The Amending Directive which amends the EU’s Prospectus Directive 2003/71/EC (the “Prospectus Directive”) was approved by the European Parliament on 17 June 2010. It follows months of discussions between the EU institutions together with industry specialists which aimed to improve clarity and certainty as well as provide a reduction in the administrative burdens contained under the Prospectus Directive.

Following the approval of the Amending Directive, Member States are required to implement the directive into their national laws within 18 months after it comes into force, which is expected later this year.  

Set out below is a summary of the principal amendments to the Prospectus Directive which affect employee share plans.  

The current position for employee share plans

Currently, the exemption under the Prospectus Directive is of fairly minimal significance for a large number of share plans since many already fall outside the scope of requiring a prospectus:  

i) non-transferable options granted to employees, do not fall under the scope of the Prospectus Directive which only applies to “transferable securities”. As such, share options are not covered by the rule to produce a prospectus (with the exception of share option plans in Germany and Poland).  

ii) free shares offered in the context of an employee share plan (offers made for no monetary consideration) will also not fall within the scope of the Prospectus Directive, since there is no element of “choice” for participants and as such there would be no “offer to the public”. Where an offer of free shares is made to a recipient who must then choose whether to accept the offer, this is regarded as an offer for no consideration. It would therefore be an excluded offer under the Directive, but would also be subject to the exemption for offers of less than €100,000 and as such no prospectus would be required. However, if the offer of free shares is deemed to disguise a “hidden” consideration, such an offer would fall within the scope of the Prospectus Directive. It is however commonly accepted that in most cases where free shares are offered in the context of an employee share plan, there is no such “hidden” consideration in the employment relationship; and  

iii) offers of transferable securities to fewer than 100 people at a time per Member State will also be exempt.  

However, the Amending Directive, seeks to further extend the employee share plan exemption which will have a significant impact on non EU companies with Employee Stock Purchase plans.  

Extension of the employee share plan exemption

Under the Prospectus Directive, certain companies are exempt from the obligation to publish a prospectus for offers to employees and directors provided that:  

i) the issuer has securities admitted to trading on a regulated market; and  

ii) a document is made available containing information on the number and nature of the securities; and the reason for and the details of the offer.  

The Amending Directive extends the exemption to:  

i) European companies (being, all companies with their head office or registered office in the EU); and  

ii) non-European companies with securities traded on a regulated market; or with securities traded on a market outside the EU (a third country) provided that in the latter case:  

a) a formal decision is made that the third country’s legal and supervisory framework is equivalent to the framework that applies to regulated markets under the Market in Financial Instruments Directive (MiFID) by the Commission; and  

b) adequate information is available in a language customary in the sphere of international finance.  

Changes to prospectus obligations

The Amending Directive also proposes the following changes to the general exemptions from prospectus obligations under the Directive:  

i) the number of persons within a member state to whom offers can be made without the requirement for a prospectus to be published, has been increased from 100 to 150 persons;  

ii) no prospectus is required for an offer with consideration of less than €5 million across the EU within any 12 month period, having been increased from €2.5 million.  

Comment

Employers operating many share plans (such as options, restricted stock and restricted stock units) do not in fact need to consider the rules under the employee share plan exemption because they fall outside the scope of the Directive altogether. The narrow category caught under the Directive, has now been further reduced, with the extension to the employee share plan exemption affecting both European and non‑European companies.  

Companies trading on an “exchangeregulated” market rather than a regulated market (such as AIM), will now fall within the exemption where their head office or registered office is located in the EU. Furthermore, non-European companies (particular US multinationals) which have employee stock purchase plans in Europe, will now be caught under the exemption provided they have securities traded on a regulated market or securities traded on a market outside the EU which is deemed to be an “equivalent” market and provided the formalities listed above are complied with.  

In particular, companies on major exchanges, such as the New York Stock Exchange, will benefit once equivalence has been established by the EU Commission. Such companies would avoid the significant cost and administrative burden of having to produce a full prospectus.  

There is, however, a lack of clarity concerning the issue of non-European companies which do not have securities traded on a regulated market (as defined under MiFID, which covers certain specified stock exchanges in the EU), but are listed on well-regulated investment exchanges in their home countries.

Further clarification is required particularly in respect of EU regulators with regards to the issue of the equivalence of non- European regulatory standards.