The EU Market Abuse Regulation (MAR) comes into force on 3 July 2016. It affects both Main Market and AIM companies. Among other things, it replaces existing rules on the announcement of share transactions by directors and senior employees as well as the rules which prevent directors and senior employees from entering into share transactions at certain times. We have recently published a Law-Now on the impact of MAR on Main Market companies and also a Law-Now on the implications for AIM companies generally.
MAR affects employee share plans because relevant share transactions include the granting and vesting of employee share awards.
However, although MAR brings some changes to what happens in the UK, in most cases the rules on announcement of transactions and when transactions are prohibited will not substantively alter, and where there at first sight appears a greater degree of flexibility than is currently the case, we think companies may on consideration not always want to take advantage of permitted changes.
Key employee share plan points currently are:
- Directors and other persons discharging managerial responsibility (collectively PDMRs) need to notify both the company and the FCA of the grants of awards under employee share plans, receipt of shares under them and sales of relevant shares.
- The obligation to notify non-director transactions is new for AIM companies as is the obligation to notify the FCA for all quoted companies.
- Companies can decide that transactions below a EUR 5,000 annual threshold are exempted, but we think few companies will want to take advantage of this because of the danger of making mistakes, not least with cumulative acquisitions.
- In practice, it is expected that the company will want to take care of the detail of all notification arrangements provided that it is aware of the transaction – which will normally be the case anyway in the case of an employee share plan-related event.
- A new, specially-prescribed form must be used, which does not currently allow for any narrative to be given. We expect companies who have in the past made announcements by way of a press release via RNS to continue to do so as well as issuing the form by RNS.
Action – companies should familiarise themselves with the new forms and the process for making the announcements so that the first time that they are needed (which may not always be at a time of the company’s choosing) does not bring surprises. AIM companies should also note that below board-level PDMRs’ employee share plan transactions are now caught by announcement obligations.
When share awards/vestings/exercises cannot occur
- The Model Code has, broadly, prevented executive employee share plan awards being made before results and at times of inside information.
- There are three main changes under the MAR regime.
- First, the basic MAR rule is that PDMRs are prevented from undertaking transactions in shares (which many employee share plan events, including the making of awards) only in a 30 day period before the announcement of annual and half-yearly financial results. The FCA has recently confirmed that it will accept that the closed period ends on the publication of the preliminary announcement of results. This 30 day period is a shorter period than applies under the current rules where the “black-out” period can be closer to 60 days.
In practice, this 30 day rule is not likely to be particularly relevant for executive share plans as companies have rarely scheduled executive award grants or vestings before results because the Investment Assocation (formerly the ABI) does not allow awards to be made before results: awards and the subsequent vestings have to occur in the 42 days after results.
- The second change is that PDMRs will also be prevented under MAR from undertaking transactions in shares at other times when they use inside information. There will no longer, as is the current position, be an automatic closed period where the company itself has inside information. What appears relevant is just the individual PDMR’s knowledge and whether he acted on the basis of that. An automatic vesting of an LTIP on the basis of a vesting date and performance conditions set some three years earlier (and the associated sale for tax) should therefore not be a problem. A pre-determined award of shares should also be able to go ahead.
- Finally, the Model Code itself is being removed. The FCA has said that PDMRs in Main Market companies are no longer required to seek clearance from the company for permission to deal unless the company is in a 30 day pre-results closed period and a special exempion is being used (for example, hardship, a savings arrangement such as a SIP monthly purchase or certain other events). In contrast, the current proposal from AIM is that AIM companies will have to have a share dealing policy which includes a clearance regime, though companies have some flexibility in designing it. However, we expect that Main Market companies will want to retain a share dealing policy, albeit amended to reflect MAR.
- Although the overall position on clearances and the award and/or receipt of shares at the time of inside information is therefore now more relaxed, particularly for Main Market companies, we still think that companies will probably want to be cautious about allowing transactions that would have been prevented under the current rules.
For example, although automatic vestings of shares under LTIPs may potentially be permitted at any time (depending on the wording on the relevant LTIP), and certainly in an inside information closed period where the employee himself is not taking advantage of the inside information, the market perception of vestings and sales to meet tax liabilities just before a profits announcement or even positive news would not currently look good. Equally, while companies may now have a greater capacity to make a pre-planned award of LTIPs in an inside information close period, the perception of inappropriate behavour may still exist if the award is followed shortly by a market announcement of what was previously inside information. It may therefore take time for companies and investors to be confident about accepting the flexibility given by the new rules.
- All-employee plans, however, should continue more or less as previously albeit with clearance needed for a transaction in a pre-results period.
Action – In contrast to the changes affecting market announcements of transactions in shares (see above), where all companies will notice some procedural changes, companies may not notice much difference following the MAR changes, because UK practice and perception may not allow them to take advantage of the new MAR rules. Whether or not companies take advantage of the changes is driven off whether companies still want to have a restrictive dealing code and clearance policy, which is linked to whether they want to operate within the minimum required by MAR or continue operating more or less as they currently do.
Are changes needed to employee share plan rules?
At this stage, no. Although the Model Code itself will be removed, Main Market company and AIM company plan rules normally refer to equivalent codes or legislation and so MAR will automatically apply where relevant without any need for specific plan amendments as well. Depending on where relevant bodies emerge on various issues over the next few months, drafting of particular rules may need to be made clearer, but there is no point at this stage in making changes until final views are known.
Is further guidance still expected?
Yes. Surprisingly, although the core piece of legislation was agreed in 2014, much is still left open awaiting final comments from the FCA, the relevant European authorities and AIM and so the agreed or market position on many issues has not yet formed. Accordingly, there may be further updates in the coming weeks before (and after) 3 July and the relevant European authorities may only give their guidance much later this year.
UK market bodies finally seem to have started addressing the MAR changes, including the GC100, comprising general counsel and company secretaries of FTSE100 companies, and ICSA, the company secretaries institute. Some guidance may emerge under their leadership, as well as from AIM, the FCA or the European authorities.