The Market Abuse Regulation (“MAR”) came into force throughout the EU one year ago, with significant impact for companies operating employee share plans. In this article we summarise the impact of the MAR on employee share plans, and some important points of clarification from its first year of operation.
The MAR: what’s it all about?
The MAR is intended to create a common framework for the corporate governance of listed companies.
What does MAR mean for employee share plans?
The MAR regime includes a number of provisions which affect when options and other share awards can be granted to employees, and when persons discharging managerial responsibilities (“PDMRs”) can deal in shares (which could include exercising options). These provisions:
- impose a common standard across the EU for determining when a closed period exists;
- define what constitutes insider trading; and
- dictate when and how reporting of transactions by PDMRs must be made.
The MAR and the associated MAR Delegated Regulation also contain a number of exemptions which are relevant for the operation of employee share plans. There is, for example, an exemption which can apply to the acquisition of shares by PDMRs in a closed period where the acquisition is the automatic result of an action taken outside a closed period (e.g. the acquisition by a PDMR of shares on the vesting of restricted stock units in a closed period).
What’s new – and what does this mean for employers?
When MAR was first introduced, the precise interpretation of a number of its provisions remained uncertain. The European Securities and Markets Authority (“ESMA”) has since published a number of Q&A on some of these issues affecting share plans and employee equity:
- Annual €5,000 exemption from reporting obligations clarified; but is rarely used. An annual €5,000 exemption from reporting obligations applies under the MAR (the PDMR must report each transaction to the issuing company, which must then report the transaction to the relevant stock exchange). ESMA has issued various clarifications about how this should be calculated. But, in practice, many companies will not want PDMRs to take advantage of the reporting exemption, because of the potential penalties and reputational risk involved in inadvertently failing to report a transaction, for example through failure to aggregate correctly all reportable events. It is safer to report all dealings by PDMRs.
- Shares received as part of a remuneration package: reporting requirement triggered on transaction, not on entering into remuneration contract. ESMA has confirmed that simply entering into a remuneration contract under which a PDMR is entitled to receive shares on the occurrence of certain conditions does not itself give rise to a reporting requirement. Employers should note that it is only when the eventual transaction occurs (e.g. the grant of options or the acquisition of shares) that the obligation to report arises.
- Options granted with nil-exercise price: correct reporting price is nil. When the MAR first became effective there was uncertainty in relation to options granted with a nil exercise price as to how to report the price of the securities – the nil exercise price or the market value of the underlying shares at the date of grant? ESMA has since clarified that the correct price to report is nil, which is a welcome clarification for employers. If calculating the value of the grant for the purpose of the annual €5,000 exemption, the value of the nil cost option should be determined using an accepted option pricing method; but many employers will chose not to take this route (see above).