We will track here amendments to this resource that reflect changes in law and practice.
When is a prospectus needed for an offer to employees?
A prospectus may be required for certain offers of shares (or other securities) to employees within the European Economic Area (EEA). This note deals principally with the position for offers within the UK, but also discusses significant differences in approach in other EEA states.
This note considers when a prospectus will be required under the Prospectus Directive (Directive) in connection with an offer of securities to employees within the European Economic Area (www.practicallaw.com/1-107-6197) (EEA). For the UK, these rules are contained in the Financial Services and Markets Act 2000 (www.practicallaw.com/7-107-5760) (FSMA 2000), and in the Prospectus Rules (www.practicallaw.com/7-200-9260) (PR), which are part of the Financial Conduct Authority (www.practicallaw.com/5-107-5761) (FCA)'s Handbook of Rules and Guidance. The note deals with issues in the following order:
Some share schemes may be outside the scope of the Directive altogether, because the shares are awarded free of charge, or the offers do not relate to transferable securities.
A de minimis exemption may be available for an offer of transferable securities.
If the offer does not qualify for a de minimis exemption, it may qualify for an exemption for offers to employees (referred to in this note as the employee share scheme exemption, although strictly an employee share scheme is not required). For the employee share scheme exemption to apply, the issuer has to prepare an employee information document. This note sets out requirements for an employee information document.
If the employee share scheme exemption is not available, it will be necessary for the issuer to file a prospectus, and the note sets out the required contents of the prospectus.
This note briefly considers the prospectus issues when operating a UK employee share scheme in other EEA states (see Making an offer under a UK scheme in another EEA state).
Next the note considers additional issues which arise for non-EEA companies operating share schemes within the EEA (see Non-EEA multinationals).
Finally, the note outlines expected future developments (see Amendment of the Directive and future developments).
For information on the issues for offers of shares to UK employees through a share incentive plan (www.practicallaw.com/3-107-7252) (SIP), see Practice note, Prospectus Rules: offers to employees under a share incentive plan (SIP) (www.practicallaw.com/8-535-6147).
The historical development of regulation in this area is set out in Practice note, When is a prospectus required?: Background (www.practicallaw.com/5-352-2952).
In short, it is unlawful for a public offer of transferable securities (including listed shares) to be made in the UK unless a prospectus approved by the FCA (or the competent authority of another EEA state) has been issued beforehand, or an exemption applies.
The position is the same in other EEA states. It is also necessary to issue a prospectus in order to list securities on an EEA regulated market (www.practicallaw.com/5-200-9275), but that issue is not considered in any depth in this note. (If any securities issued to employees also need to be listed, this will usually take place in the context of a more general listing of securities of that class. In any case, there is an exemption from the prospectus obligation on listing, for employee securities of a class which is already listed (see Exemption from prospectus obligation for listing of employee securities, if the class of securities is already listed).
The European Securities and Markets Authority (www.practicallaw.com/5-504-6849) (ESMA) publishes a document with answers to frequently asked questions in this area. This is entitled "Prospectuses: Questions and Answers" (www.practicallaw.com/3-554-8465) (ESMA Prospectus Q&As).
The Directive defines an "offer of securities to the public" as a communication in any form and by any means (whether or not made through financial intermediaries) which presents sufficient information to enable an investor to decide whether or not to purchase or subscribe for the securities about:
The terms of the offer.
The securities offered.
(Article 2(1)(d), Directive and section 102B, FSMA 2000).
An award of free shares is not an offer
In the case of free shares, ESMA and the European Commission (www.practicallaw.com/1-107-6244) are agreed that free share awards generally do not give rise to a prospectus obligation (see ESMA Prospectus Q&A 6). Also, it is the Commission's view that competent authorities should not assume that free shares awarded to employees involve hidden consideration, unless it is clear that other remuneration has been given up (again, see ESMA Prospectus Q&A 6). An offer or award of free securities to employees should not trigger an obligation to provide an employee information document under the employee share scheme exemption (see Exemption for employee offers of securities of EEA companies and non-EEA listed companies and Legal update, Prospectus Directive: CESR confirms information document not required for free employee securities (www.practicallaw.com/5-501-2383)).
However, there remains some possibility that free share awards might trigger a prospectus obligation in some EEA states. This is because those states have enacted the monetary exemptions in the Directive using the concept of "value" instead of "consideration". Obviously, free shares still have value, even though no consideration is paid for them.
Care will be needed if there is any suggestion that some other remuneration has been given up to pay for the "free" shares.
Transferable securities to which the Directive applies do not include employee share options, but do include private company shares
Transferable securities are defined as certain types of securities which are "negotiable on the capital market". For more information on the types of security covered refer to Practice note, When is a prospectus required?: Transferable securities (www.practicallaw.com/5-352-2952).
Note that it appears that a phantom share option (www.practicallaw.com/3-376-5197) would be caught if it were "negotiable on the capital market". However, usually phantom options are not transferable, so will not be "negotiable".
Employee share options
Although they are securities which give a right to acquire shares, employee share options are generally not assignable. If they cannot be assigned at all, they are definitely not "negotiable" and so cannot be transferable securities.
At least in the UK, the grant of employee share options will require a prospectus only if the options are purchased by employees on exceptional terms which permit the options to be freely assigned. The FCA has stated that, in its view, employee share options granted on the usual non-assignable terms do not require a prospectus. The FCA also considers that the exercise of an employee share option is unlikely to be a public offer of the shares under option. (For more information about the FCA's view on employee share options, see Legal update, Prospectus Directive regime: UKLA Newsletter issue no 10 (www.practicallaw.com/2-200-9578).)
ESMA publishes a useful statement about employee share option schemes under question 5 in ESMA Prospectus Q&As.
It is apparent from ESMA Prospectus Q&As 5 that most other competent authorities agree with the FCA that the grant of employee share options (and their exercise) will not generally give rise to prospectus obligations. However, it is also clear that a few competent authorities consider that option grants may require a prospectus because those authorities either:
Interpret at least some share options to be an offer of the shares put under option.
View the grant and exercise of a share option and the acquisition of shares on its exercise as a single transaction.
Private company shares
Although it seems that private company shares are probably capable of being "negotiable on the capital market" (see Meaning of capital market), it is not clear that all such shares actually are. If there are very substantial restrictions on sale in a private company's constitution, it must be at least arguable that its shares are not negotiable in any context, and so not transferable securities. However, there is no definitive guidance on this point either from the FCA or the European authorities, let alone a UK court, so it is safest to assume that all private company shares are subject to the Directive.
ESMA Prospectus Q&A 67 comments that typical restrictions on public company shares listed or traded on investment markets are probably not sufficient to undermine their status as transferable securities, but at the same time acknowledges that more extensive restrictions could have this effect.
Meaning of capital market
There is no definition of "capital market" in the Directive, the Investment Services Directive (www.practicallaw.com/1-200-9282) (ISD) or the Markets in Financial Instruments Directive (MiFID) (which now contains the relevant definition of transferable securities), which is unfortunate as such a definition could be helpful in deciding whether a security is "transferable". However, the European Commission has published non-binding guidance online dealing with the interpretation of MiFID in a question and answer format (MiFID Q&As). This includes guidance which indicates that "capital market" should have a broad interpretation:
"The notion of ‘capital market’ is not explicitly defined ... . It is a broad one and is meant to include all contexts where buying and selling interest[s] in securities meet"
(ID 150, MiFID Q&As.)
"Intermediating in the acquisition of shares of entities not admitting to trading on a Regulated Market or not traded in [a multilateral trading facility] would constitute the provision of an investment service as long as those shares are financial instruments. In order to be financial instruments [t]hose shares have to be transferable securities within the meaning of Article 4(1)(18) of MiFID and in particular be ‘negotiable on the capital market’. Those terms have to be understood in a broad manner in the sense that only under limited circumstances will a share that is negotiated not [PLC emphasis] fall under the definition of financial instrument."
(ID 226, MiFID Q&As.)
"If the securities in question are of a kind that is capable of being traded on a regulated market or [multilateral trading facility], this will be a conclusive indication that they are transferable securities, even if the individual securities in question are not in fact traded. Conversely, if they are not capable of being traded in such multilateral systems this may indicate that they are not transferable securities, but this is not conclusive. The reference to the ‘capital markets’ is not defined but, as indicated in the answer to [ID150, internal reference 2] the concept is broad and is meant to include all contexts where buying and selling interest in securities meet. The concept of negotiability contains the notion that the instrument is tradable. If restrictions on transfer prevent an instrument from being tradable in such contexts, it is not [PLC emphasis] a transferable security."
(ID 285, MiFID Q&As.)
The de minimis exemptions in the Directive
If employees are acquiring shares in circumstances where a prospectus might be required, the main potentially helpful exemptions apply if:
The aggregate consideration for the offer is less than EUR5 million (for more information, see Offers are exempt if consideration is less than EUR5 million).
The offer is made to fewer than 150 persons in each EEA member state (for more information, see Offers are exempt if made to fewer than 150 persons in each EEA state).
Offers are exempt if consideration is less than EUR5 million
A prospectus is not required under the Directive if the total "consideration" for the securities being offered is less than EUR5 million.
To test whether an offer falls within this exemption, the maximum consideration payable under the offer must be aggregated with the consideration for all other offers of the same securities made by the offeror throughout the EEA over the preceding twelve months. However, the aggregation does not need to include any offers which were exempt from the Directive under another exemption, or for which a prospectus was registered (see ESMA Prospectus Q&A 26).
Under the Directive, EEA member states are not able to impose any additional, non-Directive prospectus requirements where the Directive applies, so there can be no additional local law requirements for any offers with total consideration of EUR5 million or more.
Offers must be aggregated across the whole EEA for the purposes of this exemption. (Article 1(1)(a)(i), Directive 2010/73/EU).
This limit should have been increased from EUR2.5 million and the aggregation rule introduced in the domestic law of the EEA member states by 1 July 2012. For more information, see Amendment of the Directive and future developments.
In the UK, this exemption limit was increased to EUR5 million with effect from 31 July 2011 (see Legal update, Prospectuses: Prospectus Regulations 2011 (www.practicallaw.com/4-506-8262)).
The EUR100,000 limit
There is a potentially confusing extra exemption in the Directive for offers with an aggregate consideration of less than EUR100,000 over a period of 12 months. Although it has been suggested that this may prevent EEA member states from introducing any prospectus requirements under local law (in addition to those in the Directive) for offers below this limit, it does not have any current significance in the UK.
Offers must be aggregated across the whole EEA for the purposes of the exemption (Article 1(3)(a)(i). Directive 2010/73/EU).
Offers are exempt if made to fewer than 150 persons in each EEA state
No prospectus is required if the offer is made to fewer than 150 persons in each member state at any time (other than "qualified investors, that is, professional investors who are taken not to require protection by the Directive).
This exemption does not include any express requirement to aggregate an offer with other offers over any period. As a result, it might be thought technically possible for an offer to be made to 149 employees on one day in a particular state and a separate offer made to 149 more on the next, without a prospectus being required. However, for this approach to work, the offers would have to be very clearly distinct: regulators would be likely to impose a prospectus obligation by interpreting the arrangement as a single offer over two days. It seems unlikely that this approach could work for offers under the same share plan, made on different days to different groups within a work force.
This is a useful exemption for some executive share schemes. However, it is unlikely to prevent a prospectus being required for an all-employee scheme, unless the workforce receiving the offer totals fewer than 150 in every relevant EEA country. However, if the workforce is fewer than 150 in any EEA country, the exemption may still be of some assistance. We understand that many national regulators do not require a prospectus to be made available in their jurisdiction if the offer is only made to fewer than 150 persons in that country.
This limit should have been increased from 100 persons and taken effect in the domestic law of the EEA member states by 1 July 2012.
In the UK, the exemption limit was amended to 150 persons with effect from 31 July 2011 (see Legal update, Prospectuses: Prospectus Regulations 2011 (www.practicallaw.com/4-506-8262)).
Exemption for employee offers of securities of EEA companies and non-EEA listed companies
If neither of the de minimis exemptions is available, it is necessary to consider the employee share scheme exemption. This applies as follows:
All companies with their head office or registered office in the EEA can benefit from the employee share schemes exemption.
All other companies (that is, those with their head office or registered office outside the EEA) can benefit from the employee share schemes exemption if they have securities traded on a regulated market in the EEA.
Non-EEA companies without securities traded on an EEA-regulated market may in future be able to benefit from the exemption if:
they have securities traded on a market in a country outside the EEA (a third country market);
the European Commission has issued a formal decision that the third country's legal and supervisory framework for that market is equivalent to the framework that applies to regulated markets (under MiFID, the Market Abuse Directive (www.practicallaw.com/3-200-9276) (MAD), and the Transparency Directive (www.practicallaw.com/7-203-6824)); and
"adequate information", including an employee information document, "is available at least in a language customary in the sphere of international finance". For a summary of the languages that are acceptable in each member state see Legal update, Prospectuses: ESMA updated table of language requirements for prospectuses and summaries (www.practicallaw.com/6-563-3787).
However, the Commission has not as yet issued such a decision
The Commission issued a consultation on extending the exemption to non-EEA private companies in February 2015 (see Legal update, European Commission consults on extending employee share schemes exemption in Prospectus Directive (www.practicallaw.com/9-601-1205)).
If the issuing company falls within the exemption, a prospectus is not needed for a public offer made to existing and former employees and directors of that company or any of its "affiliated undertakings". Instead, an employee information document should be "made available" to the employees receiving the offer, which gives information on:
The number and nature of the securities offered.
The reasons for and details of the offer.
(Article 4(1)(e), Directive, PR 1.2.2R (5) and section 85(5)(b), FSMA 2000.)
For more on employee information documents, see Employee information documents.
In the UK, the employee share scheme exemption applies whether or not the securities which are offered to employees are the same as the securities that are listed. We understand that in some other EEA states, the employee share scheme exemption is only available if the securities offered to employees are the same class as the listed securities.
Non-EEA AIM companies fall outside the employee share scheme exemption
An AIM company (www.practicallaw.com/0-502-1945) with its head office or registered office outside the EEA will fall outside the employee share scheme exemption (unless it also has securities traded on a regulated market or a non-EEA equivalent market). This is because:
AIM (www.practicallaw.com/8-107-6392) is not a regulated market.
There is no provision in the amended Directive to recognise the equivalence of multilateral trading facilities (www.practicallaw.com/0-209-4964) (MTFs) within the EEA, such as AIM, even though they may be subject to many aspects of the EU's investment regulation regime.
Employee information documents
No employee information document is required for an employee offer or award of free securities, or where one of the de minimis exemptions applies. However, an employee information document is required where the company wishes to rely on the employee share scheme exemption.
At present, there are no more detailed requirements for these information documents in the Directive itself or in associated guidance issued by the European legislature or Commission, although:
ESMA published some recommendations about them in Committee of European Securities Regulators (CESR) (www.practicallaw.com/5-107-7543) recommendations that were updated by ESMA in March 2011 (these are quoted below).
Recital 14 of the Amending Directive (2010/73/EU) suggests that employee information documents prepared by unlisted companies should be updated when necessary, although this is not reflected in the operative provisions of the amended Directive (for more information, see Legal update, Prospectus Directive exemption for share schemes extended to all European companies and to non-European companies on equivalent markets: Employee information documents: apparent new updating obligation for unlisted EEA companies (www.practicallaw.com/4-504-2291)).
The requirement to make available an information document is a much less onerous obligation than the need to publish a full prospectus approved by a competent authority. We understand that the FCA does not inspect the information documents prepared for offers within its jurisdiction, but some other competent authorities do.
The ESMA/CESR guidance on employee information documents states:
"173. CESR would expect the document referred to in articles 4.1.d and 4.2.e and 4.1.e and 4.2.f to include:
a) the identification of the issuer and a indication of where additional information on the issuer can be found;
b) an explanation of the reasons of the offer or admission to trading together with an indication of the specific provision of the Directive under which the exemption applies;
c) details of the offer (key terms and conditions of the offer or admission to trading, which is likely to include information on the addressees of the offer, time frame of the offer, minimum and maximum amount of orders, information on where details of the price can be found, if not yet determined), including the nature of the offer (offer to issue or to sale securities), conditions upon which the securities will be issued or admitted to trading, price of the securities, if any.
174. In relation to the number and nature of the securities involved in the offer or admission to trading, CESR would expect this to include a summarised description of the rights attaching to the securities.
175. CESR considers important to point out that this document is not a prospectus; therefore information referred to in these recommendations should be abbreviated and does not need to be approved or filed with the competent authority.
176. CESR also considers that this document should be made available to its addressees but not necessarily published."
Once the Commission makes equivalence decisions about third country markets, it may become necessary to produce employee information documents for non-EEA companies falling within the relevant limb of the exemption. In that case, there is an additional requirement for the document to be available "at least in a language customary in the sphere of international finance". Further disclosure may be required in such a language, as these companies are required to provide "adequate information" including an employee information document (see Exemption for employee offers of securities of EEA companies and non-EEA listed companies).
Contents of a prospectus for an offer to employees, if one is required
ESMA Prospectus Q&A 71 allows some companies making an offer of shares to employees to prepare a short form prospectus, rather than a full prospectus, in order to meet the company's obligations under the Directive:
The offers within ESMA Prospectus Q&A 71 are public offers:
made to current or former directors or employees;
of securities in the relevant employer or an affiliated undertaking (for example the employer's parent company).
ESMA Prospectus Q&A 71 applies to companies which have securities traded on any market, not only a regulated market within the EEA.
Companies with shares listed or admitted to trading on AIM or non-EEA markets will therefore be able to take advantage of ESMA Prospectus Q&A 71.
However, non-EEA private and unquoted public companies will still need to consider whether a full prospectus might be required for any employee offer.
ESMA Prospectus Q&A 71 focuses on share offers, since these are by far the most common offers to employees subject to the Directive.
It is not clear whether this means that a similar approach will not be available for any other type of securities offered to employees by a quoted company, or simply that ESMA has not yet developed or published a common approach to these circumstances.
If a company falls within ESMA Prospectus Q&A 71 and makes a share offer to employees, it should prepare a short-form prospectus, omitting various items normally required under the Directive, but which ESMA considers unnecessary for employee share offers. ESMA Prospectus Q&A 711 contains a list of the information which can be left out (see Information which can generally be omitted from a short-form prospectus).
However, if it is appropriate, the relevant competent authority can still require the inclusion of any items from this list, despite the guidance. In particular, the competent authority may do so if it is not satisfied that the ongoing disclosure requirements of the relevant market "ensure a sufficient level of information for investors".
A short-form prospectus will still need to be scrutinised and approved by the competent authority in the usual way.
Information which can generally be omitted from a short-form prospectus
ESMA Prospectus Q&A 71(3)specifies that a short-form prospectus generally will not need to include the information required by the following items in the annexes to the Prospectus Regulation (www.practicallaw.com/4-200-9266):
Annex I: 5.1.2 to 5.1.5, 5.2, 6, 7, 8, 9, 10, 11, 15, 16, 17.1, 18, 19, 20.1 to 20.5, 20.6, 21, 22 and 25.
Annex III: 3.3, 4.10, 5.1.9, 5.1.10, 5.2, 5.4.1, 5.4.3, 5.4.4, 6.3, 6.4, 6.5, 7 and 10.2.
For further details of the full and short-form prospectus requirements, see Practice note, Prospectus Directive: short-form prospectus requirements for an offer of quoted shares to employees (www.practicallaw.com/6-384-9389).
Short-form prospectus regime is temporary
The ESMA Prospectus Q&A 71 short-form prospectus regime was designed as a temporary measure, introduced while the EU legislature was in the process of considering the extension of the share schemes exemption that has now been enacted (at least at the EU level). It was always intended that this regime would be reviewed once the employee share scheme exemption had been extended. However, we are not aware of any further comment from European authorities about plans to review the short-form prospectus regime. The ESMA Prospectus Q&As were most recently updated in October 2014, at which date ESMA Prospectus Q&A 71 remained unchanged.
Exemption from prospectus obligation for listing of employee securities, if the class of securities is already listed
There is an exemption from the prospectus obligation arising on admission to a regulated market of securities offered or allotted to employees (which is very similar to the employee share scheme exemption for offers to employees). However, in this case, the securities involved must be in the same class as those already admitted to that regulated market.
Making an offer under a UK scheme in another EEA state
Companies still need local legal advice before offering participation in a UK employee share scheme to employees in any other EEA state. This is for the following reasons:
Some parts of the Directive are not very precise or comprehensive, leaving scope for various interpretations.
The Directive has not been enacted into domestic law completely consistently across the EEA.
There is significant variation between competent authorities in the interpretation of the Directive. Some competent authorities have also been very hesitant and cautious in trying to sort out difficulties of interpretation.
Although the UK has not done so, some other EEA states have introduced local, non-Directive prospectus requirements for offers with aggregate consideration of between EUR100,000 and EUR5 million (see Offers are exempt if consideration is less than EUR5 million).
For a company resident outside the EEA (a third country issuer) operating an employee share scheme within the EEA, there are additional complications.
Which is the home member state?
The third country issuer or its advisers will need to work out which is the "home member state" under the Directive and, accordingly, which competent authority has responsibility for it. For these purposes, the Directive began to have effects as soon as it was enacted (on 31 December 2003) and before it otherwise came into force (on 1 July 2005). Any offers or listings within the EEA between 31 December 2003 and 1 July 2005, as well as any since 1 July 2005, need to be taken into account.
(Article 2(1)(m)(iii), Directive.)
Third country issuers may be listed on a home country market, rather than an EEA-regulated market
A third country issuer could well be listed on a major stock exchange outside the EEA. However, it would not be able to take advantage of the employee share scheme exemption, even though the standards of its home stock exchange may offer comparable levels of protection for employees participating in the third country issuer's share plans.
Companies in this position:
Will benefit from the short-form prospectus regime (see Contents of a prospectus for an offer to employees, if one is required).
May in future benefit from a provision introduced by the Amending Directive which allows the European Commission to recognise the regulation of a non-EEA market as equivalent in key respects to that of an EEA-regulated market. Companies listed on a recognised non-EEA market will then benefit from the employee share scheme exemption in almost the same way as an EEA company (for more information, see Exemption for employee offers of securities of EEA companies and non-EEA listed companies and Amendment of the Directive and future developments).
Amendment of the Directive and future developments
Non-EEA companies listed on well-regulated markets outside the EEA may benefit from future equivalence decisions by the European Commission, although it is not clear whether and when any such decisions are likely to be made (see Exemption for employee offers of securities of EEA companies and non-EEA listed companies). In January 2011, ESMA began consultations on various issues arising from the amendment of the Directive, including the criteria for assessing equivalence of the regulatory framework of third country markets in connection with the employee share scheme exemption (for more information, see Legal update, Prospectus Directive: ESMA call for evidence on request for technical advice (www.practicallaw.com/3-504-6124)).
It is possible to check for details of domestic legislation of EU member states implementing the Directive using the EU legislation database (see Directive 2010/73/EU of the European Parliament and of the Council of 24 November 2010 ). Note that this does not give access to English translations of the local measures and does not guarantee that the measures are comprehensive or in conformity with the Amending Directive.
It is also possible to check for implementation of relevant directives by EEA member states which are not EU members (that is, Iceland, Liechtenstein and Norway) by searching against the identifying number of the directive in the appropriate database (see EFTA Surveillance Authority: Implementation status).