Module 3 - Legal and Regulatory

Question 1

Remember: Law and practice are not the same

Answer 1

Law is one of the drivers of behaviour. No-one wants to commit a crime or to get sued, but there are other key drivers such as budget, time and workability.

You have to understand the legal framework but you don’t have to make it your only driver.

Sometimes you may take some legal risk – that is normal in business. What you need to know is what risk are you taking, who is taking that risk and the potential consequences.

Question 2

Contract Law

Answer 2

The key characteristics of contracts are that:

• they are voluntary agreements between parties (Contracts must be entered into voluntarily by the parties. Generally speaking, if you don’t want to sign up to a contract, you don’t have to)
• they are enforceable (Contracts are private commitments which courts can enforce. The bottom line with any contract is that if one party does not do what they have said they will do, then the other party can usually sue them)
• they have specific terms.
  (Every contract has terms and the basic rule is that it does what it says on the tin).

Question 3

What are the four components of a contract?

Answer 3

• Offer and Acceptance
• Consideration
• An intention to be legally bound
• Certainty of terms

Question 4

Learn: Offer and Acceptance

Answer 4

The basic form of an agreement is that one party makes an offer and the other party accepts that offer.

Offer:
To make an offer for these purposes, the offering party must set out the terms of the proposed agreement and must be willing to be bound to those terms.

If there is no willingness to be bound by contract, it will not be an offer. It may instead simply be characterised as an ‘invitation to treat’.

For example, if a company announces to its workforce that it is considering making awards under a share incentive plan within the next year, it it does not constitute an ‘offer’.
When an employer provides grant documents to participants (for example, an award certificate) these documents will constitute an offer made by the employer to the relevant
participant.

Acceptance:
The other party has to accept the offer, and there are a number of points required in order for that acceptance to be valid.

• The acceptance must be unconditional to be effective. If, an employee said ‘yes I will accept the share award but I want to change the leaver provisions’ – that would not be effective acceptance. (That would instead be a counteroffer.)
• The acceptance must be made before the offer is withdrawn and before the expiry of any
  time limit set in the offer. If the offer says it is open until a particular date, you cannot accept it after that date.
• Acceptance should be communicated to the offeror, for example by signing a document,
  or by an electronic ‘click to accept’ process.
• Acceptance may not be explicit and can instead be inferred by the behaviour of the parties (known as ‘deemed acceptance’ or ‘acceptance by conduct’).

Such as someone offers to purchase goods from a company
at a specified price and the company then subsequently delivers the goods. You wouldn’t usually want to rely on deed acceptance.

Question 5

LEARN: Consideration

Answer 5

In English law, an agreement is generally not legally binding unless there is some
‘consideration’. Consideration means something of value must be given in exchange for
what is being promised.

Consideration does not have to be (and often is not) money. Consideration can be
money but could also be something else such as goods or services.

Question 6

What if there is no consideration?

Answer 6

If there is no consideration you will simply have an informal promise that is not legally
enforceable under contract law.

If you want to be sure that the promise is enforceable,
even where there is no consideration, then the contract should be executed as a deed.

Question 7

LEARN: Deeds

Answer 7

A deed is a unilateral contract, meaning that it is binding on the party giving it.

It is enforceable by a third-party, even though that third-party has not given any consideration. Therefore, if a company promises something to employees by executing
a deed, the participants know that they can rely on that promise.

Deeds are often used by companies where awards are being made to a large number
of participants and there is no consideration. The company will typically execute a ‘Deed
of Grant’ whereby it commits to making the awards to a list of participants and sets out
the key terms which will apply to those awards.

Question 8

Is the participant also bound by the terms of the deed?

Answer 8

Once the company has executed the deed it will generally seek confirmation from the
participants that they accept the terms of the awards set out in the deed. It is important
to note that if there is no consideration given by the participant this arrangement will still not constitute a bilateral contract between the company and the participant.

Therefore, if the company takes this approach (executes a deed of grant, and requires acceptance from the participants), this will give both the company and the participants comfort that the terms of the award should be adhered to.

Question 9

What are the FOUR key parts required in order to create and execute a VALID deed?

Answer 9

1) It must be in writing.
Contracts may be written or verbal. However, a deed must be in writing.

2) It must be clear on the face of the document that it is intended to be a deed.

3) It must be validly executed.

Individual = their signature must be witnessed by an independent person.

Company = the document must be executed by:
* the company secretary and one director; or
* two directors; or
* one director, if that signature is witnessed by another person

4) Deed is delivered on the date that the parties evidence their intention to be bound.

Question 10

LEARN: Intention to be legally bound

Answer 10

In commercial situations, there is a default presumption that the parties intend to create legal
relations. If a party wished to rebut this presumption, they would need to be able to produce clear evidence to counter that presumption.

• Documents which are intended to be contractually binding, (such as award agreements
  and grant certificates) are drafted in a way which displays a clear intention to create legally
  binding rights and obligations;

and

• Documents which are intended to be not be contractually binding (such as future
  announcements or employee FAQs which accompany plan documents) include explicit
  provisions stating that the contents of the document are non-binding and non-contractual.

Question 11

LEARN: Certainty of terms

Answer 11

The terms of a contract must be sufficiently certain for the contract to be binding. This is by far the most important factor from a practical perspective.

Express terms
The express terms of a contract are those which are expressly stated at the time the
contract is formed. Express terms could be written down in a document or they could
be stated by one, or both, of the parties verbally. In practice, written terms generally have more authority because they are
easier to evidence but there is no rule that written terms have priority over verbal ones.

Implied terms
The law allows people to decide the terms of their agreements in
the express terms. However, if it is clear that the parties had intended to make an
agreement, but what the contract actually says does not ‘work’ in some way, the courts
may in certain circumstances imply (which really means ‘add’) certain terms into a
contract in addition to the express terms.

For example, terms may be implied:

• to reflect the obvious intention of the parties;
• to make the contract work in practice;
• to reflect custom and practice;
• to reflect previous dealings between the parties; and
• to take into account applicable legislation

Question 12

LEARN: Terms incorporated by reference

Answer 12

It is very common for certain terms to be ‘incorporated by reference’. For example, the
parties to an employment contract may agree to comply with the company’s disciplinary
procedure even though neither party actually signs a copy of that document.

When incorporating documents by reference:
- The documents must be clearly identified.

• Documents must be in existence at the time the contract is formed.
• Documents may change.
• Unusual or onerous terms will need to be drawn to the attention of the other
  party. For example, a ‘click to accept’ portal might require
  the participant to click a box to confirm they agree to the application of the malus
  and clawback policy.

Question 13

Does a contract have to be in writing?

Answer 13

NO

Question 14

GOOD TO KNOW: Representations/misrepresentations

Answer 14

Contract law is not the only relevant field of law here. If there is no contract, that does not mean that nothing can be enforced, it just means that nothing can be enforced under contract law.

If one party (for example, an employer)
makes a representation to another (for example, an employee) and the employee relies on it, then the
employer cannot simply choose to ignore that representation.

For example, let’s say that an employer appears to offer an option to an individual but for certain technical reasons no contract is created – the individual (who was about to leave and go to a competitor)
may then stay with the company and work hard because the employee was relying on the representation made by the company about the options. If the company then decides not to allow the individual to exercise the options and the individual suffers loss, the individual may be able to sue for ‘misrepresentation’

Question 15

Remember: Enforceability

Answer 15

A key question from the company’s perspective is: does the company want this to be an
enforceable contract? If the answer is yes, then it is necessary to ensure that the legal requirements to create a contract have been met.

Discretionary plans:
As these are often made unilaterally, and they are often given for free, there is no consideration from the employee which then does not make the contract valid. Therefore, a deed would need be used.

Tax advantaged:
For UK tax advantaged plans such as Sharesave (also known as SAYE), HMRC require
a legally enforceable right to be given to the employee (and so the company and
individual must enter into an enforceable contract as part of the award process).
Therefore, if there is in fact no clear contractual right, the award would not meet HMRC’s
requirements and may not be considered tax qualified.

Question 16

Can a contract be amended?

Answer 16

Generally, a contract between two parties can only be amended if both parties agree to amend it. This means that unless they can both agree to an amendment, the original agreement (and its terms) remains in place.

Question 17

If a company wants to look to amend the plan rules that govern their awards, what are the 3 key potential approval, consent or notification requirements that may be required?

Answer 17

1) Shareholder approval

Where the plan was already approved by shareholders, shareholder approval may be required to make changes to the plan.

2) Participant consent

It is common for plan rules to say that, if a proposed change to the plan would be to the material disadvantage of a participant’s existing rights, participant consent must be obtained to effect the change. Even if the plan does not explicitly say this, consent from the participant will generally still be required under general contract law principles in order to effect a formal contractual change to the contract.

3) HMRC notification

If the plan is tax advantaged, you will not need HMRC’s approval to
make the change. However, if the change is to a ‘key feature’, you will need to notify HMRC of the change in your annual return for the tax qualified plan, and self-certify that the plan continues to comply with the relevant legislation.

Question 18

REMEMBER: That an award under a share plan is basically a contract!

Answer 18

x

Question 18

Exercising discretion - what are the 4 restraints that courts impose on companies when exercising discretion?

Answer 18

1) Mutual trust and confidence

In every employment contract there is an implied term of ‘mutual trust and confidence’ and an implied obligation not to undermine it. This means that the employer cannot act in a way that would be likely to damage or destroy the relationship of trust and confidence it has with its employees, unless it has reasonable and proper cause for its actions.

2) Act in good faith and not irrationally, arbitrarily or capriciously

It does not mean that the courts will insist that any discretion is exercised fairly or even reasonably, but it does mean that the company has to meet certain minimum standards when exercising discretion. The decision must not be so outrageous that no reasonable decision-maker would make it.

3) Take into account relevant factors

The exercise of a discretion must take into account all relevant factors and may not take into
account any factors which are not relevant.

4) Follow appropriate processes

Companies must also follow appropriate processes and adequately document decisions made and the reasons for them.

Question 19

When may a remuneration committee use its discretion to reduce the pay-out of an award under a share plan?

Answer 19

If there is major regulatory non-compliance, corporate failure, a major industrial accident, to address any windfall gains or, in some cases, simply if the individual’s or the company’s underlying performance over the period would not warrant the pay-out.

In these cases, the remuneration committee may think it would be inappropriate, or bad for the company’s reputation to pay out on the award.

Also:
- eligibility
- leavers
- performance conditions
- malus and clawback.

Question 20

LEARN: Employment law - pt1

Answer 20

Statutory Compliance: Companies must comply with statutory employment laws and may grant additional rights through employment contracts.

Terms & Conditions: UK law requires terms and conditions to be set out in a statement of particulars or employment contract, delivered by the employment start date for contracts beginning on or after 6 April 2020.

Share Plans: No obligation to reference share plans in the contract, but benefits provided must be detailed.

Clause Consideration: If share plans are referenced, the terms must be carefully considered.

Contract Variability: Employment contracts can vary widely within a company due to different joining dates, transfers under TUPE regulations, and differences across countries.

Share Plan Statements: Share plans often state that rights under the plan are separate from the employment contract to:
- Indicate the share award is from the parent company.

• Reduce the risk of local employment laws applying.
• Reinforce that share plan offers are discretionary and not contractual rights.

Question 21

LEARN: Employment law pt2

Answer 21

Employment Rights vs. Share Plan Rights: Distinguishing between employment rights and share plan rights can be challenging.

Reason 1: Statutory employment law may override share award contract terms.

Reason 2: Disputes are decided by employment tribunals or civil courts, which may link share plan rights to employment.

Discretionary Nature: While share plan incentives are intended to be discretionary and purely contractual, this position may not be legally robust.

Legal Advice: Involve legal advisers in drafting, implementing, varying share plans, and preparing employee communications.

Dispute Situations: Employment law advice is necessary during disputes.

Question 22

Discrimination law - What is the act that sets out a long list of ‘protected characteristics’ and name some of those characteristics

Answer 22

The Equality Act 2010

• gender;
• pregnancy and maternity;
• race;
• disability;
• sexual orientation;
• religion or belief;
• marriage and civil partnership;
• gender reassignment; and
• age

Question 23

What might examples of Direct and indirect discrimination be?

Answer 23

If a plan says ‘No women can be made awards’ – that would be direct discrimination. The company is treating women less favourably than others by reason of their gender. If a plan says ‘No one can be made an award unless they have 10 years’ continuous service’ – that may be indirect discrimination against women. This is because statistically women are more likely to have career breaks than men and so are less likely to have 10 years’ continuous service (Note: a career break is
not the same as maternity or paternity leave)

Question 24

LEARN: Retirement as a good leaver

Answer 24

‘Retirement’ can be very ambiguous - i.e. what if you leave to work for a charity, does that count as retirement etc?

There is no ‘risk free’ answer, instead, companies tend to take one of two approaches:

1. Removing retirement as a specific good leaver ground, preferring to rely on the ‘any
   other reason’ good leaver ground to achieve the same outcome, if desired.

However, this gives less comfort to employees and means they are reliant on the
discretion of the remuneration committee.

2. Keeping retirement as a good leaver reason but making it ‘retirement with the agreement of the employer’ so that there is no specific definition of retirement in the plan rules. Companies that take this approach then tend to have a retirement policy that sits in the background to help aid their decision making as to whether someone has, in fact, retired for the purposes of their share plans.

Question 25

LEARN: Objectively justify

Answer 25

If a company had concerns around whether any age group might consider themselves discriminated against, they should consider whether they could ‘objectively justify’
their approach i.e., is their approach a proportionate means of achieving a legitimate
aim.

This is extremely difficult to demonstrate and requires an acceptable aim and solid
evidence that their chosen approach is proportionate.

Question 26

REMEMBER: Age discrimination in Tax advantaged plans

Answer 26

Normal Definition of Retirement: Retirement in tax-advantaged plans no longer has a specific age definition.

Sharesave Plans: Mandatory to include retirement as a good leaver ground, allowing age-related legal exemptions.

Question 27

Restrictive covenants - to guard against employees leaving and going to work for competitors, some companies include restrictive covenants in their share plans so that awards that they were allowed to keep (e.g., as a good leaver) would lapse if the former employee later breached a restrictive covenant.

What are some of these covenants?

Answer 27

• Non-compete: prevents a former employee joining a competitor.
• Non-solicit/non-induce (employees): prevents a former employer inducing their former
  colleagues to join them at their new employment/business.
• Non-solicit (clients/customers): prevents a former employee approaching clients of the original employer with a view to obtaining their business at the new employment/business.
• Non-dealing (clients/customers): prevents a former employee doing any work for clients of the original employer regardless of how the work came about.
• Protection of confidential information: requires former employees to keep certain
  information confidential.

Question 28

Are the covenants enforceable?

Answer 28

In the share plans context, the consequence of breaching a covenant will be that the awards
lapse or restricted shares have to be sold back, rather than the former employer trying to bring
an injunction against an employee. However, an employee may wish to challenge the lapse of their awards or the former employer may also decide to bring an injunction claim.

Enforceability will depend on the particular drafting of each covenant and whether a court
agrees that there is a legitimate interest to protect and that the covenant is an appropriate
protection of that interest.

Question 29

The terms of restricted covenants should be only what is strictly necessary and should be drafted precisely. What are some of the terms a company could consider including?

Answer 29

Duration – a long period is unlikely to be enforceable. Periods of between 3-12 months
have been held as enforceable although it will depend on the other terms.

Geographical scope

Relevant employees or customers
Should be limited to those with whom the individual had contact or a material relationship for a limited period (e.g., 6 months)
before termination. A reference to all employees or all customers is unlikely to be
enforceable.

Relevant competitors
Should be limited to those that compete with the particular area
of business in which the individual worked.

Confidential information Should be defined tightly to anything the original employer
considers as a trade secret or information that could materially damage its business.

Type of covenant
A non-solicit is more likely to be enforceable than a non-dealing
as it is less restrictive on what an individual can do.

Question 30

What is malus and clawback?

Answer 30

Malus and clawback terms are ways of adjusting the remuneration of an individual if certain negative events happen.

They are risk management tools for the company – as they are used to try and manage the risks of poor performance on an individual and business-wide level.

Question 31

Define MALUS

Answer 31

Malus provisions enable a pre-settlement adjustment to an award on the occurrence of
specified triggers. This allows the company to reduce (including to nil) or lapse an award.

Question 32

Define CLAWBACK

Answer 32

Clawback provisions enable a post-settlement recovery of the value derived from the
award on the occurrence of specified triggers.

Clawback may be applied after the participant has already received the shares or cash from their award and clawback
provisions often extend to allow the company to deduct from salary and/or other incentive
awards paid out if the individual has already sold their shares.

Question 33

What are some of the specified triggers that may allow for malus/clawback provisions to be used?

Answer 33

• an event which the company considers to constitute a corporate failure of the company;
• a material misstatement of the company’s accounts;
• an award being granted or settled on the basis of erroneous or misleading information,
  assumptions or calculations;
• serious reputational damage or significant financial loss to the company as a result of the
  individual’s conduct; and
• gross misconduct of the individual.

Question 34

Do you needs the employee’s agreement to the malus and clawback terms?

Answer 34

It is imperative that a company
can evidence that the employee knows malus and clawback apply to the award, that they
understand what these provisions mean and that they expressly accept the consequences these provisions may have for their award.

Question 35

REMEMBER!

Answer 35

Even if there is a valid contract, employment law can sometimes step in and override that provision, or the entire contract, because of the additional duties (for employers) and protections (for employees) that apply under employment law.

Question 36

How difficult are malus and clawback to enforce?

Answer 36

Malus is easier to enforce than clawback as the employee may have already sold the shares/spent the cash.

In the UK, under the Employment Rights Act 1996, it is unlawful for an employer to deduct from their employees’ wages or to receive payment from an employee. However, there are exceptions to this prohibition. The relevant exceptions are set out in the
Employment Rights Act 1996 and include where:

• deductions are required/authorised by legislation or a provision in the employee’s
  contract; or
• the employee has given his/her prior written consent to the deduction.

Question 37

Companies!

Two key points to remember about companies

Answer 37

• A company is a separate legal entity – meaning that the company may own assets, it is the company which takes the decisions and the company which is liable when things go wrong (not the investors who
  own it); and
• involves limited liability – even if the investors personally have sufficient assets to cover the
  company’s liabilities, the investors’ personal liability is limited only to the amount unpaid on the
  shares they hold.

This may sometimes leave a creditor out of pocket but the principle of limited
liability was intentionally established so that investors could limit their liability to the amount they invested.

Question 38

REMEMBER - Re Company Law!

Answer 38

In the UK, company law is found in the Companies Act 2006, the Financial Services and Markets Act 2000 and various other pieces of legislation.

The law is then supplemented by other regulations and guidance affecting how companies operate, such as the Listing Rules of the London Stock Exchange and the UK Corporate Governance Code.

Question 39

What are a UK Companies to two key constitutional documents?

Answer 39

Memorandum of Association - a very short document that evidences the identities of the company’s original shareholders, with no other or continuing relevance.

Articles of Association - the key constitutional document governing the relationship between the company, its directors and shareholders. For newly formed companies, there are standard sets of ‘model articles’ that can be adopted, although companies can adapt the model articles or write their own bespoke articles.

Question 39

What are some topics that the articles will deal with?

Answer 39

• Directors: what are the limitations on the directors’ powers? How long do they remain in office?
  Who has the right to appoint the directors?
• Shares: is there just one class of share or are there different classes? If there is more than one class, what are the differences? Are the shares freely transferable?
• Board meetings: when are board meetings held? Who can call a board meeting? What is the
  quorum at a meeting? Who can vote and how is voting done?
• Shareholder meetings: when are shareholder meetings held? Who can call a shareholder
  meeting? Who can vote and how is voting done?

Question 40

What are the SEVEN general duties for directors under the Companies Act 2006?

MUST REMEMBER!

Answer 40

• Must act within their powers (as set out in the company’s constitution)
• Must promote the success of company.
• Must exercise independent judgment.
• Must exercise reasonable care, skill and diligence.
• Must avoid conflicts of interest.
• Must declare interests in any business or proposed business involving the company.
• The director must not accept benefits from third-parties.

Question 41

REMEMBER - Under ‘The directors must promote the success of company’

Answer 41

The directors must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of the company’s shareholders as a whole. The legislation lists some of the factors that directors
should take into account when considering this duty:

• the likely long-term consequences of any decision;
• the interests of the company’s employees;
• the need to foster the company’s business relationships with suppliers, customers and others;
• the impact of the company’s operations on the community and the environment;
• the desirability of the company maintaining a reputation for high standards of business
  conduction; and
• the need to act fairly as between different shareholders.

Question 42

REMEMBER:

Answer 42

For companies with a premium listing on the London Stock Exchange, share plan approval by shareholders is necessary.

Question 43

Name some other approval requirements Directors have to consider when adopting a share plan:

Answer 43

• UK Company Law Compliance: Ensure UK company laws are checked for share plan approval requirements, including pre-emption rights and share allotment approvals. Exemptions usually apply for employee share schemes.
• Directors’ Remuneration: Shareholder approval is required for directors’ remuneration reports and policies, which include share plan matters, for UK-incorporated and quoted or unquoted traded companies.
• Non-UK Companies: Consider applicable non-UK company laws if the company is not UK-incorporated.
• Company Constitution: Review the company’s articles of association for approval requirements related to share plans, the allotment of new shares, and the use of treasury shares.
• New Issue or Treasury Shares: Check the company’s constitution and legal restrictions on using new issue or treasury shares for share plan awards. Shareholder approval may be required.
• Premium Listing Requirements: For companies with a premium listing on the London Stock Exchange, share plan approval by shareholders is necessary.
• Directors’ Participation: Shareholder approval is needed for long-term incentive schemes involving directors. Limited exceptions exist, such as all-employee plans. Proposed reforms may impact this requirement.
• Institutional Investor Approval: Some companies seek prior clearance from institutional investors or key shareholders, especially for executive plans.
• HMRC Registration: UK tax-advantaged plans must be registered with HMRC and self-certified to meet relevant tax legislation requirements.

Question 44

What is Unlawful financial assistance and what is the employees’ share scheme exemption?

Answer 44

A UK public company (or one of its UK subsidiaries) helps another party (by providing ‘financial assistance’) whether directly or indirectly; to acquire the public company’s shares.

s682 of the Companies Act 2006 says that providing assistance will not be unlawful financial assistance where:

• the company provides the assistance in good faith in the interests of the company or its
  holding company;
• the company provides the assistance for the purposes of an employees’ share scheme;
  and
• if the company providing the assistance is a public company, either:
• the company’s net assets are not reduced by the assistance (for example, giving a
  loan may not reduce net assets because cash is swapped for the debt); or
• to the extent the company’s net assets are reduced by the assistance, it is provided
  out of distributable profits (meaning the company must have previously generated
  profits which are in reserve on the balance sheet). If a company is a new start-up
  company, it is very unlikely to have distributable reserves and, therefore, if it is a
  public company, it may have difficulty providing lawful financial assistance.

Question 45

When do you need to consider financial assistance?

Answer 45

Practically speaking, in the context of a company’s share incentive arrangements, the
prohibition on financial assistance should be considered whenever the company is providing free or discounted shares or is assisting participants in the acquisition of those shares.

This would include:

• when funding a trust to buy shares for an employee incentive plan (whether buying the shares in the market or by subscribing for new issue shares) (note that if the trust constitutes a
• in relation to cashless exercise facilities;
• in relation to subsidised dealing services;
• if a member of the group is lending or giving money to an employee to enable the
  employee to buy or subscribe for shares; and
• any time company funds are being provided or guarantees are being made in the context
  of a share plan.

This is when alarm bells should ring and you should carefully consider the financial assistance
rules and whether the employees’ share scheme exemption applies.

Question 46

REMEMBER: Securities laws

Answer 46

Historical Issues: Public has been offered worthless securities in the past.

Preventive Measures: Most countries have rules and laws to regulate public offers of shares and securities.

Terminology: These regulations are known as ‘securities laws’ and/or ‘financial services laws’.

Distinction: These laws differ from rules regulating remuneration within financial services companies.

Question 47

What is the UK prospectus regime?

Answer 47

The general principle in many countries is that if a company wants to offer shares (or certain other securities) to the public, a prospectus or similar filing must be prepared. A prospectus is a detailed information document that is intended to ensure that potential investors are given accurate and detailed information about the company, its financial position and the securities on offer, so that they can make an informed decision whether to buy the securities.

The UK’s prospectus regime is governed by various sets of rules, including the UK Prospectus Regulation and Part VI of the Financial Services and Markets Act 2000 (FSMA). These rules are due tobe replaced by the Public Offers and Admissions to Trading Regulations 2024/105 but the timeline for the implementation of the relevant regulations is currently unknown.

Question 48

The UK prospectus regime governs the offer of shares to the public.

What are the THREE exemptions from producing a prospectus in the UK?

Answer 48

1) Employee Offer Exemption:
No prospectus needed for offers to existing/former employees or directors if a document with offer details is provided.

2) EUR8 Million Exemption:
No prospectus needed if total share consideration is ≤ EUR8M over 12 months.

3) Fewer than 150 Persons Exemption:
No prospectus needed for offers to fewer than 150 persons in the UK (other than ‘qualified
investors’).

Question 49

What is the ‘general prohibition’ under FSMA (Financial Services and Markets Act 2000)?

Answer 49

Section 19 of FSMA states no person may carry on a regulated activity in the UK, or purport to do so, unless that person is authorised by the regulator (an authorised person) or is an exempt person.

This restriction is known as the ‘general prohibition’.

A breach of the general prohibition will be a criminal offence.

An activity will generally be a regulated activity if it is an activity of a specified kind which is carried on by way of business and relates to an investment of a specified kind.

Question 50

There is a helpful exclusion to the general prohibition under Article 71 of FSMA that can normally be relied upon in
connection with the operation of an employee share plan.

What are these exemptions?

Answer 50

• the activity is carried out by the issuer, a member of its group or a relevant trustee;
• the activity is one of the following: (a) dealing in investments as principal; (b) dealing in investments
  as agent; (c) arranging deals in investments; and (d) safeguarding and administering assets; and
• the purpose is to enable or facilitate: (a) transactions in the issuer’s shares between, or for the benefit of: (i) bona fide employees or former employees of the issuer or of a member of its group (+the wider beneficiary wording usually seen in a trust deed).

If this exclusion applies, the activity is not regarded as a specified activity, meaning that the activity is not a regulated activity and so will fall outside of the scope of the general prohibition.

Question 51

REMEMBER - Gender pay gap reporting

Answer 51

Since April 2017, certain companies are legally obliged to disclose particular information about what they pay men and women employed by their organisation.

This obligation – known as gender pay gap reporting – applies to private sector (including both private and listed companies) and voluntary sector companies who have 250 or more employees in the UK on 5 April each year .

Briefly, companies will need to report:
* the difference in mean and median hourly rates of pay between male and female
employees;
* the difference in mean and median bonus pay between male and female employees;
* the proportion of male and female employees who received a bonus payment over the 12
months prior to the snapshot date; and
* the numbers of male and female employees in the company’s pay quartiles.
Information gathered as part of the reporting process may be used by employ.

Question 52

REMEMBER - Investment Advice

Answer 52

There is no share plan exclusion that will be available in connection with advising on investments. Any company that is found to be advising on investments would likely be carrying out a regulated activity and so would either need to be an authorised person or an exempt person.

The easiest approach for companies to take in an employee share plan context would be to ensure that
they do not give advice in the first place. Companies should: (a) take care to not give any investment
advice to employees in the context of an employee share plan, and (b) ensure that a disclaimer is clearly
stated within the share plan communications explaining that the company is not giving investment advice
and that independent investment advice is recommended

Question 53

LEARN - Financial Promotion

Answer 53

Section 21 of FSMA prohibits the communication, in the course of business of an invitation or inducement to engage in investment activity by a person who is not authorised by the regulator (an authorised person) to make a such communication, except where the content of the communication has been approved by an authorised person.
This prohibition is known as financial promotion. The breach of the financial promotion prohibition is a criminal offence.

Fortunately, Article 60 of FSMA 2000 sets out an exemption from the financial promotion prohibition for communications issued in connection with an employee share plan. As a high-level summary, this exemption will be available where:
* the communication is made by the issuer, a member of its group or a relevant trustee;
* the communication relates to certain prescribed investments issued, or to be issued, by the issuer,
including the issuer’s shares; and
* the communication is made for the purposes of an ‘employee share scheme

If it does not apply, then the communication will typically need to be made or approved by an authorised person, unless another exemption can be relied upon

Question 54

REMEMBER - Market abuse and insider dealing

Answer 54

Laws exist in the UK to seek to prevent market abuse, ensure the integrity of the UK financial markets, and enhance investor protection and confidence in those markets. The UK Market Abuse Regulation (UK MAR), which is a post-Brexit ‘onshored’ version of the EU’s Market Abuse Regulation, comprises the core element of the UK’s market abuse rules.

UK MAR generally applies in relation to financial instruments that are traded on UK and EU markets (both large and smaller markets), although some of the obligations set out in UK MAR (such as the requirement to keep insider lists or the PDMR notification requirements) only apply to financial instruments traded on UK markets.

Question 55

What are some examples of information that may be considered ‘inside information’?

Answer 55

• Information of a precise nature;
• that has not been made public;
• that relates, directly or indirectly, to one or more issuers or to one or more financial instruments (e.g., a company or its shares); and
• which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments

Question 56

In what scenarios could insider dealing be an issue within share plans?

Answer 56

Persons discharging managerial responsibility.

Article 19 of UK MAR prohibits PDMRs in companies with financial instruments traded on a UK market from trading during a closed period.

Question 57

What is a closed period and how many calendar days prior to announcement is it from?

Answer 57

A closed period is the period of 30 calendar days prior to the announcement of interim or year-end results, which will normally include a preliminary announcement of results

Question 58

REMEMBER - PDMRs

Answer 58

UK MAR requires that a notification be made where a PDMR or PCA (family or structure connected to a PDMR) conducts certain transactions relating to the company’s shares, including in relation to phantom awards that are linked to the value of the company’s shares.

Once a notifiable transaction has taken place, the following requirements will apply:
* the PDMR or PCA must notify the issuer and the FCA promptly and no later than 3 working days after the date of the transaction; and
* the issuer must ensure that a notification is made public promptly (usually by way of an RNS announcement), and no later than 2 working days after being notified of the transaction itself. The notifications must each contain prescribed information and the FCA has published a template for this purpose.

Question 59

REMEMBER - Sanctions for market abuse

Answer 59

The FCA has wide-ranging powers to sanction an individual or a company if it breaches UK MAR. These include private warnings, fines, formal public censure, prohibiting an individual from holding an office of responsibility, prohibiting an individual from dealing in financial instruments and, in extreme cases, suspending the trading in the UK of a company’s financial instruments.

As well as the FCA’s powers under UK MAR, there is also a separate criminal offence of insider dealing that applies under the UK’s Criminal Justice Act 1993 (CJA).

The CJA gives the FCA the power to prosecute the criminal offence of insider dealing where the relevant behaviour takes place within the UK.

Question 60

The criminal offence of insider dealing is committed if an individual is an insider and….??

Answer 60

• deals in price-affected securities (including shares listed on the London Stock Exchange and AIM) when in possession of inside information;
• encourages another to do so when in possession of inside information; or
• discloses inside information otherwise than in the proper performance of their employment, office or profession.

Question 61

Name some key points an EBT can be used for

Answer 61

• Satisfying awards
• To provide liquidity for a private company’s shares
• To pay par/nominal value
• For ‘hedging’ (acquiring shares in advance of satisfying awards)
• To manage dilution limits (no dilution when acquiring shares on the market)
• To avoid shareholder approval requirements

Question 62

Name three pertinent fiduciary duties

Answer 62

• a duty to act in the best interests of the beneficiaries as a whole (this duty is critical);
• a duty to act within the terms of the trust; and
• a duty not to profit from the trust.

Question 63

REMEMBER: Negligence

Answer 63

There is a body of law called ‘tort law’ that imposes civil (rather than criminal) liability for the breach of certain obligations imposed by law. The most common, or at least most well-known, tort is the tort of ‘negligence’

Question 64

REMEMBER!

Answer 64

There is a huge gap between the theory and the practice – you need to have a grasp of the theory but do take advice on the current practice.

Question 65

TEST YOURSELF: What are the 4 key elements of a legally binding contract?

Answer 65

(2.3.1) Agreement - offer and acceptance
(2.3.2) Consideration
(2.3.3) Intention to be legally bound
(2.3.4) Certainty of terms

Question 66

TEST YOURSELF: Does a legally binding contract have to be in writing?

Answer 66

No - can be agreed verbally, but evidentially this may be hard to prove. Written is best
practice

Question 67

TEST YOURSELF: What is required to execute a document as a deed?

Answer 67

The document must be:
* In writing
* Clear on the face of it that it is intended to be a deed
* Validly executed (for example, an individual must sign in the presence of a witness)
* ‘Delivered’ as a deed (which in practice means it includes relevant wording, and is dated)

Question 68

TEST YOURSELF: Can the directors do what they like when they have ‘absolute discretion’ to make decisions under plan rules?

Answer 68

No! They must exercise their discretion in a way that honours an implied duty of mutual trust and confidence in the employment relationship and must not exercise their discretion irrationally,
arbitrarily or capriciously. They must take into account appropriate factors and follow an appropriate process

Question 69

TEST YOURSELF: What are the key employment law issues relevant when granting awards to employees?

Answer 69

Key issues include:
* Generally share plans include a statement that the rights under the share plan are separate from the employment contract - this is for a number of reasons, including:

• to try to reduce the risk of local employment laws applying to the share award contract;
• to reinforce the position that the offer of share plans is discretionary and not a contractual right.
• However, it is not always possible to keep a clear distinction between employment rights (under the employment contract and general employment laws) and the rights that a participant may have under a share plan.
  *Statutory employment law may override the terms of any share award contract.
  *In a dispute situation, there is a risk that the judge in an employment tribunal or court will decide that rights under a share plan are linked to employment.
• Discrimination law - both direct and indirect discrimination. Consider in particular the risk
  of gender or age discrimination and the treatment of part-time and fixed-term workers.
• Employment laws may also impact enforceability of restrictive covenants and malus &
  clawback

Question 70

TEST YOURSELF: What should a company think about if it has retirement as a good leaver reason in its plan rules?

Answer 70

How is retirement defined?
If it is by reference to a specific age, this could be direct discrimination which the company would need to be able to objectively justify by showing it is a proportionate means of achieving a legitimate aim.
If it is by reference to length of service or a similar factor, this could be indirect discrimination and so, as above, the company would need to be able to objectively justify it.

The company could instead delete retirement and rely on its general discretion and/or have a policy in place to explain why it may consider that someone is retiring. What type of share plan is it? If it is a Sharesave plan for example, retirement has to be a good
leaver reason so would fall within an exemption to the discrimination legislation (where agerelated terms are required by other legislation).

Question 71

TEST YOURSELF: What do clawback provisions enable?

Answer 71

A post-settlement recovery of the value derived from the award on the occurrence of specified triggers

Question 72

TEST YOURSELF: In what circumstances might you need to contact HMRC in relation to an amendment of a share plan, and do you need their approval for the change?

Answer 72

You might need to contact HMRC in relation to an amendment to a share plan if you are amending a tax advantaged plan and the change is to a ‘key feature’ of the plan.

You would not need HMRC’s approval for the change. You would simply need to notify them of the change in the annual return for the plan, and self-certify that the plan continues to comply with the relevant legislation

Question 73

TEST YOURSELF: What duties does a director have under company law?

Answer 73

Must act within powers, must promote the success of the company, must exercise independent judgment, must exercise reasonable care, skill and diligence, must avoid conflicts of interest, must declare interests in any business or proposed business involving the company and must not accept benefits from third-parties.

Question 74

TEST YOURSELF: What is the key constitutional document of a UK company?

Answer 74

The articles of association is now the key constitutional document governing the relationship
between the company, its directors and shareholders

Question 75

TEST YOURSELF: Can a UK public company fund its employee benefit trust to buy shares in the market or is this
prohibited financial assistance?

Answer 75

Yes it can provide the funding, provided that it can comply with the exemption in the
Companies Act 2006 for ‘employee share schemes.’ This means that:
* the assistance must be in the interests of the Company;
* the assistance must not reduce net assets or if it does, must be out of distributable profits;
and
* the employee benefit trust must qualify as an employee share scheme under s1166 of the
Companies Act 2006.

Question 76

TEST YOURSELF: What are some of the obligations that arise under the UK Market Abuse Regulation?

Answer 76

The obligations include:
* not to deal during a period of inside information;
* maintain an insider list;
* for PDMRs, not to trade during a MAR closed period; and
* notify the issuer, the FCA and the market as to certain transactions by a PDMR or PCA.

Question 77

TEST YOURSELF: Can a PDMR exercise an option during a MAR closed period?

Answer 77

No, this would be a prohibited dealing during a closed period.

Question 78

TEST YOURSELF: What does the ‘general prohibition’ prevent?

Answer 78

The general prohibition (set out at Section 19 of the Financial Services and Markets Act 2000) prevents a person from carrying on a regulated activity in the UK, or purporting to do so, unless
that person is authorised by the regulator (i.e., they are an authorised person) or is an exempt
person