Share scheme issues for listed companies: a quick guide

This is a quick guide to the main share scheme issues for companies listed on the main market of the London Stock Exchange.

It is part of a series of quick guides to share schemes and is also one of a series of quick guides on many other subjects, see Quick guides.

In this quick guide, "listed company" refers to a company whose shares are listed on the Main Market (www.practicallaw.com/0-107-6800) of the London Stock Exchange. For an introduction to the key issues for companies traded on AIM, see AIM companies: share scheme issues: practice note (www.practicallaw.com/8-222-6017).

Nearly all listed companies will have at least one share incentive scheme

The vast majority of listed companies will have at least one share incentive arrangement. Usually a listed company will have:

• One or more share plans specifically for executive directors and sometimes other very senior employees. Sometimes, these are known as "discretionary" or "executive" share plans, and are likely to include a performance share plan (www.practicallaw.com/5-204-1204) (PSP) and/or a tax-approved company share option plan (www.practicallaw.com/1-107-5956) (CSOP).
• One or more share plans open to all employees regardless of seniority. External share plan administrators normally carry out the day-to-day administration of these "all-employee" share plans. These plans will usually be an HMRC approved SAYE option scheme (www.practicallaw.com/4-107-7195) and/or share incentive plan (www.practicallaw.com/3-107-7252).

For a summary of the type of share plans that can be offered, see Employee share schemes: a quick guide (www.practicallaw.com/9-378-9652).

In-house counsel need to be aware of share plans issues, but may not be responsible for them

In large companies, the person who is responsible for the implementation and operation of share plans may not be the person who reports to the in-house counsel. In many companies, it is the finance or HR director who takes responsibility for share plans and who may deal with the remuneration committee (www.practicallaw.com/3-205-9129) on executive share plan issues.

However, all in-house lawyers need to be aware of some key issues that will have an impact on share plans so they can spot problems and liaise with their colleagues as appropriate.

Listing rules, regulatory rules and investor guidelines affect the design and operation of a listed company's share incentive arrangements

The design of a listed company's share plans is affected by statute (particularly in the case of HMRC tax-approved plans) and various other regulatory rules and investor guidelines. These include the Listing Rules (www.practicallaw.com/7-107-6774) (including the Model Code (www.practicallaw.com/7-107-6854)), the UK Corporate Governance Code (www.practicallaw.com/2-502-1888), the Disclosure and Transparency Rules (www.practicallaw.com/8-209-4955), and investor guidelines, particularly the ABI remuneration principles (www.practicallaw.com/2-205-8149). These have a significant impact on the design and operation of plans, particularly those that involve senior employees, including:

• Who awards can be granted to.

• The size and value of awards.

• When awards can be granted and exercised and when the shares underlying the awards be sold.

• How much dilution will be tolerated by shareholders.

• When shareholder approval is required for a particular plan or transaction.

• How a company can treat leavers.

• What type of performance conditions are attached awards.

• What must be announced to the market and when.

Adverse publicity is a significant risk for listed companies

Media, political and public interest in executive pay in listed companies has vastly increased over recent years. A large proportion of executive pay is likely to come from a listed company's share plans. Adverse publicity is a risk in particular where:

• Departing executives, who may be regarded as having failed, receive large share incentive awards when they leave.

• The company asks shareholders for approval for new share plans which contain unusual elements, unambitious performance targets or are very generous.

Financial assistance is an issue for public companies

In general, it is unlawful for a public company to provide financial assistance (www.practicallaw.com/6-107-5751) to any person to acquire its shares. There are exceptions to this general prohibition, including one relating to financial assistance in connection with an employees' share scheme (www.practicallaw.com/6-107-6213), subject to certain conditions.

Anti-avoidance legislation affects share plans that use an employee benefit trust

Most listed companies use an employee benefit trust (www.practicallaw.com/6-205-8072) (EBT) in conjunction with their share incentive arrangements. Anti-avoidance legislation exists that can affect how share plans are designed and operated, even where there is no anti-avoidance purpose. With care, listed companies should be able to make use of the various exclusions for share plans contained in the legislation, but it is important to be aware of the issue, because transactions that are caught can result in adverse income tax and NICs charges.

Information disclosure and filing

Disclosure and filing obligations include:

• Certain transactions, such as grants of awards, must be announced to the market.

• Information about a company's share incentive arrangements must be disclosed in the company's annual report and accounts in the remuneration report.

• The company must file annual returns to HMRC about all their share plans and must include share plan gains in monthly and annual PAYE filings.

Other issues that affect share plan operation for all companies

Companies establishing and operating share plans may also need to consider some of the issues below:

• Financial services law.
• In corporate transactions, you need to think about the impact on share plans of:
  • acquisitions and disposals of companies and business units;
  • demergers and corporate restructurings; and
  • rights issues (www.practicallaw.com/1-107-7173).
• The accounting treatment of share plans.
• Internationally mobile employees.