Although we’re not in the business of crystal ball-gazing, here are some possible issues relating to Brexit and executive pay, particularly share-based remuneration, that we’d like to throw into the pot (unless that’s too much of a mixed metaphor).
It seems unlikely that post-Brexit the UK would impose restrictions on overseas issuers offering their shares to their employees in the UK. Therefore, we have focused on issues for companies that are headquartered or have shares listed in the UK, with employees in the EU.
Disclosure of directors’ remuneration
In this area, the UK is ahead of the field, having brought in enhanced disclosure and binding policy votes in 2013. The European Shareholder Rights Directive is expected to bring in a “say-on-pay” vote later this year and Brexit means that the tweaks to the UK regulations to bring them in line with this directive may no longer need to be made.
A cap on bonuses paid by banks, which was introduced by the Capital Requirements Directive (CRD) and the Capital Requirements Regulation, has applied since 2014. The Financial Conduct Authority (FCA) challenged the bonus cap unsuccessfully in the European Court of Justice (ECJ), so it seems reasonable to assume that post-Brexit the cap might be removed. CRD also introduced compulsory deferral and clawback of bankers’ bonuses, which since the beginning of 2016 have been even more stringent for “senior managers”. Given the importance to the UK of the City of London as a financial services centre, it would not be surprising if these regulations did not survive Brexit.
Share dealing rules
Our recent post explained how the way companies operate share plans would be affected by the EU Market Abuse Regulation. This replaces the Model Code and the AIM rules on share dealing by directors and other executives with effect from 3 July 2016. Currently, there is uncertainty as to how these rules will operate in practice, with many calls for more guidance from the FCA, such as its recent confirmation that the announcement of a company’s financial results will end a closed period. After Brexit, it may be that the UK goes back to the old tried-and-tested dealing rules. Either way, this probably isn’t going to be very significant.
The Prospectus Directive
This directive provides the framework for securities laws in the European Economic Area (EEA) and, in particular, contains several useful exemptions allowing companies quoted on EEA markets to operate employee share plans without issuing a prospectus. Other companies (for example, those that are unquoted or are quoted on US markets) have more restricted exemptions. If the UK falls outside of the EEA after Brexit, then UK quoted companies with large numbers of employees in the EEA may join US companies in having difficulties in offering their employee share plans to European employees. However, there is an easy fix to this one, assuming the UK can negotiate it. The European Commission can designate a non-EEA market as having an equivalent supervisory regime to that required in the EEA so that companies listed on those markets can enjoy the full employee share plan exemptions. This is being considered for markets like the NYSE and NASDAQ and the London Stock Exchange could be added to that list.
Operating share plans usually involves the transfer of sensitive personal data about employees between companies and administrators. The EU’s new data protection law, the General Data Protection Regulation (GDPR), is already in play and companies have until 25 May 2018 to make the necessary changes to ensure that they are compliant. After Brexit, it would be for the UK effectively to adopt the GDPR or for the EU to determine that the UK otherwise imposes adequate protection for the storage and transfer of data relating to EU employees. The alternative routes of model clauses (which are currently being challenged in the ECJ) or express, informed consent from employees would bring extra administrative burdens.
The Equal Treatment Framework Directive was implemented by the UK as the Equality Act 2010. It prohibits discrimination on the grounds of age (amongst other things) and abolished the concept of default retirement age, unless an employer can demonstrate objective justification. In the sphere of share plans, particular care is needed to avoid discrimination against younger employees, for example by imposing a discriminatory period of qualifying employment. Giving “good leaver” treatment on retirement is also potentially an issue. Currently, in any dispute about whether the Equality Act complies with the Framework Directive, the case can be transferred to the ECJ. After Brexit, the UK courts will be the final arbiter for such determinations (unless the discriminatory action took place before Brexit takes effect) and they will have more freedom to make decisions on these issues. However, it seems unlikely that the principles of this directive will be reversed.
EMI and state aid
The rules of the EEA prohibit the giving of state aid (widely defined) to businesses in the EEA because of the potential distortion of competition. Enterprise Management Incentives (EMI) were established by the UK government as particularly tax-advantaged share incentives specifically for use by small and growing companies. The EMI regime was granted state aid approval from the EU, which expires in April 2018. Brexit will probably allow the UK to do what it likes with EMI (assuming that it doesn’t have to continue to restrict state aid as a quid pro quo in negotiations on wider issues to do with the relationship between the UK and the EU going forward).
Of course, all the above assumes that the current suggestions of a second referendum are wide of the mark and that we will actually leave the EU. Interesting times ….