9 JUNE 2016
Getting the green light
The changes to the PDMR rules are forcing companies to review the way in which they operate their share plans.
PDMRs will also need to consider when they can take actions in relation to their equity incentives, whether that
involves the exercise of a share option, participation in a tax advantaged all employee share plan or the sale of any
shares acquired. Barbara Allen, partner and head of Employee Incentives and Anika Chandra, senior associate,
discuss MAR's impact on share incentive arrangements.
GETTING THE GREEN LIGHT – 9 JUNE 2016
PDMRs of premium listed companies currently adhere
to the Model Code, the prescriptive framework that
forms part of the Listing Rules. "Directors and
applicable employees" of AIM traded companies abide
by the AIM Rules, which contain a general prohibition
on dealing in a closed period (Rule 21). Many AIM
companies adopt a share dealing code, which
typically contains provisions similar to (and
sometimes more stringent than) those in the Model
Code.
From 3 July 2016, listed companies and those on
AIM, will be brought under the same MAR regime
when it comes to dealing in "securities". The Model
Code will be removed and the AIM Rules will be
amended to require companies to have a dealing
policy which reflects MAR.
The prohibitions on dealings in a MAR closed period
(defined in our article titled "Deal or no deal") and
the circumstances in which clearance to deal may be
permitted do not fit squarely with the life cycle of a
share plan used by UK companies in the same way as
the equivalent provisions in the Model Code. Below,
we consider some of the issues that are specific to
share plans. For a general discussion on MAR, an
explanation on when "dealings" can take place and
notification requirements, please see our article "Deal
or no deal".
Share plans
The process from setting up an employees' share
plan to the exercise of an option/vesting of a share
award involves several key stages and each one
needs to be considered under MAR. Take a share
option, for example. The typical life cycle involves:

the adoption of the share option plan;

the grant of an option under the plan (usually by
the issuer company);

the receipt of the option by the PDMR (this may
not require any positive action by the PDMR
although the PDMR may have a right to renounce
the option);

the vesting of the option (i.e. the point when it
becomes exercisable);

the exercise of the option (which will include the
issue or transfer of shares to the PDMR); and

the sale of some or all of the resulting shares.
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The key actions will vary depending on the type of
share awards granted. For example, the automatic
vesting of a conditional share award (which may
result in the automatic transfer of shares) does not
require any action on the part of the PDMR. In
addition, "phantom awards" (being cash payments,
the value of which is linked to the share price of a
company) will also need to be considered in the same
way as equity based awards.
With the basic rule being that transactions on a
PDMR's own account cannot take place during a MAR
closed period, save in certain circumstances where
the issuer may permit such a transaction, the
question becomes which share plan actions are
permitted?
What is the current
position?
The Model Code contains certain prescriptive
provisions relating to share plans. The grant,
acceptance, acquisition, disposal, exercise of any
option to acquire or dispose of securities in the
company is a "deal" and therefore cannot happen in
a prohibited period (i.e a period which is a close
period (because results will be announced) or where
there is inside information). However, certain actions
relating to share plans can be undertaken in a
prohibited period. For example:

certain dealings in connection with tax
advantaged (or similar) arrangements for all or
substantially all employees. There are two types
of UK tax advantaged all-employee share plans –
a Save As You Earn Plan and a Share Incentive
Plan;

options can be granted to individuals who are not
PDMRs if the grant could not reasonably be made
at another time and failure to make the grant
would indicate that the company was in a
prohibited period;

awards of shares and the grant of options under
employees’ share schemes can be made to
restricted persons in a prohibited period where:
−
the employees' share scheme was not
introduced or amended during the
relevant prohibited period and either the
terms of the scheme set out the timing of
the award or grant and those terms have
been approved by shareholders or
summarised in a document sent to
GETTING THE GREEN LIGHT – 9 JUNE 2016
shareholders or the timing is in
accordance with previous awards or
grants; and
−
the terms of the employees' share
scheme set out the amount or value of
the award or grant or the basis on which
the amount or value of the award or
grant is calculated and do not allow the
exercise of discretion; and
−
the failure to make the award would be
likely to indicate that the company is in a
prohibited period;

the cancellation or surrender of an option; and

where a company has been in an exceptionally
long prohibited period, permission to exercise an
option under an employees' share scheme may
be given where the option would otherwise lapse
during the prohibited period and where the PDMR
could not have been expected to exercise when
the company was not in a close period.
What is changing under
MAR?
Having become accustomed to a relatively
prescriptive regime which reflects the types of share
plans typically used by UK companies coupled with
long standing rules of "best practice", MAR brings
with it new uncertainty in relation to the operation of
share plans. The main difference under MAR is that
there are no "safe harbours" for share plan dealings
in the same way as there have been under the Model
Code. Therefore actions that were outside the scope
of the Model Code altogether are now in the scope of
MAR. MAR is structured so that a dealing is not
allowed in a MAR closed period unless the issuer
permits such dealing. The circumstances in which an
issuer may permit dealing are listed in the
regulations but that list is not exhaustive. It remains
to be seen what transactions will be permissible as
market practice develops in this area and whether
share plan transactions that currently can take place
in a prohibited period (under the Model Code) will
continue to do so.
As a result of the regulations deriving from Europe,
where share plans are not as prevalent nor as
regulated as they are in the UK, the wording in MAR
that provides examples of the circumstances in which
dealing can be permitted do not necessarily fit
appropriately with the actions involved for a share
option or share award.
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In summary, the MAR position is:

grants of options/awards of shares will be
prohibited in a MAR closed period. Although this
is no different to the current regime, MAR does
not contain language equivalent to that in the
Model Code to deal with actions that can be
taken in MAR closed periods. Accordingly, there is
no express exemption for grants of
options/invitations under the tax advantaged allemployee share plans in the same way as there
is under the Model Code. Care must now be
taken by companies operating such plans;

MAR sets out certain circumstances in which the
issuer may permit options to be exercised during
closed periods. These include the situation where
the option would lapse, if not otherwise
exercised, during the MAR closed period,
provided the option holder has given at least 4
months' notice of the intention to exercise. We
may see the terms of share options now stating
that they will be automatically exercised on the
day preceding the last date on which they can be
exercised;

there is no express provision that confirms that
the cancellation or surrender of an option is not a
"dealing". Accordingly, the safest view would be
that this would be a "dealing"; and

MAR contains separate rules restricting what
PDMRs can do when they have inside
information.
Conclusion
In all likelihood, the rules that allow issuers to permit
certain transactions during a MAR closed period will
be interpreted to allow much the same actions as
currently envisaged by the Model Code. However,
this will need to come about through market practice
and more guidance, be that from the FCA or ESMA
(the European Securities and Markets Authority) or
the main industry bodies representing FTSE listed
companies and/or AIM companies. We do not expect
any substantive guidance to be available before 3
July and we will have to wait some time before there
is clarity in this area.
GETTING THE GREEN LIGHT – 9 JUNE 2016
Action points: share plans
Company

Review share plans and communications to employees to ensure that any provisions in them that set out
when an individual can "deal" in the company's shares do not cut across the provisions of MAR

Consider when grants of options/awards will be made in the future

Companies will need to think about how any tax that becomes due on the exercise of an option/vesting of an
award will be funded (e.g. whether an automatic "sell to pay tax provision" can be operated during a MAR
closed period). This may be particularly relevant where shares are "thinly traded"

Share dealing codes are likely to evolve to prescribe those share plan related transactions that require
clearance. Any industry-led developments should be monitored

Key contacts
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Barbara Allen
Anika Chandra
Partner
T: +44 20 7809 2231
E: barbara.allen@shlegal.com
Senior associate
T: +44 20 7809 2104
E: anika.chandra@shlegal.com