The Advisors' Blog

– Brink Dickerson and David Meyers, Troutman Sanders

We suggest inclusion of the language below in insider trading policies as a possible response to the new ISS voting guidelines for pledging and hedging. Companies will need to decide whether to narrow the language to just “executive” officers (ISS uses the term “executives”) and whether to define “significant” (ISS does not). Also, a few companies already prohibit all pledging, and not just significant pledging, and companies may want to consider that approach as well, although we view that approach as a bit harsh.

Board members and officers are prohibited from, directly or indirectly, [pledging and hedging any of the Company’s equity securities] [(1) pledging a significant number of the Company’s equity securities, or (2) hedging with respect to any of the Company’s equity securities]. For these purposes, [(a)] “pledging” includes the intentional creation of any form of pledge, security interest, deposit, lien or other hypothecation, including the holding of shares in a margin account, that entitles a third-party to foreclose against, or otherwise sell, any equity securities, whether with or without notice, consent, default or otherwise, but does not include either the involuntary imposition of liens, such as tax liens or liens arising from legal proceedings, or customary purchase and sale agreements, such as Rule 10b5-1 plans[, and (2) “significant” means [the lesser of] 1% of the Company’s outstanding equity securities [and 50% of the equity securities of the Company owned by the board member or officer]]. Also for these purposes, “hedging” includes any instrument or transaction, including put options and forward-sale contracts, through which the board member or officer offsets or reduces exposure to the risk of price fluctuations in a corresponding equity security.

“Equity securities” include common stock, voting preferred stock and options and other securities exercisable for, or convertible into, settled in, or measured by reference to, any other equity security determined on an as-exercised and as-converted basis.

The equity securities attributable to a board member or officer for these purposes shall include equity securities attributable to the board member or officer under either Section 13 or Section 16 of the Securities Exchange Act of 1934. [Equity securities that are pledged shall not be counted toward board member and officer ownership requirements.]