Securities Law Blog

Brian Krzanich, the chief executive officer of Intel Corp., has been subjected to recent scrutiny in the business press regarding the timing of his stock option exercise and subsequent sale of 644,135 shares and sale of an additional 245,743 shares of stock at the end of November 2017. The sales were reported to have occurred just a few weeks before Intel disclosed certain security flaws with its chips making them vulnerable to hackers.  In response to the scrutiny, an Intel spokesperson last week said “[The sales were] made pursuant to a pre-arranged stock sale plan with an automated sale schedule.” 

Executives routinely set up stock sale plans under Rule 10b5-1 to sell up to a predetermined number of shares at a predetermined price.  Mr. Krzanich had previously sold shares under similar plans since 2015.  However, in this case, questions surround the timing of the instructions for the sales, which were determined in October 2017, and the size of the transactions, which were significantly larger than his sales in previous years and reduced his holdings by almost 50%.  Intel allegedly first learned of the security flaw with its chips in June 2017, well in advance of Mr. Krzanich’s sale instructions.  Given the conditions that must be met when entering into a Rule 10b5-1 plan, the SEC is likely to examine these transactions in order to determine what information Mr. Krzanich knew and when he knew it.

Rule 10b5-1, adopted by the SEC in 2000, provides insiders of a publicly traded company an affirmative defense to the assertion that a purchase or sale of a security was made on the basis of material non-public information about the security or the issuer.  This rule generally permits an individual or entity to enter into a prearranged written plan with a broker, bank or other third party for future transactions that sets forth non-discretionary instructions with respect to the amount, price and date for the proposed transactions (or includes a written formula, algorithm or computer program for determining the amount, price and date), provided that such plan is established in good faith at a time when that person or entity is not in possession of material non-public information about the security or the issuer.  Insiders who have trades executed on their behalf in accordance with a properly established plan have an affirmative defense against accusations of insider trading, even if such trades are executed at a time when the individual or entity may be aware of material non‐public information that would otherwise subject that individual or entity to liability for insider trading under Section10(b) of the Securities Exchange Act of 1934 or Rule 10b-5.

A Rule 10b5-1 plan must be entered into in “good faith” and not as part of a plan or scheme to evade the prohibitions of Rule 10b-5.  It is this “good faith” provision that permits the SEC to challenge the affirmative defense when it suspects abuse of the rule.  A Rule 10b5-1 plan should generally not be used immediately after it is adopted.  It is recommended that the plan include a “waiting period” (typically at least 30 days) before any trades occur to prevent any appearance of impropriety that the person or entity may have been in possession of material non-public information at the time the plan was established.  However, merely including a waiting period as part of the plan will not legitimize the plan if the plan was adopted while in possession of material non-public information. 

A Rule 10b5-1 plan may be amended, provided that the person or entity modifying the plan is not in possession of material non-public information at the time of the modification and all other elements required at the inception of the plan are met.  Although permissible, amendments should be avoided, if possible, so as to limit the perception that the modifications are being done as a means to manipulate the timing of sales under the plan to benefit from material non-public information.

Based upon press reports, it seems that there are questions to be investigated with respect to Mr. Krzanich’s stock sales, such as whether he was in possession of material non-public information in October 2017 when he modified the instructions to his plan.  Even if Mr. Krzanich is ultimately absolved of any illegal activity, at a minimum, the timing of his transactions has resulted in negative publicity for him and Intel as well as significant expenses to respond to these claims and dealing with any investigation.

Mr. Krzanich’s experience should serve as a reminder to insiders about the importance of properly entering into or amending a Rule 10b5-1 plan, including following all applicable issuer procedures and obtaining any required consents.