Insider Trading Laws and Employee Stock Compensation Randall J. Fons and James J. Beha II

• Pages: 185-194

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CHAPTER 12

Insider Trading Laws and

Employee Stock Compensation

Randall J. Fons and James J. Beha II

Public companies frequently compensate corporate officers and directors

with company stock in the form of employee stock options, restricted

stock, or stock grants. As a result, officers and directors frequently need

to transact in company stock, either by exercising options or selling stock.

This chapter addresses two issues related to the interaction between

employee stock compensation and insider trading laws. First, we discuss

the application of insider trading laws to an employee exercising employee

stock options while possessing material non-public information. Second,

we discuss 10b5-1 plans, written plans for future purchases or sales of

company stock, which (1) permit company insiders to sell stock without

violating insider trading rules and (2) provide an affirmative defense to

charges of insider trading.

1. The Application of Insider Trading

Laws to Employees Exercising

Employee Stock Options

Several years ago, following the options “backdating” scandal, many

commentators considered the potential insider trading implications from

granting employee stock options to officers and directors when those

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