The EU Prospectus Directive (implemented in July 2005) requires companies to issue a prospectus when offering "transferable securities" to the public in the European Economic Area (consisting of the EU, Norway, Liechtenstein and Iceland).
The Directive does not include a full exemption for shares offered pursuant to employee share plans. There is a partial employee share plan exemption but it:
- only applies to companies with shares or debt listed on a regulated EU market (so excludes AIM and many US listed companies); and
- is only a partial exemption as companies still have to provide a basic information document to employees.
As a consequence, companies operating employee share plans have tried to use other exemptions and / or limits in the Directive.
It is accepted by national regulators (other than in Germany and Poland) that options are outside the Directive if they are non-transferrable.
Free shares fall within the exemption for offers with consideration of less than 100,000 euro per country.
Companies that offer shares for sale direct to employees typically use the per country exemptions of less than 100,000 euro and / or less than 100 people. If these are not sufficient, there is a 2.5 million euro threshold for offers in all EU jurisdictions in the previous 12 months but it is less satisfactory as it does not exclude local law overrides so one has to check whether there are any additional requirements in each jurisdiction (the UK has none).
If the 2.5 million euro threshold is exceeded, companies that then take advantage of the partial exemption have to issue an information document to employees.
Many companies, however, do not qualify for the partial exemption (such as US and AIM traded companies that do not have shares or debt traded on an EU regulated market). Companies in this position are faced with a difficult choice of:
- Pulling the offer;
- Producing a prospectus; or
- Arranging for their shares or debt to be listed on an EU regulated market.
Most companies pull the offer but the few that persist have tended to cut costs by producing messy prospectuses which cross-refer to information in their NYSE or NASDAQ filings.
We reported in June 2009 on how the Committee of European Securities Regulators ("CESR") had published guidance relaxing the level of disclosure required for prospectuses used for offers of shares to employees. To view, please click here.
Whilst the relaxation was welcome what is really needed is an amendment to the Directive to provide for a full employee share plan exemption.
Amendments to the Directive
On 11 December 2010 the EU Commission published a final draft of an amending directive which took effect 31 December 2010.
The amending directive expands the existing partial employee share plan exemption to include:
- All companies with their head office or registered office in the EU; and
- Non-EU companies with securities traded on a market outside the EU, provided the supervisory regime of that market has been formally declared by the European Commission to be equivalent to the EU supervisory regime for regulated markets.
The amending directive also amends some of the other exemptions and thresholdsin the Directive. The 100 person exemption is increased to 150 and the 2.5 million euro threshold is increased to 5 million euro.
The amendments also make clear that the new 5 million euro threshold is calculated by reference to total consideration across the whole EU and not on a state by state basis.
Amendments to the 100 person exemption, 2.5 million euro threshold and to the partial employee share plan exemption have to be implemented by member states through secondary legislation. Members have until 1 July 2012 to enact these amendments so there may be a temporary divergence in these limits between member states until then.
Consultation of Equivalent Exchanges
The recognition of equivalent stock exchanges can be implemented by the regulatory authorities in individual member states through changes to their prospectus rules.
The European Securities and Markets Authority ("ESMA") has taken over responsibility for the Directive from CESR. On 26 January 2011, ESMA issued a request for views on, among other things, the criteria for assessing equivalence of the regulatory framework of third country markets. To view, please click here. These views will inform its advice to the European Commission on exchanges which may be recognised as equivalent for these purposes. ESMA intends to publish a consultation paper in July 2011.
Whilst the proposed amendments are welcome, the employee share plan exemption will still be only a partial exemption requiring certain information to be made available to employees. In addition, the expanded partial exemption will not apply to companies incorporated outside the EEA that do not have shares or debt listed on an EEA market or on an equivalent exchange (e.g. Canadian incorporated companies with shares traded on AIM).
Several bodies in the UK are pressing for AIM to be recognised for these purposes in addition to obvious exchanges such as NASDAQ and the NYSE.