Publications

---

In today’s global economy, it is common for companies of all sizes and in all industries to have operations in multiple countries. An increasing majority of these companies offer stock awards to the employees of their global operations. When analyzing the potential liabilities and compliance requirements in an M&A transaction, it is important for an acquiring company to consider whether the acquisition of the target company’s global operations and the assumption or substitution of the employee stock awards will trigger securities, tax, currency exchange, labor, and data privacy issues.

These requirements may be triggered when the acquiring company enters a new country, when it expands its work force in a country, or when there is the assumption of different types of stock awards granted by the target company.

In this article, we address the potential securities notice and disclosure requirements in the EU member states.
EU Prospectus Directive Has Meant Sweeping Changes in Securities Compliance
The European Parliament published Directive 2003/71/EC on the Prospectus to be Published when Securities are Offered to the Public or Admitted to Trading (the EU Prospectus Directive or Directive) on December 31, 2003. The EU Prospectus Directive has resulted in sweeping changes for non-EU regulated companies that offer securities, including stock awards under employee stock plans, in the EU.

The Directive is intended to harmonize the regulation of capital markets within the EU. It is also intended to allow an issuing company to be regulated by one member state rather than by each member state in which securities are offered. For this purpose, the Directive introduces a single regime to govern the content, format, approval, and distribution of a prospectus in connection with a securities offering within the EU. The member states were required to enact domestic legislation implementing the Directive by July 1, 2005.

Directive Intended to Harmonize Laws, But Reality is Inconsistent

Though the intent of the Directive was harmonization, the resulting legislative framework post-implementation, however, has been not been uniform across the member states. The implementing legislation, as well as the regulators’ interpretations of the legislation, have been inconsistent among the member states.

With that said, there are some consistencies in the application of the Directive. Each of the EU member states has enacted new securities legislation implementing the provisions of the Directive,[1] requiring a prospectus to accompany all “offers of securities to the public,” subject to certain exemptions. Such an “offer” is defined broadly in the Directive as “a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe to these securities.”

Under the Directive, “securities” are defined as “transferable securities”[2] which are either (i) shares in companies and other securities equivalent to shares in companies, or (ii) bonds and other forms of securitized debt that are negotiable on the capital market and any other securities normally dealt in giving the right to acquire any such transferable securities by subscription or exchange or giving rise to a cash settlement excluding instruments of payment. [3]

If a prospectus is required, it must be approved first by the securities authorities of the company’s home member state. The prospectus content requirements are somewhat involved and onerous.

Once approved, the prospectus may then be distributed without additional approval through a passport process to the other member states where public offers of securities are being made.
Home Member State Designation
The designation of the home member state is important because the securities authority of the home member state is the regulatory body that will oversee the drafting and approval of the prospectus. Accordingly, the home member state will dictate which information will be included in the prospectus and whether translation will be required.

The home member state is determined by the following criteria:

A. The member state in which the company made its first public offer of securities after December 31, 2003;[4] or

B. The member state in which the company first applied for admission to trading on a regulated market.

An issuer’s home member state designation may turn on whether an exclusion from the Directive is applicable. The distinction between an exclusion from the Directive and an exemption from the prospectus filing requirement is significant. If an offer of securities is subject to the Directive, but nonetheless eligible for an exemption to the prospectus filing requirement, it could determine the home member state for the issuing company. An excluded offer of securities does not determine the home member state designation.
Potential Exclusions from the Directive
Offers of stock awards may be excluded from coverage under the Directive, and, thus will not be subject to the prospectus requirements if they meet the following criteria:

A. Offers of free shares (i.e., RSUs);

B. Offers of non-transferable securities; or

C. Offers of securities within a 12-month period and with an aggregate value of less than €2,500,000.[5]

As noted above, the implementation of the Directive has been inconsistent across the member states. One significant area of inconsistent application is the interpretation of whether employee stock awards are transferable securities subject to the prospectus requirements.

Unfortunately, because of the differing interpretations at the member state level, the prospectus filing requirements for the grant of each form of stock award (e.g., options, purchase rights, RSUs) must be analyzed on a country-by-country basis.
Potential Exemptions from the Prospectus Requirements
If an offer of securities is covered under the Directive, companies may still avoid the prospectus filing requirement if the offer qualifies for an exemption. The different types of offers listed below are considered “offers of securities to the public” subject to the Directive, but are exempt from the prospectus filing requirement:

A. Offers of securities to fewer than 100 individuals in a member state;

B. Shares offered free of charge to existing shareholders, and dividends paid out in the form of shares of the same class as the shares in respect of which such dividends are paid, provided that a document is made available containing information on the number and nature of the shares and the reasons for and details of the offer; and

C. Offers of shares by companies listed on an EU-regulated market (only EU-based markets are considered regulated.)
Content of Prospectus


If an offer of securities falls within the Directive and is not an exempt public offer, then the company issuing the securities must file a prospectus detailing the following with respect to the offering:

A. details about the individual(s) bearing responsibility for preparing the prospectus and details of the auditors that prepare and approve the annual report and accounts of the parent company awarding the stock awards;

B. a description of the equity plan, including any eligibility requirements, vesting provisions, and applicable tax rules;

C. a description of the parent company awarding the stock awards, including a description of the company’s business, details of the company’s articles of association or bylaws, and a breakdown of the company’s share capital;

D. details of the financial position of the parent company awarding the stock awards, including the company’s financial accounts;

E. a description of the board of directors of the parent company awarding the stock awards; and

F. a description of the growth of the parent company and predicted future development of the company.

The submission procedure for the prospectus can usually be concluded over a three-month period. The same securities law requirements apply whether the shares underlying the stock awards are newly issued shares or treasury shares.
Impact of the Directive on M&A Transactions
Whether a prospectus filing is required under the Directive must be analyzed on a country-by-country basis. In many cases, the expansion of the acquiring company’s presence in a country through an M&A transaction will result in the loss of exemptions to the securities notice and disclosure requirements that the company previously enjoyed.

Prior to a transaction, the parties involved should first consider all outstanding employee stock plans and awards offered by each party (i.e., awards that have been granted to employees and are not yet vested, exercised, or expired). Then, the parties should consider for each EU member state:

A. whether the stock awards granted (options, purchase rights, restricted stock units, etc.) are deemed “transferable securities,” and, thus, subject to the prospectus requirements;

B. whether any exclusions apply to the stock awards (e.g., offers of “free shares” such as RSUs); and

C. whether any exemptions may apply to stock awards not already ruled out by items A or B above (e.g., offers of securities to fewer than 100 individuals in a member state).

Only if an award is deemed a transferable security and if no exemptions or exclusions apply, will a prospectus be required.

This analysis should be applied first to the awards granted prior to the acquisition. Then the analysis should be applied to awards that are planned following the acquisition.