In a December alert (click here for the full newsletter), we discussed the easing of restrictions on foreign exchange rules in Argentina. The newly elected government acted to reverse the tight controls imposed on access by residents to the foreign exchange market to purchase foreign currency and remit funds out of Argentina.
What are the problems with the existing exchange control rules?
Since 2011, strict exchange control regulations meant that the purchase and sale of foreign currency, and all transfers of foreign currency to and from Argentina, were strictly controlled with criminal consequences for non-compliance. This placed severe limitations on the ability of a local resident to purchase foreign currency to acquire shares under a share plan or for a local employer to reimburse its parent company for the costs of a plan.
On 17 December, the Argentine Central Bank (ACB) announced significant amendments to the exchange control rules, essentially winding back the 2011 restrictions and introducing greater flexibility in the acquisition of foreign currency for local residents, to allow for payments for imports, services and cross border finance. In particular, individuals and companies are now able to purchase up to USD2,000,000 per calendar month, including for investment abroad.
The highly restrictive exchange control rules added a layer of complexity for employers offering share plans to employees in Argentina. Plans had to be structured so that there was no inflow or outflow of funds and no obligations on local employees or the local employing company to make payments abroad. The current news from Argentina appears to remove most of the restrictions on employees participating fully in global share plans. However, certain restrictions still apply, such as a reporting regime with the Argentinian Revenue Service and certain procedural requirements.
Our local counsel is reviewing how the changes will apply to companies who offer share plans to employees in Argentina. Please let us know if you would like specific information about how this will affect the ability of employees in Argentina to participate in your global employee plans.
In a recent alert (click here for the full newsletter), we reported on the introduction of new filing obligations with regard to all share plans operating in Luxembourg. The obligations are set out in circular L.I.R. n° 104/2bis, which was issued by the Luxembourg tax authorities on 28 December and applies to new plans due to be set up from 1 January as well as to plans which were implemented before 2016 but under which further awards can be made.
What plans are covered by the circular? Although the circular refers specifically to ‘stock option plans’, our Luxembourg lawyers have advised that the circular applies to any type of employee share plan and that it would be prudent to make a filing even for a cash plan if the plan could be satisfied by an issue of shares.
What is required? The circular requires employers to file a copy of the share plan rules (and any other documents which set out the terms of the award) and a list of the plan participants with the local withholding tax office two months before setting up a new plan and as soon as possible for all existing plans.
The circular is a brief, half-page document and raises some practical issues:
- It is not clear how the two month notification period will apply for plans which are due to be implemented before the end of February 2016 or which existed before that date. This point has been raised with the Luxembourg tax authorities and further guidance is expected but in the meantime local counsel recommends acting as quickly as possible to make the filing.
- The filing requirement refers to the plan rules and the names of the participants (so there is no requirement to include the value of any awards granted). However, even this limited level of information may cause difficulties where the names of the participants are not known at the outset of the plan.
Our local counsel is in touch with the tax authorities and we hope to have clarification on some of the practical issues outlined above soon. In the meantime, please let us know if you have any concerns about the new filing obligations or if we can assist you with making the filing.
In November, the Chancellor of the Exchequer / Finance Minister announced the UK government’s Autumn Statement setting out key economic policies that will be implemented over the next few years.
While there was not a lot directly related to share plans, the following points are interesting:
- The government will introduce a number of technical changes to streamline and simplify the tax rules for tax-advantaged and non-tax advantaged employee share plans, including clarifying the tax treatment for internationally mobile employees. These changes will be included in the Finance Bill 2016 which we will see in Spring 2016.
- The government renewed their commitment to combatting tax avoidance and evasion and have both updated the General Anti-Abuse Rules to include a 60% penalty in cases which fall under the Rules and stated that they will consider legislating on the use of disguised remuneration schemes in a future Finance Bill.
- The taxation of asset manager’s performance based rewards may be subject to change. The government has said that they will introduce legislation in the Finance Bill 2016 to determine when performance awards received by asset managers will be taxed as income or capital gains. The statement says that an award will be subject to income tax unless the underlying fund undertakes ‘long term investment activity’.
None of these announcements were particularly ground breaking and should not significantly affect your UK plans, but it will be interesting to see how the technical changes will ‘streamline’ and ‘simplify’ employee share plans, and the clarification regarding the taxation of internationally mobile employees is definitely welcome.
We do not expect that employee share plans will be caught by the General Anti-Abuse Rules and as long as you are careful not to ‘earmark’ awards with regard to your offshore trusts, disguised remuneration rules should not be an issue. That said, we will keep you informed of any future legislative developments in this area.
With regard to the taxation of asset manager’s performance based rewards, it is understood that during the consultation process in July, it was suggested that employment-related securities will not be caught by these changes but this is currently unclear. However, for asset manager businesses they will need to keep an eye on this as it may necessitate a review of your plans. We will keep you up-to-date.
It was interesting to see that the Government decided to gift Royal Mail shares to employees of the recently privatised company instead of simply selling them. This shows the government’s commitment to employee share ownership.
In November we reported on a decision of the UK’s top court, the Supreme Court, in which the court took the opportunity (“the first in a century”) to review the law relating to contractual penalty clauses. This case is likely to have an impact on the enforcement of clawbacks in the UK and in other common law jurisdictions (such as New Zealand and Bermuda) which have ties to the UK judicial system. The decision relates to whether a contract can specify an amount to be paid (repaid) if there is a breach of contract.
The Court did not abolish or extend the penalty rule but did significantly change the test as to what would amount to an unenforceable “penalty clause”. This ruling was a joint judgment delivered in early November (ParkingEye v Beavis and Cavendish Square Holding BV v El Makdessi).
This change could impact both employment and incentive related contracts, particularly clawbacks. Now these provisions should be enforceable unless the financial cost to the employee is out of all proportion to the employer’s legitimate interest in enforcing the obligations.
Please click here to read the full article.
Tapestry comment: is this relevant to incentives?
This could be highly relevant – for example in the context of Clawback and also in the context of bad leaver provisions. In the past the employee could argue that these provisions did not amount to a ‘genuine pre-estimate’ of the loss suffered by the employer - and it may have been hard for the employer to prove loss, for example where the employee has breached a restrictive covenant.
Now these provisions should be enforceable unless the financial cost to the employee is out of all proportion to the employer’s legitimate interest in enforcing the obligations. Careful drafting remains crucial and it may be helpful specifically to identify the legitimate interest that the provision is protecting.
Investment Association Principles of Remuneration for 2015
In November, the Investment Association published its updated Principles of Remuneration for 2015 along with its annual letter to remuneration committee chairmen. Please see our detailed discussion of the key points here.
1. Change to the Principles of Remuneration: LTI Performance and Holding Periods
The Investment Association has recommended that performance periods should last at least three years and that additional holding periods are expected so that the total period of performance and holding periods should last at least five years. Note that where this period should have previously been ‘considered’, it is now expected. This is the only change that has been made to the principles themselves.
Remuneration committees will now need to consider whether their company’s plans will meet this five year expectation. We have done research of the FTSE 100 which looks at and compares the retention periods. 47% of companies in the FTSE 100 had disclosed retention periods in their remuneration reports for 2014. Some had tried to address the retention period through having detailed shareholding guidelines which now will probably not be sufficient. In our research we also covered the use of malus and clawback which shows that all the FTSE 100 companies had implemented them but what they introduced varied considerably. If you would like a copy of our research please contact Gabby.
2. Annual letter - Issues of concern to shareholders
The IA have re-emphasised the views of their members on the following issues:
- Salary increases
- Bonus increases
- Service contracts
- Recruitment and leavers
These comments provide guidance for discussions with companies’ institutions. The main area of activity will be the focus on longer-term incentives by either increasing the vesting period and/or introducing a retention period. The IA’s Executive Remuneration Working Group have said that they will have a full review of the whole area of executive pay and are expected to release their proposals in Spring 2016. Tapestry will update you when those proposals are released.
We have worked with many companies over the last couple of years to introduce retention arrangements, using different arrangements like nominees and trusts, and their interaction with malus and clawback provisions. Please contact us if you would like us to assist you with specific advice on such arrangements for your own incentive plans.
Financial Services Updates:
The UK’s PRA and FCA published proposals for increased mandatory disclosure as part of the referencing process for senior hires (including NEDs) in banks and insurance companies. This means that a previous employer will no longer be able to simply provide the dates that the individual worked for them in their reference; a more comprehensive view of the candidate’s background in the industry is required. (For a summary of the proposals please click here).
Since the financial crisis in 2008, policymakers in Britain have strived towards a simplified system through which staff are able to raise concerns. In October, the regulators also published rules to introduce a formal, standardised procedure which will protect ‘whistleblowers’ at banks, encouraging people to express any concerns.
These proposals aim to make staff in the financial services sector more accountable for their actions, and give companies a more accurate view of the candidates which they are considering. Banks must be careful not to enter into any arrangement limiting their ability to disclose that relevant information to ensure that they are not subject to any data privacy consequences.
Banks providing the reference owe a duty to former employees and recipients to exercise due care and skill in the preparation of the reference. The reference should be an honest view of the employee based on verified information and opinions. Failure to take reasonable care in providing a reference can lead to defamation claims (from the former employee) and claims for negligent misstatement (from both former employees and the recipients of the reference). Companies will need to make sure they keep records of the references they give.
Going forward, the regulators have also said they would consider in a separate consultation applying these requirements to all the firms they authorise.
The UK Parliamentary Commission on Banking Standards has wanted the regulators to find some way to apply malus and clawback to sign-on arrangements with new employers so that if bad things come to light those sign-ons could be forfeited. This is very hard to do. The approach to require more detailed references will go some way to provide visibility where an employee is known to have breached regulatory requirements or had disciplinary proceedings in their previous employer.
In the last quarter of 2015, we sent out several newsletters to keep you updated on progress with the EBA Remuneration Guidelines and other developments relating to EU remuneration regulations. The Remuneration Guidelines and its Opinion on the application of proportionality were finally published in December. Our summary of the key points and a link to the Guidelines and the Opinion can be found here.
The guidelines apply from the performance year starting on 1 January 2017. This is good news. It had been suggested they would apply for the performance year 2016 so there is a year to consider and prepare. However, firms will need to start planning for some of the changes over the next few months and particularly whether to seek external shareholder approval in the 2016 shareholder meeting. It is very unfortunate that many more firms are likely to be caught by the bonus cap and they too will need to consider whether they will need to go to shareholders.
During December, the EBA also issued a consultation on how sales staff are paid, this is in addition to the Remuneration Guidelines which apply to CRD businesses. Click here for a link to the consultation.
The consultation reflects the EBA’s concern that there are poor remuneration practices which have promoted misselling of products and services.
Who is in scope? Staff employed by credit institutions, credit intermediaries, payment institutions and electronic money institutions, when providing deposits, payment accounts, payment services, electronic money, mortgages, and other forms of credit to consumers.
What happens next? Responses to the EBA by 22 March 2016. The EBA will publish the final guidelines Summer 2016.