If you are expanding your business internationally, incentivising your employees and senior executives through stock awards is likely to be an essential element of your compensation arrangements. This brochure aims to provide an overview of the main legal and regulatory considerations when extending stock incentive plans into any Member State of the European Union (EU).
Whether participation is offered in the form of a stock option, stock purchase or restricted stock plan, the following areas of law should be considered for each EU Member State in which participants are based:
- securities laws
- employment and labor laws
- employee data privacy and protection
- financial promotions
- exchange control restrictions.
Many of these areas are the subject of overarching European legislation in the form of “European Directives”, incorporated into each Member State’s national law through detailed domestic legislation. Whilst European Directives are intended to harmonise the position across Member States, differences exist between each jurisdiction’s domestic legislation because of the approaches taken by each local regulatory body. For this reason, although the position across the EU may be broadly similar, it will be necessary to check the position in each relevant Member State.
We set out below the questions which must be considered and a high level overview of the position across the EU.
Typically, variations between each Member State’s laws are identified in a compliance and accessibility check are accommodated by companies adopting country-specific addenda to their stock incentive plan rules, which disapply or modify their standard terms.
For a review of the tax considerations, please refer to our brochure Tax considerations for companies offering international stock incentive arrangements.
Does the offer of the securities to employees require a prospectus?
The European Prospectus Directive requires that a prospectus must be published by a company if there is an “offer of securities to the public”. This is defined as “a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe to these securities”.
“Securities” are widely defined and will include both shares and instruments such as stock options or phantom stock options. A key question to determine is whether such securities are transferable and it should be noted that shares will always be considered to be transferable for this purpose, regardless of whether such shares are in a private company or listed on a regulated market and whether they are subject to restrictions on transfer. On the other hand, if an employee is prohibited from transferring an option, the option is not transferable.
The term “public” is not defined but it should be assumed that it is widely drawn and will include an employee or director of any company to whom it offers transferable securities in any Member State.
A prospectus published and approved by the relevant regulator in one Member State will fulfil the prospectus obligations for a similar offer in all other Member States for a period of 12 months under a “passporting” regime. Nevertheless, cost means a company is not likely to wish to produce a prospectus solely for the purpose of offering its employees participation in an equity incentive arrangement. It is possible in many cases to structure the employee incentive arrangement so that it does not constitute an “offer” of “transferable securities” or so that it fulfils the conditions necessary for one of the available exemptions to apply. Please refer to our brochure Offering shares to employees: do you need a prospectus? for a chart which will assist in establishing whether it is likely that a prospectus will be required or if an exemption may be available on the basis of the structure of the stock incentive plan.
How do employment law issues affect the terms and operation of the stock incentive arrangements?
Employment laws in Member States derive from a complex combination of applicable EU Directives and domestic legislation unique to that state. Obligations and restrictions on employer’s and employees’ rights to participate in stock incentive plans can vary significantly between EU jurisdictions. Key employment law issues which must be investigated in each relevant Member State include:
- requirement to consult with a works council or trade union – in certain jurisdictions, employers may, and in some cases must, put in place procedures for consulting their workforce about employment-related matters
- communication – there may be a requirement to translate the plan documentation into the local language and there may be restrictions on the form of employee communications (ie electronic or written)
- anti-discrimination laws (for example, relating to age and gender) may affect the permitted terms and operation of the arrangements
- there may be limits on the extent to which a company may lawfully exercise discretions and/or operate clawback
- employees may acquire on-going participation rights as a result of established custom and practice, even where a grant of awards is at the sole discretion of the company
- loss of stock awards on termination may allow employees to claim damages in certain circumstances and regardless of the plan’s bad leaver provisions
- provisions which result in awards being lost when employees join competitors may be unenforceable under local restraint of trade principles.
Employee data privacy and protection
What restrictions apply in relation to the holding and processing of data about employees and their participation?
The EU Data Protection Directive provides for an overarching data protection regime imposing broad obligations on the collection, processing and transfer of data as well as extensive rights aimed at protecting privacy. Although the Directive’s objective was to harmonise the position across the EU, wide discrepancies exist between Member States’ domestic regulations.
In January 2012 the European Commission published a draft Regulation on which Member States are currently consulting. The Regulation will have direct effect (without the need to be implemented through each Member State’s domestic legislation) two years after coming into force. Since the Regulation is likely to be in force soon, and given how long data may be held for the purpose of participation in a stock incentive plan, it is advisable for companies to take into account the likely future requirements of the Regulation, in addition to the current requirements.
For an employee stock plan, data protection regulations will apply in relation to a number of actions necessary to operate the arrangements and, in particular, the collection and holding of information on the individual participants and the passing of such data cross-border (for example, to a parent company) or to a third party (for example, the plan administrator or a trustee).
In common with the current Directive, the draft Regulation provides that the collection, holding and processing of personal data is lawful if it is either necessary for a permitted purpose or if individuals have provided their consent. If the relevant data activity is necessary for the performance of a contract or a legal obligation, the activity will qualify as a permitted purpose. Whilst it is very likely that the permitted purpose test can be relied on with regard to the operation of a stock incentive arrangement, it is generally considered good practice to seek each participant’s consent.
It is not uncommon for employee stock plans to provide that consent to data collection, process and transfer is deemed to be implicitly provided by an employee by virtue of his or her participation in the plan. However, some Member States may require explicit consent and explicit consent is likely to be the requirement going forward under the new Regulation.
Are there any restrictions on how the stock incentive plan may be promoted and marketed to employees?
Each Member State has enacted its own domestic legislation regulating financial promotions, communications which induce investment in securities and other financial instruments. Regulations in each jurisdiction will determine what constitutes a financial promotion, who is authorised to make such promotions and applicable exemptions.
The position in each Member State should be considered. Many jurisdictions will have established exemptions for promotions made by companies for their group employee stock arrangements but care should be taken to ensure such exemptions extend to any communications made to employees by third parties, such as plan administrators and trustees.
Exchange control restrictions
Are any restrictions placed on currency leaving or entering Member States?
For equity incentive arrangements, exchange control restrictions could be relevant if money paid for shares is either leaving or entering a Member State or on the repatriation of sale proceeds for shares sold outside the EU. Although no restrictions are placed on currency leaving and entering the EU, some Member States do require reporting of transfers over certain thresholds.
If you are considering rolling out your existing stock arrangements to employees in the UK, across the EU and/or elsewhere, the Norton Rose Fulbright team can prepare a global feasibility questionnaire tailored to your specific stock plan and conduct the jurisdiction reviews on your behalf.
Following completion of the global feasibility study, it may be necessary to produce country-specific addenda to the rules of your plan which adapt the standard terms for any specific local issues and the Norton Rose Fulbright team will be happy to assist.