Share Plan Progress
15 November 2006 Graham Rowlands
Regulations affecting directors' remuneration and employee share plans are increasing in number and complexity. Graham Rowlands and Lucy Hibbert of Linklaters explain why anyone involved in this area must keep up to date with numerous compliance issues.
Directors' remuneration is a hot topic in the media, underlined by the number of column inches that have been devoted to the recent option backdating scandal in the US. Increased transparency, particularly in the UK, has made stories easier to pick up and any non-compliance will stand out as a result.
As well as bad publicity, some lapses in compliance carry financial penalties or even criminal sanctions for directors. Many companies now offer share plans to employees across the globe, adding an extra dimension to compliance.
EMPLOYEE SHARE PLANS
Employee share plans have increased in popularity over the last 20 years or so. They provide companies with an effective retention and incentivisation tool while giving employees extra reward, often on a tax-efficient basis. There is increasing evidence that companies that operate employee share plans have increased productivity and more motivated staff.
Over the last couple of years there have been significant changes in the rules relating to share awards and dealings by directors and senior management. Many of these rules aim to improve transparency by increasing disclosure.
In the US there have been recent proposals by the SEC to increase disclosure of directors' remuneration, including, as in the UK's disclosure of remuneration policy, the introduction of the new disclosure rules and changes to the rules on insider dealing mean that companies must notify the market about share dealings within a couple of days.
These announcements are regularly scanned by journalists hungry for a 'fat cat' story, so they need to be timely and accurate. Changes proposed to the insider dealing rules in the UK in 2007 may ease the burden a little, but not to any great extent.
Another regulatory hurdle is the new UK rules against age discrimination. While the UK has only just introduced regulations, other countries have had such rules for some time. Ireland has prohibited age discrimination since 1998 and there have been more claims under the age discrimination rules than under either sex or race.
In the UK everyone can rely on the new rules, but in the US, age discrimination only protects those over 40. Some countries allow companies to impose qualifying periods for benefits (for example, Poland and Portugal). Others say that this can be indirect discrimination and needs to be justifiable to be lawful.
Although the concept of age discrimination is simple, the impact of the new regulations is far reaching, and companies do need to look at the rules of their incentive plans.
For example, is it still acceptable to not grant awards to those nearing retirement? Can you set service requirements for awards? What about early vesting on retirement – is that allowed? How do you distinguish resignation from early retirement anyway?
PROSPECTUS DIRECTIVE RULES
Before a company can even think of making awards under a plan, it must work through the new prospectus directive rules to check whether a full prospectus has to be published. Giving shares to employees means offering shares to the public and the new rules are there to level the playing field of investor protection across the EU.
A prospectus is a lengthy document providing detailed information about the company and the offer, and is time consuming and costly to prepare. There is an exemption from the requirement to produce a prospectus in relation to share plans, but only if the company is listed in Europe. To fall within the exemption the company must make available certain information about the offer, which could be included in share plan communications to employees.
For non-EU listed companies, the position is trickier and there is ongoing debate about how the rules will apply in practice. In a recent survey, nearly half of overseas companies say that the new rules hurt their ability to offer shares to employees in the EU. A fifth have gone further and said that they will be changing or dropping schemes as a result of the new rules.
Even if you fully acquainted with the UK rules, other member states are implementing the requirements in different ways and some have not done so at all yet, so detailed due diligence is still necessary for international plans.
KEEPING UP TO DATE
It is difficult for finance directors, company secretaries and others involved in share plans to keep up to date with new regulations and latest corporate governance best practice.
In the UK alone, there are a number of different sources of regulation – for example, from statute, the FSA, the EU and institutional investors. One of these sources is the new website from Linklaters, which provides information and guidance on employee share plans and executive pay.
With resources such as these at your fingertips, your company will have instant access to anything it needs to keep up to date or refresh its knowledge.