigation into whether the transaction was improper, it’s clear that not all are convinced the transaction was innocent. More broadly speaking, while 10b5-1 plans are meant to shield a company from questions about stock sales, they are not a panacea when the facts are less than favorable.
Rule 10b5-1 plans have drawn negative attention, with some questioning whether they are being strategically used to cover up insider trading. Nevertheless, it’s quite common for executives to have 10b5-1 trading plans, Miller said. “It’s probably the best thing you can do if you’re an executive to allow you to trade without being accused of trading based on material nonpublic information,” he noted.
However, he warned, “you can still get questions because you can’t always help the timing.”
One way to limit raised eyebrows is for those tasked with implementing and managing these plans, often the general counsel in conjunction with other senior-level employees, is to enforce a lengthy timeline, said Alan Dye, a partner at Hogan Lovells, whose focuses include securities and corporate governance. By allowing as much time as possible between entering the plan and when a sale occurs, “I think you can minimize the second-guessing,” he said.
The value of these plans just isn’t as great if there’s a short timeframe, Dye said, and this is particularly true during a crisis. If, for instance, material information comes to light around the time when trades under the plan clear, a timeframe of 30 days may make it hard to explain that this info wasn’t available around a month ago, when the plan commenced, Dye offered.
A longer period of time “will often mitigate that suspicion that the plan was entered into with a desire to game the system,” agreed Joseph Hall, partner at Davis Polk & Wardwell and head of the firm’s corporate governance practice. As for what the right amount of time is, Hall said the most protective policy would be to enter into these plans during the first week of an open period for trading and then not allow the first sale to happen until the next open window.
Hall, who was not speaking about Intel specifically, added that allowing for frequent amendments to a trading plan can also create some concerns. “A well-managed policy would not let someone amend the plan just because they say they want to. You would want to see a good reason,” he said. “Absent being able to point to a real changed circumstance, I think you have to be really careful about it.”
Allowing executives to frequently change their plans is just asking for a higher level of scrutiny when bad news is disclosed, Marketo’s Miller said. “You put yourself in a hard position. And that’s a hard story to get ahead of,” he explained.