This update contains a round-up of key developments in this area during August 2015.

In summary:

CORPORATE GOVERNANCE

  • The Investment Association has changed the process it will follow for consultations on executive remuneration at UK listed companies.

TAX

  • First-tier Tribunal decision on valuing employees shares and whether the lapse of an option amounts to  consideration

INTERNATIONAL PLANS

  • Court of Appeal determines that English courts have jurisdiction in a dispute arising in connection with a US employee share plan

ACCOUNTING FOR SHARE PLANS

Changes to the way in which certain share plans are accounted for look to be on their way for some companies

In full:

CORPORATE GOVERNANCE

Changes to the consultation process on executive remuneration

The Investment Association (IA) (previously the ABI) has changed the process it will follow for consultations on executive remuneration at UK listed companies. This remuneration consultation process will now be taken on by the IVIS team. 
The process will now be as follows:

  • if a company (or its advisers) would like to consult IA on changes to the company's remuneration structures, the proposal should be emailed to ivis@theinvestmentassociation.org .  IA has stated that it  would be helpful if this email could also set out the details of any institutional investors the company is also consulting. In order to provide sufficient time in collating shareholder views on specific proposals, IA has asked that proposals should be provided in good time to enable IA to review and respond to draft proposals and that communications which are for information purposes only and do not require further substantial input by the company's investors should be noted as such;
  • IVIS will then produce a short summary of the company’s proposals which will be sent to those members which the company inform IA, they have consulted;
  • IA will then collate members' views and feed these back to the company for their consideration in the further development of their proposals; and 
  • IA will continue to review the need for further engagement or collective engagement with a particular company on an individual proposal.

TAX

First-tier Tribunal decision on valuing employees shares and whether the lapse of an option amounts to consideration

The taxpayer, Mr Sjumarken, worked for BNP Paribas (BNP) until he was made redundant in October 2005. During his time at BNP, he participated in a share incentive plan (SIP) (despite its name, this was not a tax-advantaged plan) and a long dated option plan (Long Dated Options).

Unfortunately, detailed rules of the two schemes were not made available to the Tribunal and there was considerable uncertainty as to the extent of the taxpayer's rights under the SIP and the Long Dated Options.

Following his redundancy, Mr Sjumarken signed a compromise agreement with BNP in January 2006 under which he confirmed that he had no claim in relation to the Long Dated Options.

It was not clear to the Tribunal when the taxpayer acquired the SIP shares: in particular whether they were acquired before or after the change in relevant legislation on 16 April 2003. In a letter to HMRC, BNP stated that as a result of being made redundant, Mr Sjumarken "had unfettered rights to" the SIP shares.  This appeared to be supported by the SIP documents that were produced to the Tribunal which did not contain restrictions on SIP shares released as a result of redundancy.

How should the shares be valued? When Mr Sjumarken attempted to sell the SIP shares he was, nonetheless, told by BNP that he could not do so as they were subject to restrictions on sale.  He claimed, therefore, that the SIP shares were, as a matter of fact, restricted since he was unable to sell them, and accordingly the value for tax purposes should reflect this. The Tribunal agreed and held that the SIP shares were restricted from sale and that this should have been taken into account in determining their taxable value.

Is the lapse of an option consideration? The Long Dated Options were "in the money" at the time of the compromise agreement (i.e. the value of the shares was higher than the option price) and Mr Sjumarken argued that by signing the compromise agreement he had given up the options and that this represented consideration flowing from him to BNP. He considered that the value of the options should either be treated as "negative earnings", or be netted off against the value he had received under the compromise agreement.  In this instance, the Tribunal disagreed and held that the Long Dated Options had either lapsed on termination of employment, or had been cancelled as a result of the compromise agreement. In either case, there was no separate bargain under which consideration passed from the taxpayer to BNP. Therefore the tribunal did not need to consider the question of "negative earnings".

Comment: Unfortunately, whilst the Tribunals findings are clear, there does appear to have been some confusion as to the dates on which Mr Sjumarken acquired his SIP shares and therefore which legislation should be applied. This emphasises the need for companies and employees to keep proper records in relation to employee share schemes, and for employers to communicate clearly and accurately with leavers regarding their rights under those schemes.

(Sjumarken v HMRC [2015] UKFTT 375 (TC))

INTERNATIONAL PLANS

Court of Appeal determines that English courts have jurisdiction in a dispute arising in connection with a US employee share plan

Notwithstanding that a US employee share plan stated that it was subject to the exclusive jurisdiction of the Massachusetts Courts, the Court of Appeal has held that the English courts have jurisdiction in a dispute arising under the share plan.  In addition, the Court of Appeal also granted an anti-suit injunction which restrained the US parent company from pursuing proceedings in Massachusetts.

When determining the issue of the jurisdiction of the English courts over defendants who are domiciled in EU member states, the English courts must consider the provisions of an EU regulation usually referred to as "the Recast Brussels Regulation".   This regulation provides that in matters "relating to" individual contracts of employment, an employer may be sued in the member state where the employee habitually carries out his work and that the employer may only bring proceedings against the employee in the state where the employee is domiciled.  Except in very specific circumstances (which are not relevant here), these provisions cannot be departed from by agreement between the parties.

In this case the Court of Appeal considered that a dispute about the agreement under the share plan was a matter "relating to" the contract of employment for the purposes of the regulation. This was the case even though the agreement entered into between the parties under the share plan contained provisions purporting to separate the agreement from the employment relationship. The court considered that the share award was "intrinsically bound up with" the contract of employment.

Comment: The case will be of interest to overseas companies that extend their incentive arrangements to UK employees.  Notwithstanding that the share plan and any agreement made under it may state that the overseas courts have exclusive jurisdiction, this is unlikely to be enforceable against UK employees.

(Petter v EMC Europe Ltd and another [2015] EWCA Civ 828).

ACCOUNTING FOR SHARE PLANS

Potential changes to the way in which certain share plans are accounted for

The Interpretations Committee (IC) of the International Accounting Standards Board (IASB) has recommended that changes be made to International Financial Reporting Standards (IFRS) 2 which will effect the way in which certain share plans are accounted for.  Companies listed on the main market of the London Stock Exchange, any other regulated market and AIM are required to prepare consolidated accounts in accordance with IFRS.

The changes will be discussed by the IASB at a future meeting and will effect the accounting treatment of (i) cash-settled share-based payments subject to vesting conditions; (ii) net-settled share-based payments (i.e. where, when the award is settled, the company issues or transfers a reduced number of shares to the employee and makes a cash payment to HMRC to cover the PAYE liability); and (iii) cash-settled share-based payment which are subsequently recharacterised as equity-settled.

There is currently no timetable in place for the changes to IFRS 2 to be finalised but we will keep you posted on developments.