Brexit – brief overview of its impact on share schemes in the UK

1. Introduction

For so long as the UK was part of the European Union, some types of EU legislation such as Regulations and Decisions, were directly applicable as law in the UK pursuant to section 2(1) of the European Communities Act 1972. Other types of EU legislation such as Directives were implemented through domestic legislation.

The UK has withdrawn from the EU from 23.00 hours on 31 December 2020. EU legislation as it applied to the UK on 31 December 2020 has been made part of UK domestic legislation through the ‘onshoring’ process. However, from the end of the transition period, the UK is no longer treated as if it were still an EU member state, and the UK can implement new policies in many areas that previously fell within EU competence, to the extent consistent with its international obligations.

This article briefly looks at the impact of Brexit on a few aspects of share schemes and share awards as at the end of the transition period in relation to the UK’s withdrawal from the EU.

2. State aid and EMI options

The UK was subject to the state aid regime, governed by the Treaty on the Functioning of the European Union (TFEU). As EMI options provide certain tax reliefs to small and medium enterprises, state aid approval was required. State aid approval was given until the end of the transition period.

There was some uncertainty as to the fate of EMI schemes after the Brexit transition period. As reported in our October newsletter, in its Employment Related Securities Bulletin (37) published on 27 October 2020, HMRC has confirmed that EMI schemes will continue to be available and will operate under UK law from 1 January 2021.

3. Data protection

The administration of employee share plans often involves the transfer and processing of employees’ personal data between various entities and states.  In the UK, the GDPR was automatically incorporated into domestic law. Following the end of the transition period, GDPR has virtually been adopted in the UK pursuant to the Data Protection, Privacy and Electronic Communications (Amendment etc) (EU Exit) Regulations 2019, SI 2019/419. However, it will not necessarily automatically incorporate any changes made to the EU GDPR going forward (which would need to be incorporated in UK legislation).

In addition to having a lawful means to process the data, an EU member state may only transfer personal data outside the EU (i.e. to a ‘third party country’ which includes the UK as it is now outside the EU) if: (a) the transferee country has an adequate level of protection for personal data in the European Commission’s decision, or (b) the company has implemented appropriate safeguards and enforceable legal remedies are available to the data subjects. Appropriate safeguards may take the form of, among other things, binding corporate rules or standard data protection clauses from a European Commission template.

The final provisions of the trade and co-operation agreement between the EU and the UK include an interim provision for transmission of personal data by EU member states to the UK without additional safeguards provided that the UK’s applicable data protection regime continues to apply. This interim provision is for a period of four months from the trade and co-operation agreement coming into force, which can be extended by a further two months unless one of the parties objects, or, if earlier, until there is an adequacy finding for the UK. This gives the European Commission time to determine whether the UK, now a third party country, has an adequate level of protection for personal data.

Subject to further review, the amended UK data protection legislation provides that transfers from the UK to the EU can continue without additional protections being put in place, as EU countries will be deemed by the UK to have an adequate level of data protection.

By contrast, unless an alternative agreement is reached between the EU and UK or the European Council decides that UK has an adequate level of protection for personal data, a company transferring data from the EEA to the UK will need to ensure that it has appropriate safeguards in place. An appropriate safeguard would be by using the standard contractual clauses (which can be found on the European Commission’s website).

4. Prospectus requirements

Until 31 December 2020, the UK was subject to the EU prospectus regime which standardised the requirements for the disclosure document for a public offer of transferable securities in the EU or for the admission of such securities to trading on an EU regulated market.

The EU prospectus regime provided an exemption from publication of a prospectus for offers (grant of options over shares or award of shares) to employees. This exemption initially applied those companies whose headquarters was in the EEA or whose shares were listed on a EEA regulated market. However, from 21 July 2019, this exemption applied to any employee share scheme irrespective of where the issuer has its headquarters.

Under the EU Withdrawal Agreement, the EU Prospectus Regulation, EU Prospectus Delegated Regulation and the EU Prospectus RTS Regulation as they stood on 31 December 2020, became part of UK domestic law. Accordingly, companies in the EEA can continue to make share awards to employees in the UK and UK companies can make share awards to employees in the EEA without having to issue a prospectus.

However, if the employee share scheme exemption is to be relied upon, an information document must be made available to the employees by the issuing company. While there are no detailed requirements of the information document, the Committee of European Securities Regulators have indicated that they would expect the document to include identification of the issuer, an explanation of the reasons of the offer or admission and details (including the nature) of the offer.

In addition to the information document, further requirements and notifications may be required by a member state. UK companies should seek appropriate advice on any additional local requirements that would need to be met in order to rely on the employee share scheme exemption.

5. Market Abuse Regulation

Until 31 December 2020, the Market Abuse Regulation (MAR) contained in Regulation (EU) No 596/2014, which contains certain rules and restrictions relating to dealing in shares by certain persons was automatically applicable in the UK.

From 1 January 2021, MAR was largely incorporated into the UK domestic legislation with certain consequential changes, for example, the transfer of powers and functions previously held by the European Securities and Markets Authority (ESMA) to the Financial Conduct Authority, to enable the legislation to work effectively in the UK.

However, the ESMA guidelines and recommendations have not been incorporated into UK law, although it is expected that firms and market participants will continue to apply them.

For further information contact JD Ghosh.

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