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Restricted Stock Vests During a Blackout

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May 12, 2011 | Rachel Murillo

Restricted Stock Vests During a Blackout

Companies impose trading blackouts prior to the public release of information that could influence trading decisions on company stock as a safeguard to avoid questionable trading in advance of significant corporate developments. Typically, these trading blackouts will regularly occur in advance of quarterly financial disclosures, but may also be imposed in advance of potential corporate transactions.

There are several situations where the blackout period could be problematic for both the company and employees--other than the obvious inconvenience of having to wait for an open trading window. One of these issues is what to do about restricted stock vests. When a restricted stock unit or award vests, taxes are due on the income from that vest. If trading is absolutely prohibited during the blackout, the issue of how to cover the taxes due becomes a problem. There are, however, a few solutions to consider.

First, you can try to ensure that no vesting ever takes place in a blackout. This means not only timing your vesting, but ensuring the vesting is never modified by a leave of absence or change in status. This also doesn't help if you have an unscheduled trading blackout. However, this strategy is still a good idea in general even if your company is employing other approaches because it will reduce the number of instances where restricted stock is vesting in a blackout period.

Second, you can require employees to remit shares back to the company to cover the tax obligation, either for every vest or only for vests that take place in a blackout period. It is easier to get your legal counsel and auditors to be comfortable with a required share withholding because there is no market transaction. There are, of course, considerations for this tax remittance such as calculating minimum statutory tax rates and the availability of cash that may make this an undesirable choice for your company.

Third, you can disallow any choice in the tax withholding method. You may or may not want to also have Rule 10b5-1 language built into your grant agreements to help secure an affirmative defense against allegations of insider trading. If you allow a choice it is conceivable that this could be manipulated, particularly if the company permits a choice between paying cash for the taxes and another method. For example, if a person knows that the company stock will fall as a result of an upcoming announcement and happens to have restricted stock vesting, she could choose to sell or trade shares for taxes instead of pay cash knowing that this would be the best price she'll get for the shares for a while. More likely, however, is that an employee would make that decision based on personal circumstances like an unexpected expense. If an employee changed from paying cash to selling shares and then the stock happened to fall drastically after financial disclosures, there would be a risk of the appearance of making that decision based on inside information. By removing the choice, you help to eliminate the appearance of insider trading.

You may also have a combination of these methods, such as having a default tax payment method, but not permit any change inside a blackout period. This may work for your non-insiders, but may require special attention for your Section 16 insiders. If this isn't enough for your legal team or auditor, consider requiring Section 16 insiders to include the restricted stock vests as part of a Rule 10b5-1 trading plan.

Also, whatever your approach is, don't forget to check the verbiage in your insider trading policy. If you will be permitting remitting selling shares to cover taxes in a blackout period, it's best if your insider trading policy clearly indicates this exception.


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