By JANET MCFARLAND, NICOLAS VAN PRAET, DAVID MILSTEAD
Saturday, November 17, 2018
Quebec's Autorité des marchés financiers (AMF) approved an application in September from Bombardier Inc. executives to delay publicly reporting their insider trading transactions under a new automatic share sale program that has become the focus of a probe by the securities regulator.
Bombardier asked for the reporting exemption after announcing Aug. 15 it had created an automatic share disposition program, which would allow 12 senior executives to exercise options and sell shares through an arms-length broker who would make the trades.
Share sales under automatic disposition programs have to be reported within five days, similar to other insider trading reports. But the Bombardier application approved in September by the AMF allows the trading to be disclosed just once annually, up to three months after the end of a company's fiscal year. Prior to that, investors have no way of knowing how many shares are sold at what price.
Companies seek an exemption from disclosing each trade because they argue the shares will be sold on an automatic schedule and no investment discretion will be applied. Many companies do not want to report a series of sales that leave the impression that top executives are making decisions to routinely sell their shares.
The Ontario Securities Commission has said it will consider allowing the disclosure exemptions if the insider can demonstrate the plan is automatic and does not allow for investment discretion.
Bombardier shares plunged 20 per cent to $1.67 on Friday in a massive sell-off as more than 72 million shares changed hands.
The AMF announced after markets closed on Thursday that it is reviewing stock transactions made by Bombardier executives since the share sale program was unveiled in August, not long after the company's share price hit a five-year high.
The program allowed executives to begin selling shares effective Sept. 17 through the arm's-length broker. Executives were allowed to provide general instructions about what they wanted to do with their stock options and shares when the sales program was created, but could not dictate the exact timing of trades.
Details about the parameters of those instructions - such as how many shares were to be sold at what time - are unclear.
The company announced plans on Nov. 8 for an additional 5,000 job cuts and two significant asset sales. It also updated guidance for free cash flow for 2018 that was about US$600-million worse than previously estimated.
Bombardier said it will only be able to reach its target of breaking even on a cash-flow basis this year by including the proceeds from selling its Downsview property in Toronto.
The news rekindled investor anxiety over the company's cash situation and sent its share price tumbling. Now, it has also raised concerns about the timing of executive share sales and whether Bombardier should have created an automatic share disposition program when it did.
Concordia University business professor Michel Magnan, who specializes in corporate governance issues, said executives may be shielded from accusations of trading with insider information by making their share sales automatic at predetermined time periods, but they can still face criticisms about the timing of their decision to set up the sales program in the first place.
"In the Bombardier case, the fact that insiders decided to set a program at a time when the stock was at a high and for a considerable number of shares does not inspire confidence, especially in the context in which it is being said that the turnaround is still under way," Prof. Magnan said.
Because of the AMF reporting exemption, which was granted Sept. 14, there is no public disclosure of how much money executives may have earned from exercising options or selling shares in September or October before the negative news was reported. The 12 top executives put more than 35 million stock options and other securities into the plan.
Quebec's securities regulator said on Thursday that it has asked Bombardier to stop any further insider transactions. Sylvain Théberge, spokesman for the AMF, confirmed Friday the regulator gave the reporting relief to Bombardier, but would not comment further on whether that application will be part of the investigation announced Thursday.
Bombardier spokesman Simon Letendre said Friday the company will disclose trading under the program "in due time," saying the disclosure isn't required until three months after the end of the year. Mr. Letendre said the program was set up at a time when trading was permitted under Bombardier's internal guidelines and under applicable securities law. Bombardier is co-operating with the AMF investigation, and Mr. Letendre said the program was reviewed by the AMF before it was established in August.
"We won't comment further on the transactions since the AMF review is ongoing," he said.
According to the AMF's decision granting the reporting exemption, the 12 executives participating in the program - including chairman Pierre Beaudoin, chief executive Alain Bellemare and chief financial officer John Di Bert - each said they were not aware of any "undisclosed material fact or material change about Bombardier" at the time the trading program was created.
The AMF said each executive also provided assurances that they were entering into the program "in good faith and not as part of a plan or scheme to evade the insider trading prohibitions" in Canadian legislation.
An analysis by The Globe and Mail shows Mr. Bellemare put securities worth $21.9-million into the share sale plan, based on the closing price of Bombardier's shares on Aug. 15 and the potential profit from stock options if they were exercised on that date.
Mr. Beaudoin contributed securities estimated to be worth $9.8-million on Aug. 15, while Mr.
Di Bert contributed securities worth $14.7-million. Divisional presidents David Coleal and Fred Cromer had securities worth $14million and $12.2-million, respectively.
Ted Dixon, who operates a service called Ink Research that tracks insider sales, says allowing the exemption from typical disclosure creates uncertainty for investors and lacks transparency, because sales can occur at different times and different prices and investors won't know for quite some time. "These plans aren't necessarily designed in uniform ways."
Bombardier has lost more than two-thirds of its market capitalization since its shares hit a fiveyear high of $5.43 in July as investor anxiety grows generally for heavily indebted companies.
Bombardier is working through delivery delays in its train unit and trying to get its new Global 7500 jet into service, both of which are affecting its cash position. The issues are short-term, the company has said.
"Over the past few months, many investors appear to be selling the stocks of companies with large debt levels and Bombardier is still working through its deleveraging process," said Michael Willemse, an analyst at Taylor Asset Management in Toronto. "We think the sell-off [in Bombardier] is significantly overdone."
Quebec shareholders rights group Médac called on the AMF to immediately revoke the authorization it gave for Bombardier's automatic securities disposition plan and to order that all trades done through the plan so far be made public. "This whole affair is directly undermining investor confidence," Médac spokesman Willie Gagnon said.
The CEO has played down the concerns, noting the company will end the year with US$3-billion in cash and that the turnaround plan is on track to meet its 2020 targets. Bombardier had long-term debt of US$9.1-billion as of the end of September. Its next major maturity is scheduled for March, 2020, when an US$850million bond comes due, according to Bloomberg data.