EU Prospectus Directive – some improvements on the way

08 June 2009

Employee Incentives & Benefits Group

The EU Commission announced their intention to introduce a wider employee share plan exemption but it will take years to implement, guidance issued by CESR (and more recently clarified) may reduce the cost of issuing a prospectus in the meantime.

Background

The EU Prospectus Directive requires companies to issue a prospectus when offering “transferable securities” to the public in the European Economic Area (consisting of the EU, Norway, Liechtenstein and Iceland).

The Directive is misconceived in that it does not include a full exemption for shares offered pursuant to employee share plans.  There is a partial employee share plan exemption but it:

  • only applies to companies with shares or debt listed on a regulated EU market (so excludes AIM and many US listed companies); and

  • is only a partial exemption as companies still have to provide a basic information document to employees. 

As a consequence, all companies operating employee share plans try to use other exemptions and / or limits in the Directive. 

It is accepted by regulators (other than in Germany and Poland) that options are outside the Directive if they are non-transferrable. 

Free shares fall within the exemption for offers with consideration of less than 100,000 euro per country.   

Companies that offer shares for sale direct to employees typically use the per country exemptions of less than 100,000 euro and / or less than 100 people.  If these are breached there is a 2.5 million euro threshold for offers in all EU jurisdictions in the previous 12 months but it is less satisfactory as it does not exclude local law overrides so one has to check whether there are any additional requirements in each jurisdiction (the UK has none). 

If the 2.5 million euro threshold is exceeded, companies that can take advantage of the partial exemption have to issue an information document. 

Many companies, however, do not qualify for the partial exemption (such as US companies that do not have shares or debt traded on an EU regulated market).  Companies in this position are faced with a difficult choice of:

  • Pulling the offer;

  • Producing a prospectus; or

  • Arranging for their shares or debt to be listed on an EU regulated market. 

Most companies pull the offer but the few that persist have tended to cut costs by producing messy prospectuses which cross-refer to information in their NYSE or NASDAQ filings.  

CESR announcements

The Committee of European Securities Regulators (“CESR”), the body responsible for the Directive, published guidance in February 2009 on a reduced level of disclosure required for prospectuses used for offers of shares to employees.  The guidance applies to all listed companies whether or not listed on an EU regulated market (so extend to AIM, NYSE and NASDAQ listed companies).   

The new guidelines may marginally reduce the cost of producing a prospectus and therefore encourage more companies to go down the prospectus route.  

Information memorandum

CESR also consulted in February on the content of the information memorandum required to be issued to employees by companies that currently qualify for the partial employee share plan exemption.  They proposed an increase in the information required to be included in the memorandum to align it with the information their new guidance requires for slimmed-down prospectuses.  After some lobbying they recently agreed not to do this so the current limited information requirements remain.

Comment

We are currently acting for an NYSE listed company which is extending its ESPP to employees in Europe (including a UK workforce of nearly 500).  We hope to rely on the 2.5 million threshold but if they choose to raise funds in Europe this may not be possible further down the line even if they are within the limit when the plan is launched.  A proper exemption that companies can rely on is required as soon as possible to encourage employee share ownership. 

The EU Prospectus Directive would have been much better if it had included a full employee share plan exemption at the outset.  The proposed exemption should allow any company to offer securities pursuant to an employee share plan without having to issue a prospectus or an information memorandum. 

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