The founder and chairman and the lead independent director of Green Mountain Coffee Roaster (GMCR) both were removed from their leadership positions as a result of margin call sales of company stock earlier this month that the company termed "inconsistent with" the company's insider trading policy. According to the company's press release, Mr. Robert P. Stiller was removed as chairman and Mr. William D. Davis was removed as independent lead director because they had margin call related stock sales totaling 5.548 million shares. These forced sales were related to margin loans, which were secured by pledges of Mr. Stiller's and Mr. Davis' GMCR stock and were triggered by recent GMCR stock price declines (the stock dropped almost 50% after the company released quarterly results and lowered its fiscal year forecast). The sales occurred at a time when the trading window in GMCR stock was closed under the company's internal trading policy. Also, it was discovered that Mr. Davis had pledged shares after the internal trading policy had been amended to prohibit pledges of company stock (existing pledges were grandfathered). Margin loans and stock pledges by directors and officers raise several issues to consider under federal securities laws:

  • Insider Trading. Pledges and margining of securities may be viewed as sales under securities laws; accordingly, stock should never be pledged or margined by insiders when they are in possession of material, non-public information. Similarly, if the insider fails to meet a margin call or defaults on the underlying loan, such securities could be sold at a time when the insider is aware of material, non-public information and potentially result in an insider trading law violation. Best practices suggest that an issuer's insider trading policy prohibit the holding of the issuer's securities in a margin account or the pledging of such securities as collateral for a loan. Exceptions to this policy should rarely be given and then only if the insider is able to provide evidence of sufficient current and future financial ability to repay the loan without resorting to the sale of the margined/pledged stock.
  • Section 16 Issues. Generally, depositing stock in a margin account or a bona fide pledge to secure a loan is not a "sale" for purposes of Section 16 of the Exchange Act and is not reportable.1 However, the sale of stock as a result of a margin call or foreclosure is viewed as a sale by the insider for Section 16 purposes and is reportable within two business days on a Form 4 report. The insider also will be liable for any profit under Section 16 if the sale is within six months of a matchable purchase of the same class of stock.2
  • Proxy and Registration Statement Disclosures. Issuers must disclose in the stock ownership table in any proxy statement and registration statement they file the amount of shares that have been pledged (including in margin accounts) by directors and executive officers.3
  • Schedule 13D. If the insider is required to file a Schedule 13D, pledges of securities are required to be disclosed as well as "material" sales4 that result from any margin call or foreclosure. SEC Rule 13d-2(a) provides that acquisitions or dispositions of 1% or more of the outstanding class of securities will be deemed material, although lesser amounts may be deemed material depending upon the facts and circumstances.
  • Form 8-K Report. Under more extreme circumstances, the sale of margined or pledged securities of an insider could result in a change of control of the issuer, requiring the filing of a Current Report on Form 8-K under Item 5.01.5

Footnotes

1. See Securities Exchange Act Release No. 34-18114, n. 64 (1981).

2. See Alloys Unlimited, Inc. v. Gilbert, 319 F. Supp. 617 (S.D.N.Y. 1970).

3. Rule 403(b)(3) of Regulation S-K, 17 CFR §229.403(b)(3).

4. Rule 13d-2(a), 17 CFR §240.13d-2(a).

5. See e.g., Current Report on Form 8-K of CBS Corporation, (May 5, 2009), available at http://www.sec.gov/Archives/edgar/data/813828/000081382809000180/form_8k.htm.

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