N9- LTIP Key Features and Key Documents Flashcards
LTIP employee eligibility
Eligible employees is anyone who may participate In the plan and may be granted awards under the plan rules.
Drafted very broadly even in discretionary to include all employees but LTIP will only be granted to those who are selected.
Eligibility and participation are different things. Eligibility is about who may participate and participation is about who actually participates
Grant of an award
Moment in time when participant is given a contractual right. Don’t be deed with a conditional share award to ensure right is contractually enforceable.
Following grant employee receives an award certificate or some form of statement to evidence the contract.
The employee may then be ask to accept the terms of their award
Vesting and vesting periods
When the right vests the employee typically becomes unconditionally entitled to receive the shares.
In the case of options the employee becomes entitle to exercise those options.
Shareholders expect directors of Uk listed companies to have at least a 3 years vesting period
Conditions
The vesting of the award is often conditional on performance or other conditions.
Conditions like hitting financial targets, or continues employment often called a service condition
Lapse
Certain events means the employees shares will lapse.
The conditional right the shares ceasing to exists.
Employees leaves under any other than a good leaver reason means they lose the right to the shares subject to the award
Settlement
The act of satisfying the award (delivering the shares to the participant) called transfer of delivery.
Happens after the vesting of a conditional share award or shortly after exercise of an option.
Plan rules dictate how plans will be satisfied can be partly or wholly settled with a cash payment instead of shares.
Source of shares
Might be satisfied by the issue of new shares, the transfer of treasury shares or by market purchase (by using shares held in a trust)
Change of control
Plan included provisions which states what till happen in a range of events like what if the company was acquired by another etc which could result in awards vesting early, being reduced or being exchanged
Amendments
The rules will set out how the rules may be changed and who will need to approve the changes.
Will say when directors or remuneration committee can amend plan rules and whether shareholders and or participants need to consent to the changes.
May also say that certain changes need to be notified to HMRC if the plan is tax advantaged.
Conditional share award vesting
Vets for CSAs is when the participant becomes unconditionally entitled to the shares under the rules of the plan. Shares are then automatically delivered
Options vesting
Best happens when the option holder becomes entitled to exercise the option under the rules of the plan and all the conditions have been satisfied.
The option is exercise when the option holder elects to exercise the option. Option holder usually has a period in time in which it can be exercised if they fail to do so in the option period, their award will lapse.
Options vesting
Best happens when the option holder becomes entitled to exercise the option under the rules of the plan and all the conditions have been satisfied.
The option is exercise when the option holder elects to exercise the option. Option holder usually has a period in time in which it can be exercised if they fail to do so in the option period, their award will lapse.
Key documentation for LTIP
Plan rules
Shareholder circular
Deed of grant
Grant/award document, letter or certificate
Covering letter
Acceptance terms
Rejection/renunciation form
Explanatory brochure
Vesting and exercise details
Nominee information/agreement
Trust documents
Tax forms/declarations
Web portals and pages
Companies can update participants without admin and risks associated with paper communication. Easier to navigate and understand, all information they need in easily accessible form. Content and application is governed by legal rules.
Associated costs however can be justified against increased accessibility and reduced administration.
Internet access can be a problem for companies operating globally. Contractual obligations when using a portal online maybe be more complicated globally.
Plan Rules
Set our the contractual terms in which awards may be granted. Legal framework under which the company grants the awards.
Sets terms of a legal relationship between the participant and the company.
Contractually binding.
Shareholder circular
Needed if shareholder approval is needed to establish the plan .
A communication to shareholders which explains how the plan will work.
Will contain shareholder resolutions asking them to approve the plan.
Less info than plan rules
Deed of Grant
This is the document a company would typically use to grant awards and create the
relevant contractual rights.
Grant/award document, letter or certificate
This is usually a short document (or email)
confirming to an employee that they have been granted an award. This will set out details of the
individual’s award such as the size of the award, any performance or other conditions, the vesting
period, any holding period, etc.
covering letter
This is a letter from the company to the employee. This is not necessary, but most
companies will want to explain to participants the benefits of plan participation.
Acceptance terms
Increasingly, companies are requiring participants to accept an award and, if
they do not do so within a specified period, their award may lapse. Where participants are required to accept their award, there will often be an acceptance page on an online portal which links to the
plan documents, like the plan rules.
There may also be additional terms the participant is required to accept – for example, any terms required for participants in specific countries, or onerous terms
that are desirable to draw to participants’ attention (e.g., malus and clawback to improve
enforceability).
Rejection/renunciation form
Where companies do not have an active acceptance process, it is common for companies to have a ‘rejection’ process instead.
This is a form for the participant to reject an award. Someone may not want the award, may not be allowed it, or receiving the award
(or shares) may cause tax issues for them. If so, it might be that they are able to reject their award in a specific time frame by completing a rejection form.
Explanatory brochure (and other communications)
This is an informal guide, or FAQ, covering how the plan works and is not generally contractually binding.
The brochure will describe key
features and benefits of the plan to participants and would normally contain some tax information.
Vesting/exercise details (including notice of exercise for options)
Although most participants
will receive everything they need for the plan at the outset, it is normal to remind them, at the time their benefits mature, that their award is about to vest, and shares will be delivered to them (in the
case of conditional share awards), or that their option has become exercisable (in the case of an option).
The documents will explain what participants need to do, and any other information they need to think about, including tax consequences. Can the company give investment advice i.e., as
to whether a participant should sell or retain the shares?
Nominee information/agreement
If the company has set up a nominee arrangement to hold
shares on behalf of participants, information about this will need to be provided to participants.
A formal agreement will need to be entered into between the nominee company and the company issuing the shares.
