Legal Report / Stock Option Plan / United Kingdom

Executive Summary

• Securities Laws and Regulatory Issues:

  There are no securities law restrictions, registrations or filings required.

• Exchange Controls:

  There are no exchange control restrictions or filings required. 

• Other Filings and Reports:

  Following the end of each tax year (5th April), and by 6th July, a return must be filed with HMRC in respect of share plans operated in respect of UK Participants during that tax year. Failure to file a return may result in a penalty. Find the registration details and forms on the HMRC website.

  On the acquisition of shares from Awards, it is recommended that the Company and Participant consider entering into a joint election (known as a 'section 431 election') within 14 days of the acquisition of shares to ensure there is no risk of an income tax liability arising in connection with the shares in the future when the shares cease being subject to restrictions (such as on a future sale of shares). 

• Award Documents and Communication:
  • Plan Documentation:

    It is common practice that the Plan documentation is made available to Participants.

  • Award Document Wording:

    It is recommended to have a local version of the Award documents which includes wording to deal with local tax and legal issues.

  • Translations:

    Consideration should be given to providing a translated version of the key Plan documents in appropriate circumstances.

  • Electronic Communications:

    There are no issues with the use of electronic communications. 

  • Acceptance by Participants:

    Whether Award documents need to be counter-signed by Participants will be determined by the laws of the country in which the Plan is stated to be subject. 

  • Jurisdiction Issues:

    The local courts will generally respect the laws under which the Plan documents are stated to be subject. 

  • Salary Deductions:

    The Local Company may make deductions from Participants' salaries in connection with the Plan.  These deductions must be agreed to by Participants.

• Consultation and Employment Rights:
  • Works Councils:

    Any agreements with local works councils or trade unions must be respected in connection with the implementation of the Plan.

  • Local Laws:

    Anti-discrimination laws will apply to the offer of Awards and the operation of the Plan.

  • Exclusion of Liability:

    It is permissible to exclude liability for compensation for the loss of Awards on termination of employment, however, there are circumstances where such exclusion will not be enforceable.

  • Compensation:

    There are certain circumstances where a Participant may be able to make a claim for compensation for the loss of Awards.

  • Clawback Provisions:

    Clawback provisions are generally permissible. 

  • Restrictive Covenants:

    The forfeiture of Awards as a consequence of the breach of restrictive covenants is generally permissible. 

• PEO & EoR:

  If a Participant is engaged via a Professional Employer Organisation (PEO) or other Employer of Record (EoR) they may not be regarded as an employee of the Company’s group.  Certain helpful "employee share scheme" exemptions may not be available and the PEO or EoR will be responsible for dealing with the tax withholding and reporting obligations.  Awards should be made under a separate plan or sub-plan (and not under the Plan for employees of the Company's group).

• Consultants:

  If a Participant is engaged as a consultant or contractor they will not be regarded as an employee of the Company’s group.  Certain helpful "employee share scheme" exemptions may not be available.  Awards should be made under a separate plan or sub-plan (and not under the Plan for employees of the Company's group).

• Data Privacy:

  The Local Company needs to ensure compliance generally with the General Data Protection Regulation (GDPR) (as specifically incorporated into UK law) and it is recommended to add language to confirm that the Local Company is operating the Plan in accordance with the applicable data privacy notice.  

• Other Issues:

  If participation in the Plan potentially extends to individuals who are not employees of the Company's group (for example, non-executive directors, consultants and/or individuals engaged via a Professional Employer Organisation), the Company should consider a separate arrangement (or a sub-plan) for UK-based employees.  This is because the Plan is unlikely to be an "employee share scheme" for UK legal purposes and will miss out on certain regulatory exemptions (including a helpful exemption from the "financial promotion" regulations). 

  There is an uncapped employer social security liability in connection with Awards. 

Legal Report

Securities Laws and Regulatory Issues

Offers of securities are generally subject to a requirement to make available an approved prospectus in accordance with the Financial Services and Markets Act 2000. As the Awards are structured as options, they are generally interpreted as being ‘non-transferable securities’ that fall outside the scope of this requirement and, therefore, no prospectus or information document is required.

Time: Grant.

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Exchange Controls

There are no exchange control restrictions or filings required. 

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Other Filings and Reports

ERS Annual Return in July

Following the end of each tax year (5th April), and by 6th July, a return must be filed with HMRC in respect of share plans operated in respect of UK Participants during that tax year. Failure to file a return may result in a penalty. Find the registration details and forms on the HMRC website.

Time: Grant, exercise.

Cost: EUR 2200 - For assisting with preparing an ERS Annual Return (per Award type). This is an annual obligation.

Section 431 Election

On the acquisition of shares from Awards, it is recommended that the Company and Participant consider entering into a joint election (known as a 'section 431 election') within 14 days of the acquisition of shares to ensure there is no risk of an income tax liability arising in connection with the shares in the future when the shares cease being subject to restrictions (such as on a future sale of shares). 

Time: Grant, exercise.

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Award Documents and Communication

Plan Documentation

There is no legal requirement to provide Participants with a copy of the Plan documentation. However, it is common practice that the Plan documentation (for example, the rules of the Plan) is made available to Participants in order to avoid misinterpretation of the rights and restrictions under the Plan.

Award Document Wording

It is recommended that the following is included in the Award documents:

1. wording to state that the Award is separate from and does not form part of the Participant’s employment benefits to exclude any liability on the part of the Company or Local Company for the loss of an Award as a result of the Participant’s termination of employment;
2. a full indemnity in respect of income tax and National Insurance contributions. If payment of the employer’s National Insurance contributions is to be made by the Participant, this should also be stated in the Award documentation;
3. language to confirm that the Local Company is operating the Plan in accordance with the applicable data privacy notice; and
4. where deductions are to be made to Participants' salaries in connection with the Plan, that Participants agree to such deductions being made.

Time: Grant.

Cost: EUR 2000 - Per Award type.

Translations

There is no legal requirement to provide a translated version of the Plan documentation. However, if there are any concerns that the Participants will not understand the Plan, consideration should be given to providing a translated version of the key Plan documents (for example, the Award certificate and any FAQs).

Electronic Communications

There are no issues with the use of electronic communications. 

Acceptance by Participants

Whether Award documents need to be counter-signed by Participants will be determined by the laws of the country in which the Plan is stated to be subject. 

Jurisdiction Issues

The local courts will generally respect the laws under which the Plan documents are stated to be subject. 

Salary Deductions

The Local Company may make deductions from Participants' salaries in connection with the Plan.  These deductions must be agreed to by Participants.

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Consultation and Employment Rights

Works Councils

There is no legal obligation to consult works councils before implementing the Plan unless the Local Company is bound to do so under the terms of a collective agreement or trade union arrangement. Where such agreements are in place these must be respected, and the Local Company should consult with the employees or their representatives before implementing the Plan.

Local Laws

Discrimination (both direct and indirect) against employees on the grounds of protected characteristics (age, gender reassignment, being married or in a civil partnership, being pregnant or on maternity leave, disability, race, religion or belief, sex, sexual orientation) is prohibited. Consideration should be given to these issues when determining who should participate in the Plan, what should happen during a Participant’s period of absence and what should happen when a Participant leaves employment. 

Time: Grant, leavers.

Exclusion of Liability

It is permissible to exclude liability for compensation for the loss of Awards on termination of employment, however, such an exclusion will not apply: 

1. where a Participant is unfairly dismissed (as defined in the Employment Rights Act 1996); or 
2. to a claim for damages for breach of contract caused by how a Company/Local Company exercised, or didn’t exercise, its discretion in connection with the Plan on the termination of employment. 

Time: Grant, leavers.

Compensation

The loss of Awards may be included in a claim for compensation where:

1. a Participant successfully claims unfair dismissal under the Employment Rights Act 1996, the loss of Awards may be included in the settlement (but, other than in cases of discrimination and 'whistle-blowing', the settlement for unfair dismissal is subject to a statutory financial cap); or
2. a Participant makes a successful contractual claim - either for wrongful dismissal under the terms of the Participant's employment contract or for the improper use of discretion by the Company/Local Company in connection with an Award.

Time: Grant, leavers.

Clawback Provisions

It is possible to provide that value derived from Awards may be clawed back in certain circumstances, but the enforceability will depend on how the specific clawback provisions are worded.

Restrictive Covenants

It is possible to provide that Awards may be forfeited in certain circumstances, but the enforceability will depend on how the specific restrictive covenants are worded.

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PEO & EoR

If a Participant is engaged via a Professional Employer Organisation (PEO) or other Employer of Record (EoR) they may not be regarded as an employee of the Company’s group.  As a result:

1. The obligation to file the ERS Annual Return may fall on the PEO or EoR (although it is likely that the Company will need to assist with the preparation of this).
2. Any indemnity in the Award documentation against income tax and National Insurance contributions should be extended to the PEO or EoR.
3. Further advice should be sought when communicating with the Participants in relation to their Awards as any communication could constitute a "financial promotion", which is a regulated activity (this concern does not generally apply to communications made in connection with an "employee share scheme"). 

Participants who are not employees of the Company's group (which would include those engaged via a PEO or EoR) should not participate under the same Plan as employees: a separate plan or a sub-plan should be established.  The Company should also consider whether the engagement with the PEO or EoR adequately deals with the practical operation of the Plan (taking into account the points highlighted above).

Time: Grant, exercise, leavers.

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Consultants

If a Participant is engaged as a consultant or contractor they will not be regarded as an employee of the Company’s group.  As a result, further advice should be sought when communicating with the Participants in relation to their Awards as any communication could constitute a "financial promotion", which is a regulated activity (this concern does not generally apply to communications made in connection with an "employee share scheme"). Participants who are not employees of the Company's group should not participate under the same Plan as employees: a separate plan or a sub-plan should be established. Care should also be taken that Participants in this category are genuine consultants or contractors and not viewed as an employee under local laws.

Time: Grant, exercise, leavers.

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Data Privacy

There are no specific requirements to make an external filing or registration for data protection purposes in respect of the Plan or the making of Awards. 

The Local Company needs to ensure compliance generally with the General Data Protection Regulation (GDPR) (as specifically incorporated into UK law) in relation to the way it handles data and by having proper data privacy procedures in place, including a data privacy notice for employees. The Local Company should ensure that its data privacy notice sufficiently captures participation in the Plan. 

There is no legal requirement to add data privacy language to Award documentation. However, it is recommended to add language to confirm that the Local Company is operating the Plan in accordance with the applicable data privacy notice.  

Time: Grant.

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Other Issues

Participation of Non-Employees

If participation in the Plan potentially extends to individuals who are not employees of the Company's group (for example, non-executive directors, consultants and/or individuals engaged via a Professional Employer Organisation), the Company should consider a separate arrangement (or a sub-plan) for UK-based employees.  This is because the Plan is unlikely to be an "employee share scheme" for UK legal purposes and will miss out on certain regulatory exemptions (including a helpful exemption from the "financial promotion" regulations). 

Time: Grant.

Tax Alert

There is an uncapped employer social security liability in connection with Awards. 

Time: Grant, exercise.

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