We will track here amendments to this resource that reflect changes in law and practice.
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 in connection with an offer of securities to employees within the European Economic Area (www.practicallaw.com/1-107-6197) (EEA) (see When is a prospectus required for an offer to employees?).
Sets out the types of employee share offer for which a prospectus is not likely to be required (see When is a prospectus not required for an offer to employees?).
Considers the main exemptions which might be useful if securities are to be offered to employees (see The relevant exemptions in the Directive).
Considers the requirement for an employee information document, if relying on the employee share scheme exemption (see Employee information documents).
Briefly considers the prospectus issues when operating a UK employee share scheme in other EEA states (see Making an offer under a UK share scheme in another EEA state).
Considers the information that needs to be included in a prospectus for an employee share offer, if one should be required (see Contents of a prospectus for an offer to employees, if one is required).
Considers additional issues which arise for non-EEA companies operating share schemes within the EEA (see Non-EEA multinationals).
Outlines expected future developments (see Amendment of the Directive and future developments).
On 1 July 2005, the Prospectus Directive (www.practicallaw.com/8-200-9274) (Directive) was incorporated into the laws of the UK jurisdictions. Before then, there was a clear exemption from the need to produce a prospectus for offers of shares and other securities under employee share schemes (under the old Public Offer of Securities (POS) regulations (www.practicallaw.com/2-107-7021)). Between 1 July 2005 and 1 July 2012, this was no longer the case, although the Directive did include an exemption for some employee offers. This exemption was expanded to cover many more employee share schemes throughout the EEA, as member states' domestic laws were aligned with amendments made to the Directive on 1 January 2011 by Directive 2010/73/EU (Amending Directive). The revised employee offer exemption came into effect in the UK on 1 July 2012 (although some other amendments came into effect in the UK before then) (see Legal update, Directive amending Prospectus Directive implemented in UK (www.practicallaw.com/5-520-0732)). From that date, a prospectus obligation is only likely to arise for an offer to employees in the UK if the issuer of the securities is based outside the EEA and does not:
Have securities admitted to trading on an EEA regulated market (www.practicallaw.com/5-200-9275).
Have securities admitted to trading on a non-EEA market which has been determined by the European Commission to have an equivalent legal and regulatory framework (but no determinations of that kind have yet been made).
However, this exemption, unlike some others in the Directive, does require companies to prepare and circulate an employee information document (see Employee information documents). While this is a much less onerous obligation than filing a prospectus, companies falling within the exemption may still be interested in whether, in fact, the prospectus obligation would apply without an exemption, and, if so, whether another, more complete, exemption could be relied upon instead of the employee offer exemption.
The Directive harmonises the requirements for a prospectus (for public offers and for listings of securities) across the EEA. As a result, a prospectus approved by the competent authority (www.practicallaw.com/5-107-5959) of a company's home member state can be used for offers and listing applications across the whole EEA.
The Directive has been given effect in the UK through:
Amendments to the Financial Services and Markets Act 2000 (www.practicallaw.com/7-107-5760) (FSMA 2000).
The Prospectus Rules (www.practicallaw.com/7-200-9260) (PR), which are part of the Financial Services Authority's (www.practicallaw.com/7-107-6608) (FSA) Handbook of Rules and Guidance.
For more information on the Directive, see PLC Corporate, Practice note, When is a prospectus required? (www.practicallaw.com/5-352-2952)
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 FSA (or the competent authority of another EEA state) has been issued beforehand, or an exemption applies. (For more information on the meanings of public offer and transferable securities for the purposes of the Directive, see Public offers and Transferable securities to which the Directive applies.)
(Article 3(1), Directive; section 85(1) FSMA 2000.)
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, but that issue is not considered in any depth in this note. (If any securities issued to employees also require 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.)
When offering shares to employees, a prospectus is most likely to be required where the shares are to be sold to employees (and not on exercise of a share option), for example, an offer of partnership shares under an HMRC-approved share incentive plan (www.practicallaw.com/3-107-7252).
Transferable securities are defined as those which are "negotiable on the capital market" including:
Shares in companies
Securities equivalent to shares in companies, partnerships and other entities.
Any securities giving the right to acquire or sell such securities.
Any securities giving rise to a cash settlement determined by reference to such securities.
Note that it appears that this would catch any phantom share option if it were "negotiable on the capital market". However, usually phantom options are not transferable, so will not be "negotiable".
The definition of transferable securities is not set out in the Directive itself, which incorporates the definition in the investment services directive (www.practicallaw.com/1-200-9282) (ISD). Now that the ISD has been replaced by the Markets in Financial Instruments Directive (www.practicallaw.com/0-200-9292) (MiFID), the relevant definition is the one in MiFID.
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 (see Meaning of capital market).
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 FSA has stated that, in its view, employee share options granted on the usual non-assignable terms do not require a prospectus. The FSA 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 FSA's view on employee share options, see PLC Corporate, Legal update, Prospectus Directive regime: UKLA Newsletter issue no 10 (www.practicallaw.com/2-200-9578).)
The European Securities and Markets Authority (www.practicallaw.com/5-504-6849) (ESMA) publishes a useful statement about employee share option schemes under question 5 in its "Prospectuses: Questions and Answers" (ESMA Prospectus Q&As). (For the July 2012 version (version 15) of the ESMA Prospectus Q&As, see Prospectuses: Questions and Answers (15th updated version, July 2012) (www.practicallaw.com/6-520-1627).)
It is apparent from ESMA Prospectus Q&A 5 that most other competent authorities agree with the FSA 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.
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 FSA or the European authorities, let alone an English 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.
There is no definition of "capital market" in the Directive, the ISD or 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 (www.practicallaw.com/1-107-6244) 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 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; section 102B, FSMA 2000.)
There is a broad exemption (employee share scheme exemption) from the prospectus obligation for certain public offers to employees and directors if an employee information document is provided (for more information, see Exemption for employee offers of securities of EEA companies and non-EEA listed companies). However, even without the employee share scheme exemption, certain offers of securities simply do not amount to public offers of transferable securities, or are obviously exempt under other provisions of the Directive, and so do not require a prospectus or an employee information document. In the UK:
The grant of standard non-assignable employee share options will not require a prospectus or an employee information document. The exercise of share options should also not require a prospectus or an employee information document. (For more information, see Employee share options.)
Any award of free shares to employees will not require a prospectus or an employee information document. Even if the award could be considered to be an "offer", the consideration would be zero and so the offer would be exempt (for more information, see Offers are exempt if consideration is less than EUR5 million). Obviously, care will be needed if there is any suggestion that some other remuneration has been given up to pay for the "free" shares.
In other EEA states:
It remains possible that employee share option grants could trigger a prospectus obligation in some EEA countries, as discussed in Employee share options.
In the case of free shares, ESMA and the European Commission 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). In December 2009, CESR updated ESMA Prospectus Q&A 6 to add a confirmation that 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.
A prospectus may not be required for offers under an executive only share scheme, as the 150 person exemption will suffice for offers under many such schemes (for more information, see Offers are exempt if made to fewer than 150 persons in each EEA state).
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 exemption if made to fewer than 150 persons in each EEA state).
The employer or its parent is either based in the EEA or is not, but has securities listed on an EEA regulated market (for more information, see Exemption for employee offers of securities of EEA companies and non-EEA listed companies).
A prospectus is not required under the Directive if the total "consideration" for the securities being offered is less than EUR5 million.
(Article 1(2)(h), Directive; paragraph 9, Schedule 11A, FSMA 2000).
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.
The Directive itself was amended with effect from 1 January 2011, to increase this exemption to its current value (from EUR2.5 million) and make it clear within the Directive itself that offers must be aggregated across the whole EEA for the purposes of this exemption. (Article 1(1)(a)(i), Directive 2010/73/EU).
These amendments should have been given effect 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 amended to EUR5 million with effect from 31 July 2011 (see PLC Corporate, Legal update, Prospectuses: Prospectus Regulations 2011 (www.practicallaw.com/4-506-8262)). While this was immediately helpful for offers made entirely within the UK, care might still have been needed when relying on this exemption for any multi-jurisdiction offer including the UK, as it would have remained necessary to comply with the lowest relevant limit in force in the EEA at the time.
We understand that some EEA member states (other than the UK) interpreted the unamended EUR2.5 million exemption as applying separately in each member state, which has been helpful in avoiding or reducing prospectus obligations in some circumstances. As a result, it is possible that a few companies making share plan offers in certain EEA member states may find the 1 January 2011 amendments unhelpful, once they come into effect in the relevant states, as they make it clear that the limit applies across the EEA as a whole. The companies most likely to be affected will probably be non-EEA companies who are not (or not yet) able to take advantage of a European Commission market equivalence decision (see Exemption for employee offers of securities of EEA companies and non-EEA listed companies and Non-EEA multinationals).
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.
(Article 3(2)(e), Directive; section 86(1)(e), FSMA 2000.)
Unlike some of the other financial limits in the Directive, this limit was not increased with effect from 1 January 2011. However, the exemption was amended at that time, with wording added to make it clear that offers must be aggregated across the whole EEA for the purposes of the exemption (Article 1(3)(a)(i), Directive 2010/73/EU).
As with the unamended EUR2.5 million exemption, we understand that some EEA member states (other than the UK) interpreted the unamended EUR100,000 exemption as applying separately in each member state, which has been helpful in avoiding or reducing prospectus obligations in some circumstances.
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).
(Article 3(2)(b), Directive; section 86(1)(b), FSMA 2000.)
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 99 employees on one day in a particular state and a separate offer made to 99 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.
The Directive itself was amended with effect from 1 January 2011, to increase the limit in this exemption to 150 persons (Article 1(3)(a), Directive 2010/73/EU). For more information, see Amendment of the Directive and future developments.
In the UK, the exemption limit was amended to 150 persons with effect from 31 July 2011 (see PLC Corporate, Legal update, Prospectuses: Prospectus Regulations 2011 (www.practicallaw.com/4-506-8262)). While this was immediately helpful for offers made entirely within the UK, care might still have been needed when relying on this exemption for any multi-jurisdiction offer including the UK, as it would have remained necessary to comply with the lowest relevant limit in force in the EEA at the time.
The employee share scheme exemption applies (from the time the 1 January 2011 amendments to the Directive took effect in relevant states) to:
All companies with their head office or registered office in the EU (or, as a result of the EEA Agreement, in a non-EU member state of 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, MAD (www.practicallaw.com/3-200-9276) 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".
(Article 4(1)(e), Directive; PR 1.2.2R (5) and section 85(5)(b), FSMA 2000 .)
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 which 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.
No employee information document is required for an employee offer or award of free securities, as these offers fall outside the Directive under a different exemption (for more information, see Legal update, Prospectus Directive: CESR confirms information document not required for free employee securities (www.practicallaw.com/5-501-2383)). 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 publishes some recommendations about them in CESR recommendations that were updated by ESMA in March 2011 (these are quoted below).
Recital 14 of the Amending Directive (2010/73/EU) which extended the employee share scheme exemption from 1 January 2011 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 FSA 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."
(Paragraphs 173 - 176 of The consistent implementation of Commission Regulation (EC) No 809/2004 implementing the Prospectus Directive (ESMA update) (www.practicallaw.com/9-505-3913).)
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).
One notable consequence of the 1 January 2011 amendments to the employee share scheme exemption is that an AIM (www.practicallaw.com/8-107-6392) company with its head office or registered office outside the EEA will continue to 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.
There is also 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.
(Article 4(2)(f), Directive; PR 1.2.3R (6) and section 85(6)(b), FSMA 2000.)
Originally, if an offer to employees was not exempt from the Directive, the prospectus required for the offer had to be prepared in the same way as any other prospectus. Although the competent authorities have some discretion to relax some requirements, where appropriate, we understand this discretion was little used.
The Commission proposed in December 2007 that CESR consider the possibility of a "light touch" prospectus regime for offers under employee share schemes. In response, helpful guidance on prospectuses for employee share offers was added to the document that is now the ESMA Prospectus Q&As on 10 February 2009 (in ESMA Prospectus Q&A 71) (see Legal update, Prospectus Directive: CESR publishes details of "light touch" regime for employee share schemes (www.practicallaw.com/2-385-0025)).
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 affliated 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 71 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.
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).
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:
It seems unlikely that this review will take place before all the EEA member states have enacted the 1 January 2011 Directive changes in their domestic law.
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 July 2012, at which date ESMA Prospectus Q&A 71 remained unchanged.
Unfortunately:
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 these reasons, companies still need local legal advice before offering participation in a UK employee share scheme to employees in any other EEA state.
For a company resident outside the EEA (a third country issuer) operating an employee share scheme within the EEA, there are additional complications.
The third country issuer or its advisers will need to work out which is the "home member state" under the Directive. 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 to work out which competent authority has responsibility for a third country issuer.
(Article 2(1)(m)(iii), Directive.)
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 introduced for quoted companies in February 2009 (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).
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). ESMA has begun 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 extended employee share scheme exemption (for more information, see PLC Corporate, Legal update, Prospectus Directive: ESMA call for evidence on request for technical advice (www.practicallaw.com/3-504-6124)).
Until all member states have implemented the 1 January 2011 Directive amendments in their domestic laws, companies and advisers operating share plans in several different EEA states will have to be alert to the possibility of a patchwork of the old and new employee share scheme (and other) exemptions across the EEA. This necessity may persist beyond 1 July 2012, if the amendments are not implemented on time by all the EEA states.
It is possible to check for details of domestic legislation of EU member states implementing the Amending Directive using the EU legislation database at EUR-Lex: Directive 2010/73/EU of the European Parliament and of the Council of 24 November 2010: National Execution Measures. (Of course, 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.) On 9 July 2012, this page suggested that several member states had not yet notified the European Commission of domestic implementing measures. However, these included the UK, which in fact had implemented the Amending Directive at that date.
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 at the EFTA Surveillance Authority Implementation status database.