The announcement that the British public voted in favour of a so-called "Brexit" has the potential to be one of the most significant events in recent British history.  Although the vote has no immediate effect on the UK's laws, and the timing of the UK's exit from the EU is unclear, there are implications for employment and pensions law, as well as share plans, and also potentially significant implications for employers’ immigration and social security compliance.

We cover these potential implications below.  Baker & McKenzie has also created several resources to help you understand how your business might be affected by Brexit, identifying the various types of relationships with the EU which the UK may adopt in place of full membership. We invite you to review the information and resources below and please feel free to contact your Baker & McKenzie contact should you wish to discuss the specific implications for your business.

Employment implications

The precise implications for employment law are currently uncertain and might ultimately be limited, but there are some areas where employers should now be taking account of the possibility of future changes. Please read this document for more information: Brexit: Employment Implications

Pensions implications

Much of UK pensions law which is derived from EU law is contained in primary legislation, including, for example, the scheme specific funding requirements for DB schemes.  We think that it is unlikely that there will be significant change to this existing body of law as a result of the vote to leave.  It is possible that we may see some future divergence in some areas depending on how law develops in the EU and that nature of the UK's relationship with the remaining EU27 which emerges over the following months and years.

Impact on key funding risks for DB schemes

Trustees and sponsoring employers of occupational DB pension schemes will need to factor in the impact which the leave vote will have on key funding risks in the scheme: covenant, investment risk and how the funding level and strategy for the scheme is set.   Again, much is likely to depend on the nature of the revised UK/EU-27 relationship and the particular industry in which the sponsoring employer operates.

For sponsoring employers, maintaining ongoing dialogue and communications with trustees will be key.  In the event of the vote to leave having a significant adverse impact on the business, for example a reduction in credit rating, employers should consider whether any legal requirements to communicate information to trustees are triggered.  For example, this could be the case under a parent company guarantee or any information sharing agreement which is in place between the employer and trustees.  There is also a legal requirement on employers to disclose to trustees “any event relating to the employer which there is reasonable cause to believe will be of material significance in the exercise by the trustees…..of any of their functions.” 

For Trustees, although Brexit represents uncharted territory, its potential impact needs to be carefully considered like any other significant development that may affect the scheme.  In the weeks and months ahead, Trustees will, no doubt, continue to ensure an appropriate dialogue with the employers and make use of their existing monitoring and governance procedures.

We will be considering what the Brexit vote means for pensions in more detail at our breakfast briefing on 13th July.  If you would like to come along and have not yet registered to attend, you can register here.

Share plan implications

Companies and share plan administrators need to be clear on the implications of the Brexit vote on the operation of their share plans.

Short term

Legal position

From the legal point of view, Brexit has no effect on the ability of companies to implement and operate employee share and other incentive plans in the UK and elsewhere in Europe.  The Brexit vote was an advisory vote and has no direct effect on any legislation now in force. It could be two years or more before any legislation affecting share and other incentive plans is changed.

There is no need for immediate changes to the legal framework underpinning the employee share operations.

Any new EU legislation coming into force in the near future, such as the Market Abuse Regulation, will still come into force.

Market turmoil

While there is no need to change the legal framework, market turmoil is bound to affect the value of the shares held by employees and the perceptions of employees.

We are not expecting companies to change employee share awards and participation to take into account market movements on a short term basis.    

There may be a small number of cases where participants are particularly adversely affected-for instance, through the timing of the vesting of their awards and measurement of their performance conditions.  While it is likely to be difficult to change awards within the current regulatory and corporate governance framework, companies could of course check the plan rules and other terms and conditions of the awards to see if there is any flexibility in interpretation. 

Mid term

In the next couple of years, specific legislation will be put forward to replace the present legislation that is derived from EU directives.

The direct impact on the operation of employee share plans is likely to be limited.  The UK tax legislation underpinning employee share plans will be largely unaffected-though the social security treatment of participants moving to and from the UK and the EU could change in the longer term.

The main areas of impact are likely to be:

Securities Law Framework

At present, like the other member states of the EU, the UK is subject to the EU Prospectus Directive, requiring a prospectus to be issued in connection with offers of securities, unless an exemption applies.

UK and EU registered companies and companies with shares admitted to trading on an EU regulated market are able to avoid having to file expensive prospectuses in connection with employee share plan offerings by complying with the employee share plan exemption  or ensuring that their offering falls within a small offering exemption (of less than 150 persons in each EEA state).

In addition, in  common with many other EU member states, the UK takes the view that conditional share awards under long term incentive plans and Restricted Stock Units which are offered for no consideration are not subject to the Prospectus Directive.

The present regime has the biggest impact on non UK and non EU issuers who operate plans, such as employee stock purchase plans, that are considered to be public offerings and therefore require a prospectus.   Where a prospectus is required, companies are able to file one prospectus in this home EU member state and "passport" the prospectus to any other EU state in which the ESPP offering qualifies as a public offering.

Quite what will happen to those rules when the UK leaves the EU is a matter of conjecture at this stage.  One possibility is that the UK will implement similar rules for mutual recognition of prospectuses between the UK and EU member states, but that option would require a specific negotiated agreement between the UK and the EU.  Under this route, it is also possible that the UK would continue to have legislation that replicates existing employee share plan exemptions. Another route is that the UK simply enacts a blanket employee share plan exemption from prospectus requirements, but for UK-listed companies which are not also listed on another EU exchange, this will not avoid the potential need for a prospectus in other EU member states (unless the EU specifically allows for this).

Data Protection

The General Data Protection Regulation ("GDPR") is scheduled to come into force on May 25, 2018.  Though it will not apply directly to the UK once the UK leaves the EU, the two-year period of negotiation over the terms of the UK's exit has not yet begun, and the statement from Prime Minister David Cameron last Friday to the effect that he does not intend to commence that process before his replacement is elected suggests that the UK's exit may not be finalised for some time.  It seems likely, therefore, that the UK will be required to comply with the GDPR, at least for a limited period.

In the share schemes context, the GDPR presents additional challenges, including potential restrictions on the use of consent as a means of legitimising the transfer of personal data outside the EU.  That issue, and the uncertainty over what, if any, changes the UK will make to the level of data protection compliance required under the GDPR once it leaves the EU, make this a key area of focus for UK share schemes compliance in the coming months and years.

Long term

The long term implications for the UK of a Brexit are likely to be profound (though the direct effect on employee share plans is likely to be limited).

Impact on your global share/incentive plans

In a referendum on June 23, 2016, the UK voted to exit from the European Union (”EU"), the so-called Brexit. The referendum is a mandate to the UK Government to commence the process of withdrawing from the EU, but the timing is very unclear at this point.

For companies offering awards under employee share and other incentive plans in the UK and elsewhere in Europe, Brexit has no immediate effect on such offerings. The vote yesterday was an advisory vote and has no direct effect on any legislation now in force. It will likely take at least two years (and probably more), before any legislation affecting share and other incentive plans is changed.

Notwithstanding, we offer some preliminary thoughts below on areas affecting share and other incentive plans that may be impacted by Brexit in the future:

Securities Law Implications for Option and RSU/Restricted Share Grants

At present, most, if not all, of the local securities authorities appear to take the view that non-transferrable employee options or other equity incentive awards offered for no consideration are not "securities" subject to the EU Prospectus Directive (2003/71/EC) (the “Prospectus Directive”). Therefore, companies offering these kinds of incentives to their employees in the EU, including in the UK, have not been required to file a prospectus in connection with the offer.

Once the UK leaves the EU, we would expect that the UK securities authorities will take a similar view as to non-transferable employee options and other equity incentive awards offered for no consideration and that no UK securities filing would be necessary in connection with the offering of such awards.

Securities Law Implications for Share Purchase Plans

The Prospectus Directive requirements are different for the offering of employee share purchase plans ("ESPPs") in the EU. Rights to purchase shares under an ESPP generally are treated as securities offerings under the Prospectus Directive and require a prospectus filing, unless the company can rely on an exemption or exclusion. Many companies are able to rely on the small-offering exemption which applies if the ESPP is offered to fewer than 150 employees in an EU country. In addition, an employee share plan exemption exists but this exemption currently applies only to companies incorporated in the EU or listed on an EU-regulated stock exchange.

Companies that are required to file a prospectus in the EU (because they cannot rely on any of the available exemptions or exclusions) are able to file one prospectus (in their "home member country") and passport the prospectus into any other EU country in which the ESPP offering qualifies as a public offering (typically because it is made to 150 or more employees).

Once the UK leaves the EU, the Prospectus Directive may no longer apply. In this case, the UK may implement equivalent rules which could provide for the mutual recognition of prospectuses approved in a EU or EEA country. Whether there is a willingness to grant mutual recognition will depend on whether the EU will reciprocate. Problems may arise if the EU is not open to reciprocity in which case the UK may not agree to recognize a prospectus from another jurisdiction and require the company to file another/new prospectus in the UK.

However, it is also possible that the UK securities authorities will not consider ESPP offerings to be public offers of securities (similar to options and awards offered for no consideration) or that they would accept offer materials prepared under the laws of the home country of the issuer to be sufficient disclosures and not require a UK-compliant prospectus. For example, for US issuers, the delivery of a plan prospectus prepared in accordance with Section 10(a) of the U.S. Securities Act of 1933 may be considered to be sufficient.

For companies that have been relying on the employee share plan exemption under the Prospectus Directive because they are either incorporated or listed in the UK, the exemption may no longer be available after the UK withdraws from the EU, unless the company is also listed on another EU-regulated exchange. Or if a company is relying on the exemption because it is incorporated or listed in another EU or EEA country, after the UK's withdrawal from the EU, it is no longer certain if the UK will recognize the employee share plan exemption. However, as noted in the preceding paragraph, it is possible that the UK may then no longer require a prospectus filing for any employee share plan offerings. If that is not the case, another/new prospectus filing in the UK may be required (notwithstanding the continued availability of the employee share plan exemption for the EU offering).

Data Privacy Implications

As you know, data privacy regulations in the EU are in a major state of flux due to the invalidation of Safe Harbor and due to a proposed new General Data Privacy Regulation which is intended to replace the current EU Data Privacy Directive. The UK's data privacy laws implement the standards imposed by the EU Data Privacy Directive. The new General Data Privacy Regulation comes into force in May 2018, and it is unlikely that the UK will have formally withdrawn from the EU by that point, so companies should continue to prepare for the adoption of the General Data Privacy Regulation in the UK as in other EU jurisdictions. Once the UK withdraws from the EU, it may be free to amend its data privacy laws or implement new laws, but the degree of latitude which the UK has (if any) will depend on the nature of the relationship it negotiates with the EU. Quite what impact any new data privacy laws will have on share plans offered in the UK is a matter of conjecture at this stage. Companies operating share plans in the UK should continue to monitor developments in this area. We will be publishing updates on this point as more information becomes available.


Various EU directives (such as the EU Framework Directive) implemented into UK law prohibit discrimination against employees based on different grounds. For example, discrimination against part-time or fixed-term employees or discrimination against employees on the basis of age is prohibited. This can impact share plan offerings by companies to EU employees (e.g., by restricting the use of age-based retirement provisions or requiring that awards be offered also to part-time employees). As noted above in the data privacy context, it is possible that the UK may reconsider these laws after withdrawing from the EU, though the ability to do so depends on the nature of the relationship the UK ultimately negotiates with the EU.

Immigration implications

The issue of immigration was perhaps the most emotive aspect of the pre-Brexit campaign on both sides.  At present, EU nationals (including those in the UK) are free to live and work anywhere in the EU without the need to obtain a visa or other permission under the principle of free movement enshrined in the EU Treaty.  That remains the case after last week's vote.  However, the significance of the issue in the pre-referendum campaigning suggests that the UK Government will seek to depart from that principle in its negotiations over its future relationship with the EU post-Brexit.

Quite what impact that will have on the ability of UK nationals to work in the EU, and vice versa, is a matter of conjecture, depending as it does on what the UK Government seeks to negotiate with the EU (and how successful those negotiations are).  One suggestion made in pre-referendum campaigning was that the UK Government would introduce a points-based immigration system like that in place in Australia.  In fact, in 2008 the then changes to our immigration system were introduced as an "Australian style" points based system.  It is therefore very difficult to tell what a new "Australian style" points based system might look like, for example whether it will keep its existing form and be extended to EU/EEA country nationals or whether a completely new system will be introduced. 

Social security implications

Currently, employees moving between the UK and another EU state are covered by EU Regulations which determine in which state social security contributions are payable. The UK also has a number of bi-lateral agreements with certain other countries governing social security payments, and a set of default rules which apply where employees come from or leave for states outside the EU with which the UK does not have a bi-lateral agreement.

The EU Regulations and the UK's bi-lateral agreements contain provisions for seconded workers to remain in their home state social security system for a number of years, subject to certain conditions. This can be advantageous, for example for workers wishing to continue to accrue social security benefits (such as a state pension) in their home country. The UK's default rules do not permit this.

When the UK leaves the EU, it will cease to be covered automatically by the EU Regulations on social security. It is possible that the UK could seek to negotiate with the EU for the Regulations to continue to apply (in much the same way as Switzerland has). Alternatively, the UK could seek to enter into bi-lateral agreements with EU states individually. If neither of these courses of action is taken, the UK's default rules governing social security will apply, and absent further changes to them seconded workers will no longer be able to remain in their home state social security system.

In addition, until it is clear what approach the UK intends to take in relation to workers working in or moving between the UK and another EU country, it will be difficult for companies to plan how the social security costs should be attributed been those countries and what the compliance requirements will be.