What happens to awards of share plans by UK companies in the lead up to and following Brexit.
Currently UK companies can benefit from the employee share exemption included in the EU Prospectus Directive when offering share plan awards across their employee-base in the EU. This exemption means that a formal prospectus will not be required and instead a light-touch process can be relied on.
This Directive will be replaced by the EU Prospectus Regulation (“The Regulation of the EU Parliament and of the Council on the prospectus to be published when securities are offered to the public or admitted to trading” (“the Regulation”)) due to come into full force on 21st July 2019.
The concern is that, on a no deal Brexit, there will be a gap between 29th March and 21st July which will impact UK companies. The current employee share plan exemption can only be relied on by companies which are either registered in the EU or listed on an EU recognised market. There is no certainty that the United Kingdom Listing Authority will be recognised for this exemption after Brexit in the case of a no deal.
The employee share scheme exemption
The Regulation includes a revised employee share scheme exemption intended to ensure equal access to employee share schemes to directors and employees of all companies, whether or not the share offering company is established or listed inside of the EU.
The revised exemption though does not come into force until 21st July. As most UK listed companies offer during an April-June window this timing could present a serious challenge.
UK companies need certainty that they will not be subject to the full prospectus requirements following Brexit. KPMG, supporting ProShare, has sent a formal submission requesting that the exemption be put in place sooner as there are no outstanding actions or approvals required for this section of the Regulation to apply.
UK companies currently comply with the General Data Protection Regulation (“GDPR”) and have updated their practices for their employee share plan obligations under these provisions. Under the GDPR, data can be collected and processed where a legitimate basis applies. Due to the nature of a share plan award the legitimate basis can be the need to use a participant’s data to effectively grant and administer an award.
The position following Brexit and no deal is, however, uncertain. UK companies should consider whether they will need to obtain specific consent to collect and use data for share plan awards. In addition, if the process adopted in the UK is not considered adequate by the EU then the EU may place further burdens on the UK to demonstrate the protections put in place, similar to the requirements imposed on countries outside of the EU such as the US where the EU-US Data Privacy Shield applies.
The EU-US Privacy Shield
The EU-U.S. Privacy Shield was adopted on 12th July 2016 and the Privacy Shield framework became operational on 1st August 2016, replacing the Safe Harbor framework. The Court of Justice of the EU ruled that the Safe Harbour regime was invalid and the new replacement regime is subject to annual review.
As part of the second annual review, at the end of 2018, the EU Commission requested the US authorities to nominate a permanent Ombudsperson by 28th February 2019. The Ombudsperson is an important mechanism to ensure complaints concerning improper access to personal data are addressed.
As with GDPR, following Brexit and no deal, it is not clear if the UK could still rely on the Privacy Shield or if it would need to enter separate, protected arrangements with the US and more widely with other countries.
The Enterprise Management Incentive (“EMI”) and State Aid approval
One of the most generous UK statutory discretionary share plans for growing companies is EMI. The tax treatment of EMI is however dependent upon EU State Aid approval. There was an unfortunate hiatus in 2018 when the UK Government did not obtain a timely renewal of this EU Commission approval. Whilst such renewal was eventually attained, it was caveated “without prejudice to any provisions of the Withdrawal Agreement, which is under negotiation. As a result, the renewal only applies until the UK ceases to be a Member State.”
EMI grants made prior to 11pm on 29th March 2019 (or “Exit Day” should an extension be negotiated) will securely fall within the current approval but what about the treatment of EMI awards made after Exit Day?
There are four scenarios to contemplate:
Our recommendation is that companies planning to make EMI awards do so swiftly, in advance of 29th March 2019.
Finally, army reservists are being called up, from 10 February 2019, to support the Brexit no deal plans. Helpfully HMRC have published extra statutory concession (ESC A103), which provides that HMRC will treat employment with the Ministry of Defence as fulfilling the employment conditions for statutory employee share schemes, meaning that there is no breach of the EMI working time requirement. – You may wish to start taking census of your reservist employees as part of your people planning and to aid your share plan compliance record keeping.
In a no deal Brexit, the following key share plan issues may arise: