In June, the European Parliament adopted a directive which will make various changes to the EU prospectus rules which will lessen the regulatory burdens on non EU listed companies operating employee share plans in Europe.
Broadly one of the changes will mean that the onerous securities rules that can require non EU companies to produce a full prospectus when they offer shares, share options, Restricted Stock Units (RSUs) or Stock Appreciation Rights (SARs) to employees in Europe will no longer apply. For many multi-nationals it is likely that no prospectus will be needed and employees can be invited to participate in share plans with very simple company information being provided. Some useful exemptions will also be widened.
Since the EU prospectus rules were introduced in 2003, a number of US and other non EU multi-nationals have restricted the use of employee share plans in Europe due to the regulatory hurdles that the prospectus rules imposed.
The main changes will be:
- No prospectus will be needed for a public offer of transferable securities which is made to less than 150 persons in a member state. Currently this exemption applies if the number of persons is 100 (public offer exemption - article 3(2) of the Prospectus Directive).
- No prospectus will be needed for public offers of transferable securities where the aggregate consideration is less than €5 million. Currently the threshold is only €2.5 million (article 1(2) of the Prospectus Directive); and
- No prospectus will be needed by non EU companies for offers of transferable securities to their group employees if their own securities are traded on a non EU market which is recognised as “equivalent” to an EU regulated market (employee exemption Article 4(1)(e) of the Prospectus Directive).
However, the changes are not immediately effective. The next step is for EU member states to implement the amending directive into their domestic law. They will have 18 months to do this from when the directive becomes law (expected to be in September or October this year). The deadline is therefore likely to be March/April 2012. Member states may implement at different times so companies will need to be aware that there may be a transitional period when different rules could apply in different countries over the next 18 months or so.
The widening of the employee share schemes exemption
Many employee share awards will be structured as non transferrable share options or free share awards which in most countries already fall outside the scope of any prospectus rules. However, a prospectus is required where employees are purchasing shares under share purchase plans which are not structured as option plans and the numbers of people or the consideration involved exceed the 100 person threshold or the €2.5 million consideration exemptions mentioned above.
Under article 4(1)(e) of the Prospectus Directive, companies which have securities traded on a EU regulated market and that offer shares to their employees, are exempt from the requirement to publish a prospectus and need only publish a simple information document. However, other companies (for example, companies listed on the New York Stock Exchange (NYSE)) are currently required to publish a prospectus in the event that the general exemptions are unavailable to them.
Under the amending directive, the employee share schemes exemption which applies in respect of companies listed within the EU will be extended to apply to:
(a) all companies which have their head office or registered office in the EU; and
(b) companies incorporated outside the EU which have securities admitted to trading on a third country market, provided that the EU Commission has determined that the relevant market offers equivalent protections to those which exist in relation to EU markets.
It is not clear which third country markets will be recognised as “equivalent”. However, the amending directive states that the legal and supervisory framework of a third country may be considered equivalent if:
- markets in that third country are subject to authorisation and to effective supervision and enforcement on an ongoing basis;
- markets have clear and transparent rules regarding admission of securities to trading so that such securities are capable of being traded in a fair, orderly and efficient manner, and are freely negotiable;
- security issuers are subject to periodic and ongoing information requirements ensuring a high level of investor protection; and
- it ensures market transparency and integrity by preventing market abuse in the form of insider dealing and market manipulation.
It seems likely that well-established markets such as the NYSE, the Tokyo Stock Exchange, and the Australian Stock Exchange would qualify for equivalence under these criteria. It is unclear how quickly the Commission will adopt equivalence decisions.
It is to be hoped that member states will move quickly to implement this long awaited relaxation of the EU prospectus rules, and do so on a common timetable so that issuer companies are not faced with divergent rules within the EU.