It is difficult to understand why the federal government and the province of Quebec have bent over backwards to accommodate Bombardier Inc. Even with massive federal and provincial loans, the corporation has been unable to rebound. Furthermore, its dual-class share structure insulates the board from being replaced when it is performing poorly. That is the governance background against which we should consider Bombardier’s Automatic Share Disposition Plan (ASDP), which allows executives to exercise their options and sell the resulting stock.
ASDPs permit insiders to make trades in accordance with pre-arranged instructions given when participants are not in possession of material undisclosed information. ASDPs thus have the effect of protecting insiders from the reputational harm that could accrue to them and the corporation if they trade, or are alleged to have traded, on the basis of material undisclosed information. ASDPs typically seek to ensure that improper trading does not occur during a blackout period (the period of time around which financial information is periodically released).
Corporations can implement ASDPs as long as their insiders meet certain conditions. At the time the ASDP is established, insiders must not possess material information relating to the issuer that is not generally disclosed and must provide a certificate to that effect. Financial advisers and other intermediaries executing the trades are not permitted to consult with insiders regarding any sales under the plan and the insiders cannot disclose information that might influence the intermediary’s execution of the trades contemplated under the ASDP.
The difficulty with meeting these conditions turns on ambiguity regarding when a piece of information becomes “material,” a threshold that is crossed when the piece of information would be reasonably likely to affect the market price or value of the securities. Given that this is a forward-looking test — a prediction — it is easy to imagine differing judgment calls regarding when and whether a piece of information reaches the materiality threshold. Insiders can possess information that they know will be material when the change occurs but may not be material at the current moment.
Back to Bombardier — a good example of the potential dangers inherent in ASDPs. Bombardier announced the establishment of its ASDP on Aug. 15, 2018 and its stock traded at $4.64. On November 8th, it announced a restructuring together with its third-quarter earnings. In particular, the corporation announced that it would be laying off 5,000 people worldwide, that it would sell both its Q400 turboprop aircraft program for about US$300 million and its flight-training business for about US$645 million. By Nov. 16, Bombardier’s stock had fallen to $2.09 and has been hovering roughly around $2.20 recently.
Normally, insiders must report an acquisition or disposition of the corporation’s securities within five days, but the AMF, Quebec’s securities regulator, initially approved Bombardier’s request to delay publicly reporting its insider transactions under the ASDP. The AMF stated that trading needed to be disclosed only once annually (within three months after the fiscal year end). Its reasoning was that timing of sales are pre-arranged and automatic with no discretion afforded to the insiders. Recently, however, the AMF ordered Bombardier to suspend all sales of shares under the ASDP.
Perhaps the AMF would agree that something does not seem quite right. ASDPs envision sales at predetermined time periods, giving the impression that a plan is transparent and operates above the ups and downs associated with the day-to-day running of a business. But Bombardier can still be criticized about the timing of its decision to set up its ASDP in the first place. Is it possible that Bombardier’s insiders knew about the massive layoffs and sales of major assets in mid-August when the plan was established? Such major events in a corporation’s life do not happen overnight.
ASDPs should be viewed with skepticism especially in corporations like Bombardier with dual class share structures. In those cases, outside shareholders have no opportunity to reelect a new board if the ASDP appears to be misused. And it is not only Bombardier shareholders who should be concerned; last year, the federal government loaned Bombardier $370 million (without a condition that Bombardier’s dual class structure be dismantled). Every Canadian taxpayer has an interest in this corporation.
The rationale underpinning insider-trading laws is to ensure that all investors have access to the same information when making their investment decisions. But ASDPs render it less likely that investors stand on an equal footing regarding knowledge of material information when insiders are making trades. It is time to review ASDPs and admit that, at least in dual-class-share firms, they render insiders unaccountable to the investing public.
Anita Anand is the J.R. Kimber Chair in Investor Protection and Corporate Governance at the University of Toronto’s Faculty of Law and is cross-appointed to the Rotman School of Business Twitter.com/anitaanand2.