Welcome to our Employee Incentives Update for Summer 2017.

This edition covers:

  • the important 6 July deadline for companies operating share plans and employment-related securities arrangements to file their annual returns with HMRC;
  • a recent case on the exercise of discretion;
  • ESMA’s update of its Q&A on the Market Abuse Regulation;
  • an update on the Shareholder Rights Directive; and
  • some recent international developments.

We hope that you find it interesting. If you would like to discuss any aspect, please let us know. Our contact details are set out below.

Deadline approaching for filing annual returns

An important reminder for companies operating employee share plans and employment-related securities arrangements: 6 July 2017 is the deadline for filing annual returns online with HMRC for the tax year ending 5 April 2017.

Companies must do this using the HMRC Employment Related Securities Online Service. This includes the templates to be completed and submitted with the annual returns.

There are separate templates in respect of each tax-advantaged share plan (including enterprise management incentives). The company is also required to make a declaration confirming that the legislative requirements are met in respect of any tax-advantaged company share option plan, savings-related share option plan and/or share incentive plan.

The “Other” template must be completed in respect of any unapproved arrangements, including long-term incentive plans, growth share arrangements, joint share ownership plans and other acquisitions of employment-related securities or options by directors or employees (even where there is just one participant or where the participants have paid for the shares).

If any new plans have been adopted during the tax year ending 5 April 2017, it is necessary to register such arrangements online with HMRC before annual returns can be submitted in respect of them. The registration process can take a few days to complete, so any new plans should be registered by the company as soon as possible, to enable the annual returns and any necessary declarations to be made by the deadline.

Where a plan has previously been registered but there is no activity to report, a nil-return should be filed.

Failure to file annual returns and make the appropriate declarations by 6 July 2017 will have serious consequences, including penalties and loss of tax relief for tax-advantaged arrangements.

Share options – exercise of discretion

A recent High Court case (Watson and others v Watchfinder.co.uk Limited [2017]) considered the thorny issue of the exercise of discretion in a share option contract.

Although the facts were somewhat unusual (involving options granted by one company to directors of another company which provided consultancy services under a service agreement to the grantor company), the judgment raises some interesting points.

The option agreement in question contained a clause which provided that “the Option may only be exercised with the consent of a majority of the board of directors of the Company”. No such consent was given when the option holders sought to exercise their options, and the option holders brought a claim for specific performance of the option agreement.

The judge concluded that the clause could not be interpreted as giving the company an unconditional right of veto of exercise of the options. Instead, it was a discretionary power which was subject to implied limits, and as such should be exercised in a way which is not arbitrary, capricious or irrational. In fulfilling their duties, the directors would need to ensure that a proper process was taken for the decision in question (taking into account the material points and not taking into account irrelevant considerations).

On the evidence, the judge found that there was barely any considered exercise of the discretion – the question of the exercise of the options was discussed extremely quickly at a board meeting and the matter was dealt with “very casually”, with no clear evidence of what was discussed. The judge held that there had not been a proper exercise of the discretion and the option holders succeeded in their claim for specific performance (so the parties were to proceed as if consent to the exercise of the options had been given).

The case is a reminder of the need to ensure that a proper process is adopted when considering the exercise of any discretion, ensuring that it is exercised reasonably (taking into account material points and disregarding irrelevant considerations). It also emphasises the importance of accurate record-keeping and minutes. This may seem common-sense, but should not be overlooked when a board of directors or remuneration committee is required to consider the exercise of any discretion under share plan rules.

Market Abuse Regulation – updated Q&A

Quoted companies should note that the European Securities and Markets Authority updated its Q&A on the Market Abuse Regulation on 30 May 2017. The changes relate to the blanket cancellation of orders policy and disclosure of inside information related to Pillar II requirements – click here for the updated Q&A.

Shareholder Rights Directive

The final version of the EU directive amending directive 2007/36/EC as regards the encouragement of long-term shareholder engagement was published in the Official Journal of the EU on 20 May 2017, and member states now have until June 2019 to implement it.

The Shareholder Rights Directive has been amended to include new requirements which are intended to encourage more transparency and accountability about directors’ pay, and give shareholders a greater say on and engagement in executive pay. This includes a requirement that “the remuneration policy shall contribute to the company’s business strategy and long-term interests and sustainability” and explain how it does so, together with provisions on voting on the remuneration policy. The remuneration policy must be made public on the company’s website “without delay” following the vote, together with the results of the vote on it.

Clearly the negotiations and precise timing of the UK’s exit from the EU (see our Brexit insights page) will determine whether and how the amending directive is implemented in this country, but for now the remuneration reporting regime already in place in the UK means that it will be of little practical concern to quoted companies here.

Belgium | Stock options: tax increase for stock options granted to management companies

The Belgian tax authorities have published a new circular in relation to the tax treatment of stock options that are granted directly to individual managers who operate through a management company. This circular letter confirms that such grants cannot benefit from the reduced valuation rate of 9% for the purposes of the Belgian stock option law.

Read more

France | Qualifying free shares and stock-options: the employer specific contribution is refundable if the conditions under which the free shares and options are granted are not satisfied

Qualifying free shares and stock options benefit in France from a specific tax and social security regime when the rules of the plan under which these equity instruments are granted comply with the provisions of the French commercial code. For the employer, the main advantage is that qualifying options and free shares are not subject to standard employer social security charges whose rate can be very high in France (between 40% and 45%).

Read more

On the horizon

In the UK we await with interest:

  • publication of Matthew Taylor’s report on his review of employment practices in the modern economy (delayed by the general election but expected in the coming weeks);
  • publication of the Supreme Court’s decision in the long-running Rangers EBT case; and
  • the return of the provisions which were removed from the Finance Act 2017 prior to the election (in particular the changes to the taxation of termination payments intended to take effect from 6 April 2018).