On November 30, 2015, the European Commission published a proposal (the "Proposal") for a new European ("EU") Prospectus Regulation which is intended to repeal and replace the existing European Prospectus Directive. Pursuant to this Proposal, it is anticipated that third-country issuers would be covered by the employee shares scheme ("ESS") exemption without any further equivalence decision requirement.
The ESS Exemption for Third-Country Issuers: a Long Awaited Equivalence Decision
Directive 2003/71/EC has applied since July 2005 and was subsequently amended by Directive 2010/73/EC. It requires a prospectus to be made available to the public when a company makes an offer of transferable securities to the public or its securities are admitted to trading on a regulated market in the EU.
Incentivizing employees to hold securities of their own company can have a positive impact on companies' governance and help create long-term value by fostering employees' dedication and sense of ownership, aligning the respective interests of shareholders and employees, and providing the latter with investment opportunities.
Under the current version of the Directive, offers of securities to employees are exempt from the prospectus requirement by:
- any EU company, listed or not,
- non-EU issuers provided their securities are admitted to trading on an EU regulated market; or
- non-EU issuers whose securities are traded on a third-country market, in which case an equivalence decision by the EU Commission regarding the transparency rule for such third-country market is required.
Unfortunately, the Commission decision has not happened for any third country market, also due to lack of preparatory work by the European Securities Markets Authority ("ESMA") which was pushed back several times.
Equal Treatment and Information for all Participants in ESS
This situation deprived EU employees of many non-EU, non-listed companies from the opportunity to invest in their employer's securities, as their employer might refrain from launching an ESS due to the administrative burden of preparing a full prospectus - despite the fact that ESMA had developed a short form prospectus standard for employee offerings. Other issuers, mainly listed in the U.S. assumed this burden but often faced unexpected synchronization problems with their local disclosure obligations.
To create a level playing field, the Proposal widens the exemption in order to cover the ESS of third-country companies, irrespective of whether they are listed on a regulated market or not, provided a document is made available containing information on the number and nature of the securities and the reasons for and details of the offer, to safeguard investor protection (the "Information Document").
Under the ESMA's Recommendations, the Information Document must essentially include the following information:
- the identification of the issuer and where additional information on the issuer can be found;
- an explanation of the reasons for the offer; and
- details of the offer - most importantly number and nature of the securities and their price. ESMA would expect this to also include a summarized description of the rights attaching to the securities.
The Information Document is not a "prospectus" and does not need to be approved or filed with the competent authority. In practice, it is a document of four or five pages that can easily be prepared without much effort and cost.
How Much Longer for the Exemption to be in Force?
The Proposal was transmitted to the EU Parliament and the Council of the EU for discussion and adoption under the ordinary legislative procedure, i.e., the co-decision procedure. As with any other EU Regulation, its provisions will be legally binding in all EU Member States without transposition into national law from the day of entry into application. At this stage it cannot be predicted whether the proposed liberalization will be challenged in the legislative procedure.
The proposed Regulation will become applicable one year and twenty days after its publication in the Official Journal. It seems unlikely that this will happen before late 2017 / early 2018. There are reasonable expectations that once adopted, third-country issuers would be able to rely on the extended ESS exemption without having to wait for the implementing measures to be adopted by the Member States.