- HMRC issues revised Tax Advantaged Share Scheme User Manual
- Rangers FC case – The Scottish Court of Sessions determines that contributions to an employee benefit trust were re-directed earnings
- Chancellor's Autumn Statement – summary of the announcements which may impact on your remuneration strategy
- Financial Conduct Authority (FCA) consults on changes to the Listing Rules (including the Model Code) arising from the implementation of the Market Abuse Regulations
- The Investment Association (IA) issues revised "Principles of Remuneration"
- Institutional Shareholder Services (ISS) issues its "EMEA Proxy Voting Guidelines Updates: 2016 Benchmark Policy Recommendations"
- Impact on share plans of the European Court of Justice (ECJ) finding that EU-US data protection Safe Harbour framework is invalid
- The Employment Appeal Tribunal looks at age discrimination and share plans
- The law on penalty clauses has been reset and clarified by the Supreme Court. We look at its impact on clawback provisions in respect of variable pay
- European Commission (EC) issues consultation on remuneration practices under CRD IV
HMRC's Tax Advantaged Share Scheme User Manual
HMRC has updated its Tax Advantaged Share Scheme User Manual. The Manual sets out HMRC's interpretation of the legislation governing the four tax-advantaged share schemes (Company Share Option Plans, Save-As-You-Earn schemes, Share Incentive Plans and Enterprise Management Incentives). HMRC states that "The guidance is intended for use by companies and practitioners who intend to offer such schemes and [sets out] the procedures they will need to follow in order to establish, register and self certify the scheme".
A copy of the Manual can be found here
Scottish Court of Session's decision in the Rangers FC case
The Scottish Court of Sessions (CoS) has ruled in favour of HMRC in Advocate General for Scotland v Murray Group Holdings Ltd and Others (more widely referred to as the "Rangers FC case" as it involved payments into an employee benefit trust (EBT) for the benefit of, amongst others, Rangers FC employees). The CoS overturned the decision of the Upper Tribunal finding that the contributions to an EBT by group employers were redirected payments of earnings to employees which should be taxed as employment income when the contributions were made.
As you may remember, this case relates to payments of over £50 million made into an EBT by Murray Group Management Limited (and other employing companies in the group) which were then transferred into a large number of sub-trusts set out in the name of an individual employee for the benefit of family members (including the employee). In almost all cases, the full amount of the sub-trust was then lent to the employee.
The decision in this case is of historical importance only in so far as the arrangements contemplated would now be subject to income tax and NICs under the "disguised remuneration" provisions set out in Part 7A of the Income (Earnings & Pensions) Act 2003. However, unless the decision is appealed to the Supreme Court, it seems likely that HMRC will treat this case as a final judicial ruling on EBT arrangements entered into before 6 April 2011 (i.e. the date on which the disguised remuneration legislation came into force) and proceed against those companies with unresolved EBT arrangements.
The Spending Review and Autumn Statement (released by HM Treasury following the Chancellor's speech to Parliament on 25 November 2015) suggests that HMRC will now act accordingly, stating that "the Government intends to take action against those who have used or continue to use disguised remuneration and who have not yet paid their fair share of tax".
A copy of the CoS judgment can be found here.
Chancellor's Autumn Statement – remuneration issues
We sent out a summary of the key changes affecting remuneration strategy following the Chancellor's Autumn Statement on 25 November 2015. If you missed this update, a copy can be found here.
FCA consults on changes to the Listing Rules (including the Model Code) arising from the implementation of the Market Abuse Regulation (MAR)
The FCA has published CP 15/35 which sets out its proposals in respect of the changes that need to be made to the FCA Handbook arising from the implementation of the MAR in the UK. The MAR will have direct effect in the UK from 3 July 2016 and the UK must ensure that its domestic regime is compatible with MAR.
The FCA is proposing to retain the existing structure and content of the Handbook to the extent that this does not conflict with MAR. However, given the scope of the MAR, in reality this means significant amendments to the Handbook, including, of particular note in respect of share plans, replacing the existing Model Code (Annex 1 of LR 9) with guidance which companies can refer to when developing their processes to allow Persons Discharging Managerial Responsibilities to apply for clearance to deal in according with the new provisions set out in the MAR.
The consultation closes on 4 February 2016. A copy of CP 15/35 can be found here.
During the coming months we will issue a series of updates on the MAR including one on its impact on the operation of share plans in listed companies.
IA issues revised "Principles of Remuneration"
The IA has made only a limited change to its Principles of Remuneration for 2016. The Principles now make it clear that IA members expect that long term incentives should have a performance and holding period of at least five years in total.
In addition, there has been a change in policy in respect of the disclosure of performance targets. IA members expect that performance targets will either be disclosed retrospectively in full at the end of the year, or that there is a commitment to disclose such targets in full at a specified time in the future. Where companies do not disclose any targets or do not commit to full future disclosure, IA members have asked IVIS to "red top" those companies as they believe that there is insufficient information to make an informed voting decision. Where relative achievement is disclosed with no commitment to disclose the actual target ranges, an "amber top" will be given. This policy will take effect for companies with year-ends on or after 1 December 2015.
The IA has highlighted a number of the Principles which its members have asked it to re-emphasise. These are:
- salary increases – shareholders have a clear expectation that in normal circumstances, basic salary increases should be limited to inflation or to the increase being given to the general workforce. There are a growing number of investors who consider that executive directors should not receive regular salary increases, given the overall structure of their remuneration packages. IA members will continue to scrutinise all salary increases, and believe that all salary increases should be justified with clear and explicit rationale, particularly for any increases in excess of inflation or the increases provided to the general workforce.
- bonus disclosure – bonus targets should be disclosed at least retrospectively so that shareholders can ensure that there is an appropriate link between pay and performance. This information is necessary to justify supporting remuneration packages to IA's clients. Whilst there has been some improvement in the level of retrospective disclosure of bonus targets, there are still a number of companies that provide no details on their bonus targets or consider them to be commercially sensitive with little justification. Any company which considers their targets to be commercially sensitive must explain to shareholders the circumstances that justify the use of this approach and indicate when targets will be disclosed in the future.
- service contracts – the majority of IA members are still in favour of notice periods of up to 12 months. However, members believe that new contracts should have equal notice periods for both the company and the director. Members also believe that for new contracts, companies should introduce clauses to allow the withholding of pay in lieu of notice where there is any ongoing regulatory or internal disciplinary or misconduct investigation.
- pensions – IA members expect the pension arrangements for executive directors to be in line with those for the rest of the company.
- recruitment and leaving arrangements – Investors will continue to scrutinise recruitment arrangements and buyout awards. In particular, any attempts to re-award or re-issue recruitment awards in the circumstances of a fall in company value is a concern for IA members. In relation to leaving arrangements, remuneration committees should take a firm approach when determining leaving arrangements and assessing whether an individual is a good or bad leaver. IA members expect full justification of the treatment of leavers particularly where a leaver is deemed to be a good leaver.
A copy of the IA Principles can be found on the IVIS website.
ISS issues its "EMEA Proxy Voting Guidelines Updates: 2016 Benchmark Policy recommendations"
The 2016 Guidelines Update for UK and Ireland amends ISS's 2015 Guidelines in respect of votes on remuneration in FTSE Fledging and AIM companies only. The 2016 Guidelines for companies in these categories (i) separates out behaviours that would lead to a negative vote recommendation in respect of a remuneration policy resolution from those that would lead to a negative vote recommendation in respect of a remuneration report resolution; and (ii) expands upon the list of issues which would drive a negative vote recommendation. The main recommendations in the 2016 Guidelines Update in respect of remuneration are summarised below.
A negative vote recommendation would be considered in respect of a remuneration policy resolution if any of the following applied:
- executive directors have notice periods in excess of 12 months;
- incentive awards are not subject to performance targets;
- performance targets can be re-tested through the performance period; or
- there are any other serious issues with the policy when measured against good market practice.
A negative vote recommendation would be considered in respect of a remuneration report resolutionif any of the following applied during the period under review:
- there has been poor disclosure of pay practices;
- non-executives have received an element of performance-related pay;
- share options have been re-priced;
- re-testing of performance targets has been allowed;
- share incentive awards have been granted with a vesting period of less than 3 years; or
- there are any other serious issues with the report when measured against good market practice.
The 2016 Guidelines Update states that the policy provides "a framework for enhanced focus on remuneration practices at smaller companies, recognising the evolution of governance and reporting standards, and brings the policy more in line with investor expectations and best market practice."
The 2016 Guidelines Update has not amended the 2015 Proxy Voting Guidelines as they applied to FTSE All Share companies. The 2016 Proxy Voting Guidelines are available on the ISS website.
Impact on share plans of the ECJ finding that the EU-US data protection Safe Harbour framework is invalid There has been much press coverage of the ECJ's ruling in Maximillian Schrems v Data Protection Commissioner in respect of the EU-US data protection Safe Harbour framework.
The case is important for companies who operate share plans under which data is transferred from the UK to the US (which would be the case under a US company's share plan where there are UK participants). These companies will need either to obtain the employee's (i.e. the data subject) consent to the transfer of the data from the UK to the US or, in the absence of such consent, seek to rely on the derogation from the general prohibitions on data transfers to third countries that do not provide adequate protection which provides that transfers are permitted where they are necessary for the performance of a contract.
Companies in this situation should review their share plan documentation to see whether there is implied or actual consent to transfer data and, if not, it should consider seeking specific consent from participants to continue sending their data to the US.
Age discrimination and share plans
The Employment Appeal Tribunal has remitted a case regarding age discrimination under a long term incentive plan (LTIP) back to the Employment Tribunal (ET) (Cockram v Air Products plc).
In this case Mr Cockram, the claimant, was a participant in the respondent's LTIP. He retired at 50 years of age (being the age at which he could take benefits under the defined benefit pension scheme of which he was a member). The LTIP rules stated that on termination, unvested LTIP awards would lapse unless cessation was due to, amongst other things, retirement. Retirement was defined in the LTIP rules as "separating from service with the Company . . . on or after a customary retirement age for the Participant’s location, with a fully vested right to . . . immediate benefits under a retirement income plan".
However, prior to Mr Cockram's retirement, the respondent had replaced the defined benefit pension scheme with a defined contribution pension scheme. Under the new pension scheme the earliest age at which a pension could be drawn was 55. When Mr Cockram retired, the respondent determined that he had not left at the "customary retirement age" as it determine this to be 55, in accordance with the new defined contribution pension plan. The Respondent accepted that this was direct age discrimination but argued that it was justified as a "proportionate means of achieving a legitimate aim" (section 13, Equality Act 2010). The Employment Tribunal accepted this assertion.
However, on appeal, the Employment Appeal Tribunal found that the ET had erred in law by not giving sufficient explanation as to why it considered that the respondent's actions were within section 13. It remitted the case to the ET to present clear findings on the aim and whether it was legitimate and necessary stating that "The only question is one of law: was the discrimination justified? Thus the new Tribunal should accept the facts as found, and perform the function of finding from those facts what aim or aims were being pursued; whether they were legitimate aims, and whether they were proportionate in light of the discrimination and the needs of the Respondent."
This is an interesting case as age discrimination in respect of employee incentives is an issue that often taxes employment lawyers but is one on which there is very little case law. It will be interesting to see how the ET responds to the task set for it by the Employment Appeal Tribunal, we will keep you posted on developments.
The law on penalty clauses has been reset and clarified by the Supreme Court
Since the widespread introduction of clawback provisions in respect of variable pay (such as annual bonuses and share plans), there has been concern amongst lawyers that there was a real risk that the Courts would not uphold such provisions on the grounds that they amounted to an unlawful penalty. The Supreme Court has now reset and clarified the law on penalties, making it significantly less likely that a well drafted clawback clause would be held to be an unenforceable penalty.
The cases of Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis (which were jointly appealed from the Court of Appeal to the Supreme Court) were widely reported in the press – the ParkingEye decision that an £85 over-stay charge issued to Mr Beavis by ParkingEye when he overstayed by 56 minutes in a 2 hour space was not an unenforceable penalty clause and was therefore recoverable by ParkingEye was of particular widespread interest! However, the Supreme Court's decision is of much wider importance and the implications of the decision are considered by Bill Gilliam, a partner in our litigation team, in a series of blog posts which can be found here.
EC consultation on remuneration practices under CRD IV
The EC has published a consultation on the impact of the maximum remuneration ratio under the CRD IV and the overall efficiency of the CRD IV remuneration rules. It has requested comments on the specific requirements in the CRD IV and the Capital Requirements Regulations, including assessment of performance, deferral of variable remuneration, instruments that can be used for variable remuneration and remuneration disclosures. The deadline for responses to the consultation is 14 January 2016 and EC must report back by 30 June 2016.
In addition, the EC commissioned a survey by the consultancy firm IFF which (amongst other things) sought feedback on the extent to which firms are relying on the existing proportionality provisions, however this survey has now closed. The results of this survey will undoubtedly form part of the EC subsequent report.
A copy of the EC consultation can be found here.