Are there any prospectus or securities law requirements that apply to the operation of incentive plans?
US federal and state securities laws are complex, including for US private companies and public companies whose shares do not trade on a US stock exchange.
A company whose shares trade on a US stock exchange may register its plan shares for use under the Securities Act of 1933 (“’33 Act”) by filing SEC Form S-8 and delivering a prospectus (the terms of which are prescribed by the SEC) to plan participants that describes the main features of the plan and incorporates by reference other previously-filed SEC materials. The result is that employees need only be given a summary of the plan’s provisions, a description of the tax consequences of plan participation, a copy of the most recent annual report and a copy of the plan. No state filings are necessary when an S-8 is filed.
Companies whose shares are listed on a US stock exchange are subject to burdensome disclosure obligations. For example, equity awards made to so-called “Section 16 officers” must be promptly disclosed via SEC Form 4 filings. If the terms of those awards differ significantly from previously disclosed forms of grant agreements the company must make that information public shortly after grant on a Form 8-K. In addition to extensive tables and narratives regarding the compensation of “named executive officers,” public companies must include in their shareholder proxy statements information for a non-binding shareholder say-on-pay vote, a description of payments that would be made upon termination of employment or a change of control, and a disclosure of the ratio of the CEO’s pay to that of the median-paid employee of the company.
Other federal securities laws regulate executive and employee behaviour. Employees and others are prohibited by federal securities laws from trading shares of a public company on the basis of material non-public information. Senior executives must sell their shares in accordance with SEC Rule 144 which requires a form to be filed with the SEC, the executive to satisfied a holding period for the shares, and for certain sales volume limitations to be observed.
A private company’s path to securities law compliance is also difficult. Private companies, and foreign issuers who shares do not trade on a US stock exchange, must be concerned with becoming subject to the ’34 Act (which essentially requires the registration of companies) and ‘33 Act (which requires the registration of securities), in each case unless there is an applicable registration exemption.
Offering equity to US participants should not standing alone require a private or non-US traded company to register under the ’34 Act. The test for one of the available exemptions for ’34 Act registration does not count persons who receive securities pursuant to an employee compensation plan in a transaction exempt from the registration requirements of the ’33 Act against the ’34 Act’s 2,000 person limit on shareholders of record.
Avoidance of registration under the ’33 Act and state “blue sky” laws requires more effort.
The most significant ’33 Act registration exemption is Federal Rule 701. Subject to certain limitations, Rule 701 exempts from registration securities issued pursuant to a written compensatory benefit plan or written contract by a company that is otherwise not subject to the ’34 Act. Rule 701 is available where the aggregate sales price or amount of securities sold under the plan in reliance on Rule 701 (with options treated as a sale upon grant) during any consecutive 12-month period does not exceed the greatest of (i) USD1,000,000, (ii) 15% of the group’s total assets, or (iii) 15% of the outstanding securities of the class being sold.
If the amount of securities sold by an issuer in the US under employee incentive plans in reliance on Rule 701 exceeds USD10,000,000 during a 12-month period, additional requirements apply which can be quite difficult for a company not maintaining its financial statements in accordance with US GAAP.
There are other ’33 Act (federal) exemptions such as Rule 506 of Regulation D for senior executives that are “accredited investors” and the “no-sale” doctrine that may be available in certain situations.
In addition to compliance with the above federal securities laws, companies must also satisfy the securities laws of the states in which its participants are resident.
Each state has its own requirements and exemptions. Many simply require compliance with federal Rule 701 or a similar uniform exemption. Some (notably California and New York) require much more, including advance notice requirements, affidavits, consents to service of process and substantive plan provisions changes.
The Securities Laws are only applicable to public offer of securities traded on the Mexican Stock Exchange and those individuals investing in such market. Stock options or any structure alike are not considered public since they are directed to employees.
Potential prospectus requirements should be considered when envisaging to grant equity-based compensation to the employees of a Romanian subsidiary.
It is unlawful for a public offer of securities to be made without prior publication of a prospectus approved by the Romanian Financial Supervisory Authority ("FSA"), unless the offer or the offered securities qualify for an exemption provided by law.
Listed companies fall under the capital market regulations, so all share option plans which offer shares in a listed company to employees must comply with the prospectus requirements.
It is debatable to which extent options to acquire shares (which are generally not transferable) are "securities" or not. Where the options are not transferable and are awarded at no cost for the employees, one could argue that such should not be deemed as "securities".
However, since there is no clear general guidance, it should be further assessed whether exemptions to the prospectus requirements are also incident. There are various exemptions under the law when there is no need to have a prospectus approved by the FSA (considering either the type of offer or the type of securities). For example, there is no need to publish a prospectus should the offer be addressed to less than 150 natural or legal persons (other than qualified investors) per Member State. In addition, there is no need to publish a prospectus if the securities are offered, allotted or to be allotted to former or existing members of the management or employees by their employer, or its parent company or a subsidiary, but this exemption currently applies only provided that the respective issuing company has its head office or registered office in the EU or, if established in a non-Member State, its securities are listed on an EU-regulated market or (subject to an equivalence decision adopted by the European Commission on the request of the competent authority of the Member State) on a third-country market. However, companies will need to make available a document containing mainly information about the issuer and the number and nature of the securities and the reasons for and details of the offer.
See question 9 and 12.
The Ecuadorian Securities Market Law includes no specific requirements applicable to the operation of incentive plans with regards to employment relationships.
There are no formal securities law requirements apply to the operation of the incentive plans in the non-listed companies for now; while for the listed-companies , the following laws and regulations apply to the operation of the incentive plans,
- Administrative Measures for the Equity Incentives of Listed Companies
- Trial Implementation Measures for the Implementation of Equity Incentives by the State-owned Controlling Listed Companies (Domestic)
- Circular of the State-owned Assets Supervision and Administration Commission of the State Council and the Ministry of Finance on Issuing the Interim Measures for Implementing Equity Incentive Plans by State Holding Listed Companies (Oversea)
- Notice on Regulating State Holding Listed Companies Equity Incentive Scheme
Whether an approved prospectus will be required when offering awards under an incentive plan to employees in the Netherlands will depend on whether the awards qualify as ‘securities’ under Dutch law. If the awards do not qualify as security, no prospectus is required for the offer of the awards to employees in the Netherlands.
In case the awards will be transferable, the awards may qualify as securities under Dutch law and, if so, a prospectus approved by the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM), or any other competent authority, is required, unless one of the available exemptions to the prospectus requirement applies. With respect to incentive plans, the exemptions which are most often relied on are the exemption available when awards are offered to fewer than 150 persons in the Netherlands or the exemption available for certain employee award plans. These exemptions may require - inter alia - the inclusion of a mandatory disclaimer in the offer documentation and marketing materials or the availability of an information document, containing certain information on the securities offered. Upon the full engagement of the European Prospectus Regulation (EU) 2017/1127, as per 21 July 2019, the prospectus obligation and aforementioned exemptions will, albeit with some technical differences, continue to exist.
Market abuse regulation
In case of a (request for) listing and trading of shares or any other financial instruments of the company, to which the incentive plan relates, on a regulated market (RM), multilateral trading facility (MTF) or organized trading facility (OTF) in any of the member states of the European Union, the provisions of the Market Abuse Regulation (EU) (596/2014, the MAR) (including the insider trading prohibition) become applicable to the granting, exercise, and subsequent sale of shares.
In respect of employee share / option plans an exemption from the insider trading prohibition may be available under the MAR.
In case (i) the shares to which the incentive plan relates, are listed on a regulated market in the Netherlands or (ii) the MAR applies to the relevant company, specific disclosure obligations have to be observed by qualifying persons.
Securities offered to employees generally do not need to be registered under Brazilian securities law, as this states that only public offerings must be previously registered with Brazil’s securities exchange commission, the CVM. CVM has already stated that an offer is deemed ‘public’ if it is directed to the general population and an offering made to a company’s employees would be not characterised as a public offering and is thus exempt from registration.
Under regulations applicable to the securities market, executives and members of any other statutory bodies that have technical or advisory duties in a public company must inform the company of any beneficial ownership of shares issued by the company itself, its parent or its subsidiaries (in the latter two cases, this requirement is applicable only to public companies), or trades or dealings in such securities. Securities owned by a spouse, partner or any dependants included in their annual income tax returns or by companies directly or indirectly controlled by the latter should also be included in this notification, which must be made within five days of each trade, on the first business day after taking up a position, and when submitting documentation to register a company as publicly traded.
The company must send the aforementioned information to the CVM, and to the stock exchanges or organised over-the-counter market entities in which the company’s shares are listed for trading (if applicable) within 10 days of the end of the month in which the alteration of the positions held occurs, or of the receipt of a notice delivered by the executives and members of any other statutory bodies aiming at updating the information previously provided to the company, or in the month in which the aforementioned persons take up their positions. This information should be delivered on an individual basis and consolidated by body (executive management, board of administration, compliance board and committees). Consolidated data will be available to the public, but individuals’ details will not be disclosed.
Executives must comply with the blackout periods prior to the disclosure of any material act or fact to the market or the company’s quarterly or annual financial statements, provided that a trading policy previously approved by the company may allow certain transactions within the banned period. Such blackout provisions do not apply for the transfer of treasury shares to executives or the subscription of new shares by executives under a stock-based plan approved by the general shareholders meeting.
As described in 9 above, there is a disclosure requirement under the Financial Instruments and Exchange Act (which is the primary securities law in Japan) regarding incentive plans.
Further, in principle, when an ESOP is structured as a trust scheme using a share purchase partnership, the trust acquires the shares in order to sell the same to the partnership. Under the Financial Instruments and Exchange Act, in principle, such acquisition could fall under the transactions requiring a license to be implemented. However, the Financial Instruments and Exchange Act exempts an ESOP from the requirement of registration as a financial instruments business operator under certain conditions.
According to the Norwegian Securities Trading Act, where an offer to subscribe for or purchase transferable securities is addressed to 150 or more persons in the Norwegian securities market, and involves an amount of at least EUR 1,000,000 calculated over a 12 month period, a prospectus shall be prepared in accordance with the rules of this chapter. The same applies where an offeror residing in Norway makes an offer in another EEA state and the prospectus requires approval. This only applies to share based incentive plans.
However, there are some exceptions. The obligation to prepare a prospectus does not apply, inter alia, where the offer is addressed to current or former employees or board members by the employer or by another company in the same group, provided that the company concerned has its headquarters or registered address in an EEA country or a third country approved by the prospectus authority, and that a document is available containing information on the category and number of securities, as well as the background to, and conditions for, the offer.
All companies offering shares to employees resident in the EU need to consider the application of the Prospectus Rules which require any offer of shares to the public to be made pursuant to an approved prospectus. The definition of ‘offer’ is broad and although it does not include the grant of share options it does extend to the offer of shares under employee incentive arrangements such as share offers, SIP and JSOPs.
Fortunately, there are exemptions which mean that an issuer company should not have to go to the effort and expense of producing a full prospectus when operating its share plans. These currently include (i) an exemption for offers where the aggregate amount paid by participants when aggregated with all other offers made in the previous 12 months throughout the EEA is less than EUR8 million (a useful exemption for offers of shares where no consideration is being paid such as free shares awarded under a SIP), (ii) offers made to fewer than 150 people in each EEA state and (iii) an exemption for employee offers by a company with either its head office or registered office in the EEA or its securities traded on an EEA regulated market. The employee offer exemption is also available to companies registered outside the EEA with securities traded on a non-EEA market that the European Commission has determined have equivalent legal and supervisory standards. To date, no such determination has been made. Any company wishing to rely on the employee offer exemption has to publish an employee information document containing prescribed information about the offer and the issuer. This requirement is far less onerous than the need to publish a full prospectus. From 21 July 2019, certain changes will be made to this exemption, for example, it will no longer be limited to companies with EEA head offices or registered offices and non-EEA companies with securities traded on EEA regulated or equivalent markets.
Brexit is likely to impact these rules, but to date the exact nature of any changes that may apply to UK companies are unknown.
Even though the issuer of shares of publicly listed companies under certain circumstances must prepare a prospectus in accordance with the German Securities Prospectus Act (Wertpapierprospektgesetz) and consider further regulatory aspects, this does not apply to employees´ participation programs (please see question 14.).
German regulations prohibit the direct or indirect use of insider information when trading in certain financial instruments (section 14 (1) German Securities Trading Act, Wertpapierhandelsgesetz). This prohibition is necessary, due to the fact that employees might have access to further inside information of the company. This prohibition includes trading in share options, even if the company is not listed, provided that the underlying shares are listed. The restrictions shall not apply to phantom shares or other virtual programmes according to a non-binding statement of the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht).
a. Some provisions relating to securities may have an impact on incentive plans.
Insider trading and misconduct are prohibited in France. To limit this risk, “black out” periods have been set up, during which there are restrictions on certain actions. Accordingly, pursuant to the French Commercial Code, in a company whose securities are admitted to trading on a regulated market, stock options may not be granted and free shares may not be transferred:
1° Within ten trading days before and ten trading days (for stock-options) or three trading days (for free shares) after the date on which the consolidated accounts, or failing that, the annual accounts, are made public;
2° Within the period between :
- the date on which the company's corporate bodies become aware of information which, if it were made public, could have a significant impact on the price of the company's shares,
- and the date which is ten market days after the date on which such information is made public.
b. Concerning prospectus regulations, the Financial Markets Authority (“AMF”) stated that free shares allocation plans and stock option plans are not subject to the requirement to produce a prospectus.
Nevertheless, the admission to trading of shares resulting from the exercise of options constitutes an offer to the public. It may be exempted from the requirement to draw up a prospectus if it concerns a limited number of securities or if information is available to interested parties.
Spanish regulations on prospectuses and securities markets include, as an exception to the publication of an issue prospectus or admission to trading, transactions relating to securities which are offered, assigned or that are going to be assigned to current or former directors or employees by the issuer or by a company of the issuer’s group, provided that the aforementioned securities are of the same class as those that have already been admitted to listing on the same market and that a document is available that contains information on the number and nature of the securities and the reasons and details of the offering. Such document in relation to scrip or stock dividend schemes is a far less laborious document than a listing prospectus.
No, there is no securities regulations in Colombia applicable to incentive plans granted to employees.
According to Portuguese securities law, a share plan has regulatory implications solely if it can be qualified as a public offer.
An offer is deemed to be public in the following circumstances:
- If the offer of securities is addressed, wholly or partially, to unidentified recipients;
- If the offer is addressed to all the shareholders of a public company;
- If the offer is, wholly or partially, preceded or accompanied by a prospecting or a solicitation for investment's intentions from unidentified addressees or promotional material;
- If the offer is addressed to at least 100 persons who are non-qualified investors resident or established in Portugal.
The application of these criteria to share plans is not always straightforward, the key question lying on the qualification of the plan as an offer of securities. For example, “phantom” stock purchase plans, in principle, should not be qualified as offer of securities, as they do not involve effective acquisition of securities.
If the share purchase plan involves a public offer, a filing will be required with the Portuguese Securities Market Commission (CMVM) and the need to approve a prospectus. Acceptances of the offer have to be transmitted through an authorized financial intermediary.
An important exemption of the prospectus requirement is granted for public offers of securities to existing or former directors or employees by their employer which has securities already admitted to trading on a regulated market or by an affiliated undertaking, provided that a document is made available containing information on the number and nature of the securities and the reasons for and details of the offer.
Otherwise, registration with CMVM is not required in connection with the offering of securities to current or former members of the management or workers' bodies by their respective employer, company in a controlling or group relationship with the latter or by a company subject to common ownership, provided that the issuer has its statutory or effective place of business in the European Union and a document providing information on the number and nature of the securities as well as the reasons and characteristics of the offer is available.
Directors of an issuer of securities admitted to trading on a regulated market (or of a controlling company), as well as related persons, shall notify the CMVM, within five working days, of all transactions carried out on their own account, on account of third parties or on their behalf, involving shares of said issuer or related financial instruments, where the value of such transactions reaches five thousand euros.
In addition to the general rules of information on inside information, issuers and persons acting on their behalf or account have to draw up insiders lists (e.g. lists of persons with access to privileged information), with the law providing for a set of specific duties associated with this obligation (comprising obligation to include in the list inter alia the person’s identity, the reasons for their inclusion and the date of inclusion; to keep the list strictly up to date; to inform the relevant person of his/her inclusion in the list and the legal consequences in case of disclosure or misuse of inside information; to keep the list for a period of five years; and to immediately forward the updated list to the CMVM whenever it so requests).
No information or prospectus is required with regard to performance bonuses and company welfare, except for the requirements described in question 9.
For stock option plans, on the other hand, Article 114-bis of the Consolidated Law on Finance (TUF) requires that an information report be made available to the public. The main information to be published concerns:
- the reasons for adopting the plan;
- the members of the board of directors or the management board of the company, of the parent companies or subsidiaries, who benefit from the plan;
- the categories of employees or collaborators of the company and of the parent or subsidiary companies of the company who benefit from the plan;
- the arrangements and clauses for implementing the plan, specifying whether its implementation is subject to the fulfilment of conditions and, in particular, to the attainment of certain results;
- the procedures for determining prices or the criteria for determining prices for the subscription or purchase of shares;
- the restrictions on the availability of shares or option rights assigned, with particular reference to the terms within which the subsequent transfer to the same company or to third parties is permitted or prohibited.
However, these provisions only apply to listed issuers and issuers of financial instruments which are widely distributed to the public.
As a general rule, pursuant to Turkish capital markets legislation, all capital market instruments to be publicly offered must be registered with the Capital Markets Board of Turkey.
However any offer related to equity based incentive plan is not likely to trigger any prospectus rquirements or clearence from the Capital Markets Board of Turkey, provided that
- the plan is operated outside of Turkey
- the stock option is not granted in a way to constitute a “public offering” and
- the information to be provided to the employees does not include indications of a public offering
Under the CMB corporate governance principles, with respect to public companies listed on the Istanbul Stock Exchange, principles of remuneration of the members of the board and senior managers must be stated in writing, published on the company website and be submitted to the information of the shareholders in shareholders’ meetings.
Also remuneration and all benefits provided by the public companies to the members of their boards and senior managers should be disclosed to public through annual activity report.
Furthermore, under the Turkish capital markets public disclosure rules, persons with administrative responsibility in a public company as well as their related parties must publicly disclose all transactions conducted in relation to the securities of the relevant company, irrespective of the amount of securities purchased/sold.