Brexit Issues for Share Plans - KPMG United Kingdom
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Brexit Issues for Share Plans

Brexit Issues for Share Plans

What happens to awards of share plans by UK companies in the lead up to and following Brexit.

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Partner – People Services, Reward

KPMG in the UK

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Timing of grant date for awards of share plans by UK companies in the lead up to and following Brexit

Background

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.
 

What happens on data protection: GDPR and the EU-US Data Privacy Shield on Brexit?

Background

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.

What happens to EMI on Brexit?

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:

  1. During the transition period, EU law continues to have effect in the UK. This means there will be no change in State Aid rules but the UK will lose its vote in any State Aid legislation or decision-making.
  2. Under the “Backstop” provisions, a UK regime and a Northern Ireland regime are created. Ultimately the responsibility for operating State Aid for the UK will pass to the Competition and Markets Authority (“CMA”) but the EU Commission will retain significant powers to step in.
  3. The final relationship landscape is far from well-defined and remains subject to conjecture.
  4. In a no deal scenario, the Government plans that any previously approved State Aid measures would retain their status and any pending or new notification requests could be governed by the CMA.

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.
 

Summary No Deal Issues

In a no deal Brexit, the following key share plan issues may arise:

  1. UK companies may no longer be able to rely on the “employee share scheme exemption” when offering share awards to their EU employees or to their UK employees – You should consider the date you intend to grant awards. Whether this could be moved or would you then be in a closed period or would other restrictions or commercial requirements be affected;
  2. A specific agreement may need to be negotiated between the EU and the UK to ensure adequate data protection provisions are put in place. - You should ensure that your data protection arrangements are currently fit for purpose and keep these under review; and 
  3. The UK may not be able to rely on the Privacy Shield framework with the US and so it would need to enter a separate arrangement with the US; and 
  4. The UK would need to consider the other arrangements or agreements it may need to enter or comply with in respect to international participants and their home country data requirements. – You should ensure your data protection requirements are compliant across all your global locations when offering share incentives; 
  5. The EU might subsequently challenge the legitimacy of any State Aid tax relief claimed outside a bilateral UK EU agreement (thus putting under threat the tax treatment of EMI grants made after Exit Day.) – You should consider making EMI awards, if possible before 29th March 2019.

For more information, please contact Alexy Armitage or Liz Hunter.
 

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