Could the Droneshield controversy have been avoided? Here’s one possibility that could’ve reduced investor resentment over the share sales

The Droneshield controversy just won’t die. The executives who sold shares can apologise and explain themselves, but they cannot ‘unscramble the egg’. Even if they bought back all the shares they sold, they’d still be keeping a lot of the money for themselves given shares fell so much after they sold.

This article is not to condemn the company any more (that’s been done by others), but to suggest there is a way it could’ve been avoided. No, not by not selling shares at all (of course it would’ve been avoided, but it is too late for would haves now). But perhaps if Australia adopted a rule in place in America that could potentially help more foreign tech companies like Life360 choose the ASX and have less local companies go straight to the USA.

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Could the Droneshield controversy have been avoided if we had an equivalent of the SEC Rule 10b5-1?

Maybe, maybe not. Perhaps we Australians don’t like directors selling shares. But there’s also argument that they hated what happened with Droneshield because it was a surprise, there was no advance notice. And if we had an equivalent, at least there would’ve been notice. Maybe Droneshield shares would’ve fallen 15-20%, but not more than halved.

How does this work?

In the U.S., insiders (directors, founders, executives, major shareholders) can adopt a written trading plan under so-called Rule 10b5-1 that sets out in advance how many shares they will sell (or buy), at what price or pricing formula, and on what dates (or according to what algorithm).

Once that plan is adopted, as long as the insider had no material non-public information (MNPI) at the time of adoption — and provided they relinquish control (i.e. cannot later influence timing or size) — then later trades under the plan are generally protected from insider-trading liability. That is, even if the insider obtains MNPI after the plan is set up, the trades can go ahead under the “affirmative defence.”

The plan must be binding (or at least non-discretionary), and many U.S. companies now govern such plans with internal policy (pre-clearance, standardised templates, broker discretion and others).

Because the terms are predefined, insiders don’t need to “time” trades based on information. This can allow founders/execs to “sell down” gradually — rather than in one big block — which reduces market-shock risk and helps avoid signalling (whether negative or positive) that might be interpreted by other investors as a sign of insider knowledge or loss of faith.

How does that compare with Australia

Most ASX-listed companies adopt director trading policies establishing blackout periods, mandatory prior approval and notification procedures, and general rules about when insiders can trade. Droneshield had a policy too.

However, those trading policies don’t necessarily provide a formal “pre-committed trading plan” option (like 10b5-1) as a standard or mandatory feature. While a restricted person might put in place a non-discretionary trading plan, that requires explicit inclusion and often prior written clearance.

The notion of formally importing a system like 10b5-1 has been considered. But there is not one in place, so all that applies are insider trading regulations via the Corporations Act and disclosure rules mandated by the ASX.

Our conclusion

As we noted above, it may not have avoided a total panic as occured with DroneShield, but could have mitigate it. If insiders commit ahead of time to a sell-down schedule, then large sales wouldn’t appear sudden or opportunistic. The market knows such shares were always going to be sold, over time, under a plan. That can reduce panic or suspicion around large, poorly-timed sell-offs.

It reduces the risk of insiders being accused of using inside (non-public) information to time trades: once the plan is set up when there’s no non-public information, future trades are mechanically executed — insulating both the insider and the company.

For rapidly growing or high-volatility companies, predictable sell downs may smooth volatility and reduce “governance-shock” when insiders dump large blocks.

But of course, disclosure still matters. Unless the plan and its scale are disclosed (and reliably so), investors may still react badly when trades happen — especially if the plan would trigger a large volume relative to float.