Today the UK public voted to leave the EU. This has been one of the most significant political debates to have been addressed in at least two generations and its impact will be felt across all aspects of how, as the UK, we interact and engage with our European neighbours.
Clearly, given the number of UK laws that emanate from Europe, an exit will cause much of the legislation that regulates business, employment relationships and social co-operation to fall away, bringing with it a necessity to ensure transitional legislation is in place to maintain the status quo, whilst new UK specific laws are introduced to replace thousands of EU-derived rules - a process that many commentators consider will take at least a decade.
Why share plans are relevant
The design and operation of employee share plans and other remuneration arrangements are subject to a multitude of laws. Of particular focus since the financial crash of 2008, EU regulators have gone to great lengths to address the perceived unfairness and inequity of executive pay in the financial services arena ensuring that there should be no reward for failure.
This has led to malus and clawback provisions being introduced, capping bonuses and deferring compensation to link pay to longer-term performance. With a significant proportion of global finance being transacted through London, it can be argued that the UK has felt the force of these laws disproportionately compared to its European counterparts. Indeed the FCA (unsuccessfully) challenged the bonus cap through the European Court of Justice and it would not be unreasonable to suggest that the UK will now consider whether, under a UK controlled regime the cap should be scrapped.
But there are also other areas that need to be considered.
The most basic of share plan concepts, the grant of options and awards is currently subject to EU prospectus rules. This applies a single regime throughout the European Economic Area and provides a set of exclusions and exemptions to enable plans to be operated across the EEA without the tortuous and expensive requirement to produce a prospectus. However, companies based outside the EEA cannot necessarily take advantage of these exemptions. As such, following Brexit and depending upon the terms on which a continuing relationship is agreed, UK companies with employees across the EEA may find themselves subject to more onerous requirements than their EU competitors. This could make it far more difficult for them to extend their share plan arrangements more widely.
Conversely, there is also the question of whether, outside the EU, the UK would operate a regime that makes it more difficult for overseas companies to import their share plans into. Already, in the current environment, many non-EU based companies (particularly those headquartered in the US) choose another EU country (commonly France or Belgium) as their "home" jurisdiction through which they passport share plans around the EU. Following Brexit and without the benefit of the passporting regime, there lies a risk of a non-UK parent finding the process more onerous and expensive and choosing not to extend its global share plans to UK-based employees.
There are certain touch points during the life of a share plan that require careful consideration to ensure a company is not discriminating by reference to age. In particular, in considering any qualifying period of employment, it is important to ensure the requirement does not unduly restrict the ability of certain age groups from being able to participate, unless objectively justified. Similarly in determining whether an employee leaves by reason of “retirement” - and therefore is a good leaver - the interpretation of that rule should be assessed in a consistent manner, without reference to age. These principles have largely come about since 2006 through the implementation of age discrimination rules introduced through EU regulations. How likely is it that such principles will change following Brexit? Given that age discrimination legislation has become part of the fabric of UK employment law, it is unlikely that the UK will move significantly away, if at all, from the current position. Nevertheless, there will obviously be an opportunity to review the legislation as it stands today, with the possibility that some changes will follow.
Share dealing rules
Companies listed on the London Stock Exchange are subject to strict rules and standards - principally through the Model Code - that regulate when their directors and other senior managers are permitted to deal in shares and the clearance process that must be followed. In respect of share plans, this includes the grant and exercise of options and any subsequent sale of shares. These rules will be subject to change with effect from 3 July 2016 as a result of the UK’s implementation of the Market Abuse Regulation. Under current proposals, the EU driven changes potentially bring more uncertainty into how the requirements can be satisfied, doing away with the Model Code and introducing a more general systems and controls test in its place. Whilst there is every likelihood that UK companies will continue to adopt their current practices in many respects, there will be areas of change that companies will need to adopt now – and despite the vote to leave, because the exit process will take around two years, companies will still need to comply with the new regulations and the FCA will have a duty to continue to enforce it. Of course following Brexit, it may be that the UK reverts back to current rules and practice.
The operation of share plans naturally involves a flow of employee data between employing entities and any third party plan administrator. Currently, such data can be freely exchanged within the EU. However, were the UK to withdraw completely from the EU, the European Commission would have to rule that a post-Brexit UK provides an adequate level of protection for the rights and freedoms of data subjects. Without this ruling, employee data could not be exported from the EU to the UK without finding another lawful way of doing so, such as obtaining express consent or through model clauses, which would involve additional administrative burden. The challenge will be that the EU will adopt new regulations in April 2018 that will significantly amend the current regime and impose a greater data protection standard. This will be shortly before the UK leaves the EU and therefore the UK will still need to be mindful of the changes and to decide whether to align itself to this higher standard. To do otherwise could be a factor that risks the UK's attraction as the European headquarters of foreign businesses, which would then be subject to more onerous compliance requirements.
So where does this leave us?
Life after Brexit is unlikely to require a material change in how companies approach the design of their share plans and remuneration arrangements. Whilst there will be some operational and regulatory considerations to take into account, it would be expected that as part of the process of and discussions around withdrawing from the EU, the UK Government will strive hard to ensure that the UK remains open for business and does not jeopardise the competitiveness of UK companies.
Of course Brexit also provides opportunities for Government to take a more protectionist approach to UK businesses, with remuneration arrangements playing a key part in ensuring they are able to compete to attract and retain the best talent. Whether this would lead to changes such as the removal of the bonus cap for financial services companies remains to be seen, but there is no doubt that matters such as these would be influenced by the precise form of a post-Brexit relationship with the EU .
If you have any questions arising from this, please contact Stephen Diosi; 020 3321 7534