N9- LTIP Key Features and Key Documents

Question 1

LTIP employee eligibility

Answer 1

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

Question 2

Grant of an award

Answer 2

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

Question 3

Vesting and vesting periods

Answer 3

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

Question 4

Conditions

Answer 4

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

Question 5

Lapse

Answer 5

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

Question 6

Settlement

Answer 6

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.

Question 7

Source of shares

Answer 7

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)

Question 8

Change of control

Answer 8

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

Question 9

Amendments

Answer 9

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.

Question 10

Conditional share award vesting

Answer 10

Vets for CSAs is when the participant becomes unconditionally entitled to the shares under the rules of the plan. Shares are then automatically delivered

Question 11

Options vesting

Answer 11

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.

Question 12

Options vesting

Answer 12

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.

Question 13

Key documentation for LTIP

Answer 13

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

Question 14

Web portals and pages

Answer 14

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.

Question 15

Plan Rules

Answer 15

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.

Question 16

Shareholder circular

Answer 16

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

Question 17

Deed of Grant

Answer 17

This is the document a company would typically use to grant awards and create the
relevant contractual rights.

Question 18

Grant/award document, letter or certificate

Answer 18

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.

Question 19

covering letter

Answer 19

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.

Question 20

Acceptance terms

Answer 20

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).

Question 21

Rejection/renunciation form

Answer 21

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.

Question 22

Explanatory brochure (and other communications)

Answer 22

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.

Question 23

Vesting/exercise details (including notice of exercise for options)

Answer 23

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?

Question 24

Nominee information/agreement

Answer 24

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.

Question 25

Trust documents

Answer 25

Many companies use an employee benefit trust in the operation of their share
plans, including LTIPs. In operating trusts, numerous documents may be required including a trust deed, a linking agreement, a loan facility agreement and letters of recommendation.