FLOWSERVE CORPORATION Directors and Officers
Restrictions on Trading in Company Shares
As a director or officer of Flowserve Corporation (the "Company"), your purchases and sales of Company shares are subject to restrictions imposed by federal securities laws. These same restrictions may also apply to a director's or officer's spouse and minor children (as well as relatives and in-laws who reside with him/her) and to entities in which he/she has an interest (such as trusts, estates, corporations or partnerships). The purpose of this memorandum is to remind you of certain matters that must be considered each time you purchase or sell Company stock.
I. TRADING BASED ON "INSIDE INFORMATION".
The SEC and the courts have taken strong positions to prevent insiders from making trading profits on the basis of inside information not available to the general investing public. It is important, therefore, that before a director or officer trades in Company shares, a determination be made that there exists no undisclosed material information which is likely to affect the market price of the Company's shares. Not all directors or officers are simultaneously aware of all important developments in the Company's business or financial condition. Troublesome situations may arise when officers or directors trade in securities of their companies immediately prior to the announcement of important developments even when the person's trade was perfectly innocent because he/she was not aware of the significant development.
Inside information -- undisclosed material developments -- should be disclosed only to persons who need to know such information in furtherance of a Company objective. The disclosure of inside information to any person outside the Company, who utilizes such information in purchasing or selling Company shares, may result in a violation of the federal securities laws by the person who disclosed the information.
Further, trading by directors and officers should not take place immediately after public disclosure of materially important information because it takes time for such information to be disseminated and absorbed by the investing public. Thus, the timing of purchases or sales must be carefully considered. There are no hard and fast rules as to how long a director or officer should wait after a public announcement before trading. The NYSE and the SEC merely state that he/she must wait until the market has absorbed the news and has reacted. The American Stock Exchange suggests a 24-hour wait where the information is complex and a 48-hour wait if the information is not widely disseminated.
There are particular times when it is normally appropriate for a director or officer to purchase or sell Company stock. Assuming you do not possess any
undisclosed material information concerning the Company, trading will generally be appropriate during the 10-day period commencing three days after the Company has publicly released its quarterly earnings results.
Due to the fact that not every officer may have the same information about a pending material event impacting the Company, it is Company policy that each director and officer contact Ronald F. Shuff or, in his absence, Renée J. Hornbaker, prior to buying or selling any Company shares, or any interest therein, for either himself/herself or any family member.
II. RESTRICTIONS ON BUYING AND SELLING AT A PROFIT IN A SIX
MONTH PERIOD -- "SHORT SWING" PROFITS.
A “short swing" profit under Section 16(b) of the Securities Exchange Act of 1934 (the "1934 Act") is any profit realized by a director or an officer from the purchase and sale, or sale and purchase, of Company shares within any period of less than six months. The Company may sue to recover this profit, or, if the Company does not initiate suit, a shareholder (usually prompted by an attorney who tracks director and officer stock reporting) may sue to recover the profit for the Company.
Before selling Company stock, a director and officer must look back six months to determine that neither he/she, nor members of his/her household and entities in which he/she has a specified interest, have made any purchases of Company stock at a lower price during the preceding six month period. For six months after a sale he/she must make sure no such purchase occurs. If he/she is about to make a purchase, he/she must look back six months to determine that neither he/she, nor members of his/her household and entities in which he/she has a specified interest, have made a sale of Company stock at a higher price during the six month period, and for six months after the purchase he/she must make sure that no such sale occurs.
Section 16(b) is an absolute prohibition against purchase and sale or sale and purchase at a profit within less than six months. Innocence or good faith is not a defense to liability. It is reasonably accurate to say that no one intentionally violates Section 16(b). Violations usually result through inadvertence or failure to understand that a particular transaction is a purchase or a sale.
III. FORM 3, FORM 4 AND FORM 5 REPORTS.
Under Section 16(a) of the 1934 Act, a director or officer must report his/her beneficial ownership of Company shares on Form 3 within 10 days after he/she first becomes a director or officer. The report must also contain information about puts, calls, or options covering shares of the Company owned by or granted to a director or officer.
After filing a Form 3, a director or officer must, in general, report on Form 4 any subsequent acquisition or disposition of Company shares (whether by purchase, sale, stock split, stock dividend, exercise of option, gift, or otherwise) and of puts, calls and options on Company shares within 10 days after the end of the month in which the acquisition or disposition occurs.
Certain acquisitions and dispositions of Company shares, including those under qualifying stock plans, are eligible for alternative filing under Form 5, which is an annual "catch up" filing due by February 14 for prior calendar year activity.
Due to the complexity of the filing rules, directors and officers should execute a power of attorney form which authorizes Ron Shuff and Renée J. Hornbaker to file on their behalf as appropriate.
The SEC has special rules which apply to directors and officers who participate in certain Company sponsored stock plans, as summarized below.
A. Automatic Dividend Reinvestment and Stock Purchase Plan (the
"Reinvestment Plan”).
1. Reporting. A director or officer is not required to file a Form 4 each time he/she acquires shares under the Reinvestment Plan through the reinvestment of Company dividends. But, whenever you file a Form 4 or Form 5 because of any other transaction involving the Company’s shares, you must include any otherwise unreported shares acquired through the Reinvestment Plan in your end-of-period holdings.
2. "Short Swing" Profits. The purchase of shares under the Reinvestment Plan through the reinvestment of Company dividends is not a purchase for purposes of the "short swing" profits provisions of the 1934 Act. 3. Note Carefully. The Reinvestment Plan allows participants to make
voluntary cash deposits under the plan and to have these funds applied to the purchase of Company shares. Any purchase of shares by means of voluntary cash deposits must be reported on Form 4 and is a "purchase" for purposes of the "short swing" profits provisions of the 1934 Act.
B. Flowserve Corporation Retirement Savings Plan (the “Savings Plan”).
1. Directors Ineligible. Non-employee Directors are ineligible to participate in the Savings Plan, a qualified Section 401(k) plan.
2. Participating Officers. Special rules apply to participating officers, who should see Ronald F. Shuff, General Counsel, about participation.
C. Stock Option Plans (the "1989, 1997 and 1999 Plans”).
1. Grant of Option or Stock Appreciation Right. The grant of an option or stock appreciation right under the 1997 or 1999 Plans is not required to be reported on Form 4 and is not a purchase for purposes of "short-swing" liability determination. Such a grant may be reported on Form 4, but it must be reported on the next Form 5 to the extent previously unreported.
2. Exercise of an Option. The exercise of an option under the 1989, 1997 or 1999 Plans (including a qualifying exercise to defer receipt of the underlying shares pursuant to the 1997 or 1999 Plans) is required to be reported on the next otherwise required Form 4 or Form 5, whichever is earlier. It, however, is not a purchase for purposes of the "short-swing" profits provisions discussed above.
3. Payment of Option Price with Shares. Under the 1989, 1997 and 1999 Plans, an optionee may use Company shares owned by him/her ("already- owned shares") to pay all or any portion of the option price. When you use already-owned shares to exercise an option, the surrender of the shares is not treated as a sale for the purposes of the short-swing profit provision. However, this delivery must be reported on the next otherwise required Form 4 or Form 5, when the acquired shares are reported, so that your net ownership is accurately disclosed. 4. BW/IP Options. Outstanding options granted under BW/IP’s Long-Term
Incentive Plans and Non-Employee Directors’ Stock Option Plan that were assumed by Flowserve Corporation are subject to the reporting requirements discussed above.
D. Restricted Stock.
1. Grant of Restricted Stock. The grant of Restricted Stock, whether or not deferred, must be reported on Form 5, but it is not a purchase for the purpose of "short-swing" profit rules. The grant may be earlier reported on Form 4, if desired.
2. Forfeiture. The forfeiture of Restricted Stock for any reason must be reported on Form 5, or alternatively on the earlier Form 4, but it is not considered a sale for the "short-swing" rules.
3. Vesting. The vesting of Restricted Stock need not be reported nor considered for purposes of the "short-swing" rule.
E. Director Fee Deferrals as Common Stock.
1. Quarterly Deferrals. If a director wishes to defer his/her quarterly retainer/fees in the form of Flowserve stock, he/she may do so, provided this election is made at least six months in advance. The quarterly purchases of stock by the rabbi trust for the director's deferral account must be then annually reported on Form 5 or voluntarily reported earlier on Form 4.
IV. RESALES UNDER RULE 144.
The SEC considers directors and certain executive officers of the Company to be "affiliates" of the Company. Accordingly, with rare exceptions, all sales of Company shares by a director or such an officer must be made in accordance with SEC Rule 144. For a sale to qualify as a Rule 144 sale, several procedural steps must be satisfied. One procedural step is that the seller must file a Notice of Proposed Sale on Form 144 with the SEC if, during a three month period, the number of shares sold will exceed 500 or the aggregate sale price of the shares sold is expected to exceed $10,000. The Rule 144 Form must be filed before or at the same time the sale order is placed with a broker or the transaction is executed with a market maker in Company shares. While most brokers have streamlined procedures which make execution of a Rule 144 sale relatively simple, it is most important that you and your broker recognize at the outset that your sale must be made in accordance with Rule 144.
V. SHORT SALES.
Section 16(c) of the Securities Exchange Act of 1934 prohibits a director or officer from selling Company shares "short" or selling "against the box". A "short sale" is a sale by a person who does not own the shares sold and who borrows the shares for delivery. A "sale against the box" is a transaction by a person who owns the shares sold, but who does not deliver the shares within 20 days or mail the shares within five days.
VI. CONCLUSION.
As you can see, there are important securities law, as well as tax, considerations involved any time that a director or officer trades in Company shares. In order to assure that such considerations are recognized and proper action is taken, it is vital that you contact Ronald F. Shuff or, in his absence, Renée J. Hornbaker, prior to buying or selling any Company shares or any interest therein, either for yourself, any immediate family member or any entity over which you have ownership or control.
