Why After-Hours Trading Raises Risk for Directors
from Winter 1999
by John Engen
The growth of online brokerages that open up after-hours trading to individual investors creates new risks for directors. High on the list: class-action lawsuits that stem from giving some investors an informational leg up. If nothing else, board members must more closely guard against loose lips. Says Washington, D.C. attorney Thomas Smith, a corporate litigation partner at Ropes & Gray: “Directors are forced to be even more circumspect and judicious about talking shop in public” lest somebody goes home and trades that night on a tidbit picked up over cocktails.
The broader issue, however, lies in the already thorny area of formal disclosure. Companies listed on the New York Stock Exchange are required to “release quickly” information that could have a material impact on share prices and to “promptly dispel” unfounded rumors. In practice, however, about 70% of companies try to moderate the impact on their stock price by releasing earnings and other news after the major markets close, according to Eugene Beard. Beard is vice chairman of the Interpublic Group of Companies, a New York-based advertising and public relations holding company and part of an NYSE/Nasdaq committee studying the impact of longer trading hours.
With experts predicting full-out 24/7—or at least 24/5—trading in the near future, boards must be even more cautious and proactive in releasing news to avoid leaks and share-price shocks. “If a company holds back until morning, material information that could push a stock price down, I could see a class-action lawsuit being brought against the directors by everyone who suffered losses buying the stock the previous night,” says attorney Ron Glancz, a partner at the Washington, D.C. law firm Venable Baetjer & Howard. The argument: “Those directors should have known that someone would buy the stock in after-hours trading.”
Says Christine Callies, chief equity strategist for Credit Suisse First Boston: “If I were on a board, I would pre-announce controversial news more often to give investors time to brace for it. And I’d probably arrange for that news to be disseminated during the main session, because liquid markets are generally less volatile.”
Expect the Securities and Exchange Commission to scrutinize directors more closely in the name of shareholder protection. Commissioner Laura Unger recently warned that the SEC will likely zero in on “the information-gathering disparity between institutions and individual investors who participate in after-hours markets.”
Unger also hinted that companies with overseas operations might be required to organize some type of global press release system. If a U.S. multinational’s Asian subsidiary determines it will have materially lower revenue for the next quarter and puts out a local press release, she says, “foreign investors could have an informational advantage over U.S. investors.”
Another dicey area is pricing equity and debt issues. With no true market close, “the pricing window will be very narrow,” Beard notes. The same holds for timing stock splits or buying stock for employee plans. Beard’s committee is exploring a trading day that begins at 9 a.m. and ends at 4 p.m., then re-opens for four hours at 5 p.m. This would give companies a window for making important announcements. But companies that traditionally purchase shares for ESOP, pension, or 401(k) programs after the close on a given day, for instance, will have some technical choices to make. “Do you price it at four o’clock when the primary market closes, when it reopens at five o’clock, or at nine o’clock?” Beard asks. “Or do you average the three together?”
In a real 24/7 environment, the choices could get even tougher. The SEC is expected to issue after-hours guidelines for corporations early next year. But don’t expect all questions to be answered. Many issues, Glancz says, will still be left to boards’ discretion.
