We’re pleased to announce that we have now published Tapestry’s FTSE 100 Review for 2020.

For a number of years, we have reviewed the Directors' Remuneration Reports of the FTSE 100 to identify key trends. For 2020 we have focussed on the following 4 areas:

• Environmental, Social and Governance (ESG) performance metrics
• Restricted Stock
• Post-employment holding periods
• Discretion

We have produced detailed reports of our findings for each of these four topics, including a company-by-company analysis, together with an Executive Summary containing some of our key findings and commentary.

Some of the questions we have sought to answer in our review:

• How many companies are incorporating ESG metrics within their general scorecards, and how many are giving ESG metrics a separate weighting?  Which metrics are most often used, and within which type of plan, and are trends emerging across different sectors?
• How common is committee discretion and in what circumstances can it be exercised?  Which companies disclose having both an upwards and downwards discretion?
• Which companies are operating Restricted Stock plans, and how have those plans been received by shareholders?  What is the most common level of discount, and how are underpins being structured? 
• Are most companies now implementing post-employment holding periods in line with the Investment Association's (IA) guidance, and what level of shareholding is typically required?  Are companies implementing structures to enforce the holding?

Tapestry comment
The 2020 Tapestry FTSE 100 review has uncovered a number of interesting trends across the four focus areas and provides a detailed benchmark of the approach taken towards these topics by the FTSE 100 companies.
 
ESG - The increasing importance of ESG metrics is evident from the review - a large majority of FTSE 100 companies now incorporate ESG metrics into their executive remuneration, with a significant number incorporating metrics from all 3 of the ESG limbs. The speed of change is being accelerated by the shifting regulatory landscape surrounding ESG metrics, such as gender pay gap reporting and enhanced climate disclosures, and also the mounting body of evidence suggesting that a strong and well-thought-out ESG approach will correlate with a higher-performing and more robust business. 
 
Discretionary Powers - Discretion is emerging as an important tool in the COVID trading environment, as companies try to reconcile the uncertain landscape with the need to ensure that incentivisation outcomes are fair and reasonable. Our report demonstrates that including either a general or targeted discretionary power is now seen as a must-have for businesses.
 
Post-Employment Shareholding - Our review demonstrates that a majority of companies have taken significant steps to adhere to the post-employment shareholding recommendations put forward by the IA and the Corporate Governance Code, with many replicating the exact specifications of the IA's recommendations. The methods of enforcing these shareholdings are less well evidenced in the remuneration reports, but we are seeing clients making changes to their grant documentation and shareholding policies to ensure that their post-employment shareholding requirement can be enforced.
 
Restricted Stock - The recommendations from the Purposeful Company’s report on Restricted Stock are gaining traction, with 10% of FTSE 100 companies now operating a restricted stock plan. It will be interesting to see whether the current climate will act as an additional accelerant for more companies to make this switch. As COVID means many traditional inflight LTIP structures are now underwater and setting detailed performance targets for new awards is a challenge. 
 
Our report highlights those companies with the highest and lowest shareholder approval ratings and suggests there may be investor resistance to restricted stock plans implemented with an insufficient discount level. 

If you would like an electronic copy of our detailed reports, please do contact us.

Carla Walsham and Sarah Bruce

19 October 2020

It’s the season when many investment managers update their guidance on executive pay, ahead of discussions with companies in preparation for the next AGM season.

Legal & General Investment Management (L&G) has published its updated UK Principles of Executive Pay (October 2020) which can be found here. As one of Europe’s largest asset managers and a major global investor, L&G’s principles are influential in executive remuneration decision-making. Their principles are similar to those produced by the Investment Association but with some differences. L&G principles have now been updated to take the coronavirus pandemic into consideration.  

One key development is L&G’s position on diversity at the senior level. L&G has warned FTSE 100 companies with all-white boards that it will vote against them unless they hire an ethnic minority director in the next 15 months (by 1 January 2022). Although not specific to remuneration, it is an important development and may impact executive incentives – with diversity targets being linked to either annual bonuses or long term incentives (or both). 

Key updates

• Long-term incentives:
  • Companies are expected to reduce the size of any new awards if they have experienced a significant fall in share price (>20%) since the last award was made and if any new award would result in a greater number of shares being granted. Where this does not happen, and no undertaking has been provided to reduce awards when they vest, L&G will vote against the remuneration report.
  • In light of covid-19, some companies are choosing to exercise discretion to adjust vesting outcomes rather than reduce initial awards. L&G has voiced that this is not their preferred solution as they consider it to be more complex, however a clear explanation of this intention in the annual report until the awards have vested would ensure that this choice does not result in a negative vote in future years. At the point of vesting, L&G will also expect a detailed explanation on how discretion has been applied to ensure appropriate adjustments were made to avoid windfall gains.
  • L&G clarified that they do not generally support retrospective changes to LTIP awards, therefore any proposed discretion to in-flight awards that are material (i.e. impact the outcome to the benefit of the director) should be subject to shareholder consultation and support.
  • In keeping with their policy for other long-term incentive plans, L&G expects substantial share price falls over the year to be captured in the grant size of awards of restricted stock.
     
• Bonus: L&G does not expect a bonus to be paid in companies that have been impacted by Covid-19 to the extent that support from the government or shareholders and staff redundancies were necessary. Where this happens, L&G may vote against a remuneration policy unless there are reasons to support the payments.

• Performance metrics:
  • Achieving a threshold level of financial performance should be a pre-requisite for the delivery of any bonus, including the delivery of personal / strategic performance objectives.
  • L&G sees personal performance of board directors as delivering strategy. They therefore expect personal / strategic performance targets to be meaningful and quantifiable or sufficiently explained, otherwise companies risk having their remuneration policy voted against. A threshold level of financial measures must still be met before any elements of personal targets are triggered.  
  • L&G is understanding of companies that need to delay their target setting by 6 months in light of Covid-19, despite their general rule being that long-term incentive performance targets should be disclosed in advance and not adjusted retrospectively.
  • Although L&G does not generally support setting targets below the out-turn of the previous year, where this has been done in exceptional circumstances and the remuneration committee considers it appropriate, L&G will expect an explanation of why the new targets are regarded as equally stretching or, where this is not given, a reduction in award size to reflect lower targets. 

• ESG targets:
  • Where a company is exposed to high levels of environmental, social or reputational risk, they should include relevant and clearly measurable targets focusing management on mitigating these risks.
  • L&G expects ESG performance targets to be incorporated into the strategy of the business and believes that they are useful as a modifier to financial outcomes rather than to provide additional award - unless such targets go beyond the company’s purpose and are linked to growth opportunities e.g. green revenue.
  • For oil and gas companies, remuneration should prioritise financial value over production volumes. Financial measures or other strategic metrics are therefore preferred, while volume growth targets may lead to a negative vote.
     
• Post-employment shareholding requirements: These should reflect a significant proportion of the standard minimum shareholding requirement (i.e. no less than 80% of the in-post requirement). L&G clarified that purchased shares do not need to be included. Where purchased shares are used to make up the in-post holding requirement, these should be replaced when shares vest from incentive arrangements.

• Salary: When a new director is appointed, L&G expects the remuneration committee to take the opportunity to reset executive pay and consider the current circumstances of the business, as well as the previous experience of the individual. They also note that salaries for new directors should be phased over time based on their level of experience.

• Pensions: L&G expects companies to ensure that pension provisions for new board directors and others whose contracts are being renegotiated are aligned with those offered to a majority of the workforce. In line with market practice, L&G has also confirmed that they expect pension provisions for incumbent directors to be aligned with those of the majority of the workforce by 2023. They will vote against a remuneration policy if no such changes have been made to address disparity in pension provisions. 

• Benchmarks: L&G encourages companies to consider the appropriateness of their salary benchmarks in conjunction with comparators used across their performance pay disclosures.

• DRR disclosure: There should be an explanation in the annual report on how consistency and alignment with shareholders is achieved, along with how pay structures promote company strategy and shareholder value creation. Additional disclosures that L&G expects to find or be signposted in remuneration reports include:
  • How performance criteria and targets align with the long-term strategy of the company.
  • How the committee has taken into account the impact of the Covid-19 pandemic on its operations, including stakeholders when deciding pay outcomes. This aligns with L&G’s specific expectations regarding annual bonus mentioned above.
  • Gender pay gap reporting. Although L&G notes that gender pay gap reporting has been suspended for the 2019/20 period due to Covid-19, they still encourage those that can report to continue to do so.

• Remuneration committee: L&G expects the chair of the remuneration committee to have a good working knowledge of the key people they are setting pay structures for and the pay and benefits being offered throughout the company.

• Other: Any gifts on departure with a material value should be fully disclosed. ‘Golden goodbyes’ are not supported.

Tapestry Comment

L&G is one of the first big investors to make amendments to their principles to take the coronavirus pandemic into consideration. It is positive that they offer some flexibility to prevent companies from being unfairly penalised during these difficult times, although they will still expect reasonable explanations to be given to avoid a negative vote against a remuneration policy - ensuring that the situation will not be exploited by firms.

While L&G’s views are clear that a bonus should not be paid in companies that have relied on government funding or faced redundancies during the pandemic, they still assure that the facts of each individual case will be taken into consideration, signalling that it may be accepted in particular instances.

It is the first time that L&G has laid out their views on ESG metrics in executive remuneration. L&G have supported ESG measures for some time and have spoken at a number of conferences about this. This is a particularly prevalent topic at the moment and is one that we have reviewed in our recent 2020 FTSE 100 report. We found that one third of FTSE 100 companies now use ESG metrics in their remuneration policies, although this number will likely increase as more investor guidelines shift their attention to ESG as L&G have done.

It will be interesting to see whether companies continue to use discretion to adjust vesting outcomes following L&G’s opinion expressing preference for reducing initial awards instead. In our FTSE 100 review, we also looked at the inclusion of discretion provisions in annual and long term incentives, as well as other topics addressed in the L&G principles such as post-employment holding period requirements. 

L&G’s encouragement for companies to continue to undertake their gender pay gap reporting should be noted. Many companies we know have now submitted their reports and if you haven’t, you may want to consider doing so.

We are expecting the Investment Association's updated principles in mid-November. We will send an alert at that time, and also if we see any other investors issue changes to their guidelines.

If you have any questions about this alert, or if we can help you with your incentive plan compliance, please do let us know.

Janet Cooper OBE

October 2020

Staying ahead of the curve on regulatory and tax compliance is a never-ending task for companies. To help you keep on top of recent developments, this is our fourth and final quarterly Worldwide Wrap-Up of 2020, with some of the most recent changes that should be on your radar. We have summarised these topics briefly in this email, however they will be covered in more detail, along with some other recent developments, on our 14 October webinar.

Brazil - Data protection law comes into force
The General Data Protection Law, known as the Lei Geral de Proteção de Dados Pessoais (LGPD), was enacted in 2019 and was due to come into force on 15 August 2020.  Following several delays, and the intervention by the Brazilian Senate, the LGPD came into effect on 18 September 2020. LGPD is similar to the EU General Data Protection Regulation and introduces a robust set of rules including obligations to keep records of data processing activity and to determine the legal basis for the processing of data; obligations for transparency of data processing, cross-border transfers of data, data security and data breaches, sensitive data and specifies situations in which data processing must stop. LGPD also requires the appointment of a data protection officer.
Tapestry comment
To comply with LGPD, where specific consent for the collection and processing of personal data is not already standard procedure, the employer should ensure that it has in place a system to obtain the relevant consents from employees in Brazil. Companies may wish to undertake an audit of their internal privacy policies and consider what administrative and technical processes could be put in place to fill current compliance gaps and, on-going, to monitor compliance with LGPD.

Canada - employee rights
A recent decision of the Ontario Superior Court held that termination provisions which provided that an employee lost his right to unvested awards upon termination of employment for any reason were unenforceable. Even though the termination provisions were unambiguous, the court found that as the provisions took away the employee’s right to awards on termination without cause they were “harsh and oppressive” and that the employer had not taken sufficient steps to bring the provisions to the attention of the employee. (Battiston v Microsoft Canada Inc.). The employer has appealed the decision.
Tapestry comment
The key takeaway from this decision is that where a  termination provision limits an employee’s entitlements to post-termination awards, it is not sufficient  that the provision is unambiguous. The provision may still be deemed to be “harsh and oppressive.”  Where this is the case, the  employer must ensure that the provision has been brought to the employee’s attention.  In this case, the obligation on the employer was not discharged by requiring the employee to tick a box to confirm that he had read the terms of the award.  

Data Protection - global update
Following the roll out of the GDPR, there has been a flurry of activity as countries around the globe move to put in place rules that, to greater or lesser, extent follow the EU gold standard set by the GDPR. Over the past few months we have seen developments in Brazil (as discussed above), Egypt, New Zealand, South Africa and Thailand. 
Tapestry comment
Many countries are following the lead of the EU and putting in place robust rules for dealing with personal data. This is not a share plan specific issue but as share plans are often operated globally, rules surrounding how employees agree to their data being used and restrictions on the transfer of personal data, impact on the operation of share plans. There are real costs of failing to comply, both the risk of damage to the company’s reputation and, increasingly, substantial fines. It is crucial that companies ensure that they have systems in place to comply with the rules.

Global tax rates
Not surprisingly, the impact of COVID-19 has caused delays in government tax rate announcements for countries with a July/June tax year. There have been some changes since our last webinar, including:  
Angola - Progressive rates have now increased
Bangladesh - Top tax rate reduced
Canada - 2020 budget postponed
Gibraltar - 2020/21 budget postponed until 2021
UK - 2020/21 budget postponed until 2021
Zimbabwe - changes to the highest tax rate on annual income
Tapestry comment
We will discuss the detail of these changes during our 14 October webinar. 

Greece – tax break for free-share awards
In January 2020, Greece introduced a new tax break for employees receiving shares under an employee share option plan. Under the new tax treatment, any gains made following the exercise of a compliant option will be subject to capital gains tax rather than income tax. The benefit was extended to free shares in August 2020 (effective for income from 1 January 2020).
Tapestry comment
This is a helpful clarification of the application of this significant tax break for Greek employees. When the rules were first announced in January, the tax break only referred to share options and it was unclear if free share plans would also benefit.

UK - Brexit update
On 31 January 2020, the UK left the EU. The transition period ends on 31 December 2020. An ongoing relationship agreement has not yet been reached and therefore it is still unclear what will happen after 31 December on matters such as securities laws, data protection, tax and social security.
Tapestry comment
We will be discussing some of the issues of Brexit in a share plans context and what developments we hope to see over the next few months.

USA - Uber sued by employees over RSUs
In May 2019, Uber’s long awaited IPO took place. This August, around 190 current and former Uber employees filed a lawsuit against the ride-hailing firm in relation to their RSUs that were settled on the IPO date.  The plaintiffs are arguing that Uber unfairly accelerated the settlement of these RSUs by six months, resulting in a significantly higher tax burden for the employees. The case will focus on whether Uber had the contractual right to accelerate the RSUs. Uber argues that the case is ‘without merit’. For a more detailed discussion of the case, please see our newsletter (here).
Tapestry comment
Whatever the result of the case, the claim is a reminder that companies should consider in-flight awards on a corporate event and check carefully the terms of the award documents.

COVID-19 - global footprint
COVID-19 has changed the way we work for good. Some companies now have an entirely virtual workforce, others have employees working from different locations to normal, and some may have new employee populations. As a result, we are seeing a shift in companies’ global footprint, meaning new considerations when reviewing share plan compliance. Do you know where your employees are located? Do you know why it matters?
Tapestry comment
We will look at one of the most prominent impacts of COVID-19 on the operation of your share plans. We will discuss why employee location matters, why you may need to add to your compliance list, and tools to help manage changes to your workforce.

If you have any questions, or would like to discuss any element of legal and tax compliance for your global incentive plans, do get in touch - we would be delighted to help!

Lorna, Steve & Tom

30 September 2020

The European Securities and Markets Authority (ESMA) has published a report on the appropriateness of certain provisions of the EU Market Abuse Regulation (MAR). The report is based on extensive feedback following a consultation paper published by ESMA in October 2019. The report concludes that, on the whole, MAR has been effective and is fit for purpose, but offers some proposals for targeted amendments to MAR and additional guidance.

Background
 
MAR came into effect in July 2016 with the aim of increasing market integrity, confidence and investor protection through creating a common regulatory framework on market abuse across the EU. After 3 years, the European Commission (EC) is required to review MAR and present a report to the European Parliament and Council, proposing any legislative amendments it considers appropriate. In May 2019, the EC formally asked ESMA to advise it on these points. ESMA then released its consultation paper last October to help formulate its advice and the report of its findings and recommendations has now been released (after being delayed due to COVID).
 
Focus of the report
 
Whilst the report is very detailed (running to over 150 pages and over 250 including all the annexes), it focuses on a few key areas. These cover different topics, including looking at sanctions and delayed disclosure of inside information, but two of the focus areas in the report will be of particular interest to those looking after a company’s incentives - the appropriateness of the dealing prohibition for persons discharging managerial responsibility (PDMRs) and the notifications requirements for PDMRs and persons closely associated to them (PCAs).
 
Key findings in the report

• Scope of PDMR prohibition: ESMA has dropped the idea of extending the prohibition on dealing in closed periods to cover PCAs and the issuing company. Whilst ESMA felt there were benefits to including issuers (given their proximity to inside information) they felt the risks of restricting the issuer’s activity for up to 4 months a year outweighed the benefit. In terms of an extension to PCAs, respondents to the consultation were clear that there was limited advantage and significant additional burden.
• Closed periods: ESMA does not advise amending the definition of closed periods, despite the majority of respondents wanting change in response to diverging interpretations and market practices across the EU.
• Exemptions: ESMA recommends further exemptions to the PDMR prohibition on dealing in closed periods, including: 
  *  certain exercises of options
  *  dividend reinvestment programmes
  *  some corporate transactions
  *  certain actions taken by asset managers
  *  dealings where no investment decision is taken by the PDMR
  Following majority support from respondents, ESMA also recommends extending the employee share plan exemptions to include financial instruments other than shares, including sales of shares in exceptional circumstances such as severe financial difficulty.
• Thresholds for PDMR notifications: ESMA recommends retaining the current notification thresholds, currently €5,000 per individual per calendar year in the UK, but can be up to €20,000 in some member states. They concluded that the current reporting requirements adequately balance high-level market transparency with the compliance burden for issuers and PDMRs, and that it is for each member state to decide where within the €5-20k range is appropriate for them.
• Further guidance: ESMA has indicated that it intends to issue guidance on a number of points raised in the consultation, including pragmatic aspects of the notifications (such as the timing of notifications in relation to share issues and share options), the financial instruments in scope of the PDMR prohibition from dealing in closed periods and whether the prohibited action in the closed period is the decision to deal or the actual dealing.

These are the key findings in the areas we think are most relevant for incentives, but there are many other aspects of MAR covered in the report, such as the definition of inside information and the user-friendliness of insider lists, which may be of interest. A copy of the full report can be found here.

Tapestry comment  
This is the first in-depth review into the appropriateness of MAR since its implementation back in 2016. Overall, the parts of MAR that have been considered by ESMA were thought to be fit for purpose, although some fine-tuning and additional guidance has been recommended.

The fact that there are no proposals to extend the closed trading period itself or to extend the prohibition to include PCAs or issuers will be welcomed by many. Equally, the extension of the exemptions to the PDMR closed period prohibition, including for exercises of options and corporate transactions, will be helpful. It is perhaps a shame that ESMA did not choose to extend these further, particularly for sales to cover tax at maturity and dealings under all-employee plans, where it is difficult to see any ‘abuse’ or ‘manipulation’ by the PDMR.

Further guidance from ESMA will also be welcome for areas of diverging or unclear interpretation, although we hope that this will not adversely affect current well-established practices.

ESMA’s review will now be submitted to the EC who will feed it into their own report of MAR, after which any legislative changes will need to be proposed and agreed through the normal European law-making channels. Legislative changes are therefore still a while off and will certainly not happen before the UK’s Brexit transition period ends on 31 December 2020. At the end of the transition period, MAR will be transposed into UK legislation and any changes that take place to EU MAR after that will not automatically apply to UK MAR, and there is no guarantee that any changes made will be adopted in the UK. It will be interesting to see how UK MAR develops and whether more useful incentive plan exemptions can be agreed that will apply in the UK. We will be working with industry bodies in the UK to consider this further as we near the end of the transition period and beyond.

Whilst changes to EU MAR going forwards will still be of interest in the UK, at least while UK MAR still mirrors the EU provisions, the changes will be of particular importance to companies that continue to be subject to EU MAR after the transition period ends. We will continue to keep you up to date with developments in both EU and UK MAR.

If you have any questions about this alert, or we can help you with any queries you have about MAR, please do let us know.
 
Hannah Needle FGE

10 September 2020

HMRC has recently published new research on tax qualified plans, carried out by the Social Research Institute at Ipsos MORI (an independent research organisation). The research covers the four UK tax qualified plans: Save As You Earn plans (also called SAYE or ‘sharesave’), Share Incentive Plans (SIPs), Company Share Option Plans (CSOPs), and Enterprise Management Incentive plans (EMIs).

In addition to the key goal of suggesting improvements and considering how uptake could be encouraged, the research aims to:

• understand the motivations for, and barriers to, participation in tax qualified plans;
• explore customer awareness and knowledge of the current offerings;
• consider the process and burden of administering the schemes; and
• consider how the plans are communicated.

Key findings from the report

The key findings from the report include:

• Awareness and understanding of tax qualified plans is generally limited.
• Outsourcing both the set-up and management of plans is common.
• Perceptions of the value of tax qualified plans have changed over the past decade, with them being seen as less valuable when compared with other initiatives for motivating or retaining staff.
• Small companies find them expensive, while the rapid pace of change in some industries (e.g. tech) makes them unappealing.
• Interest is limited amongst younger employees and stronger amongst older employees with more experience (and more money to invest).
• SIP/CSOP/EMI
  - All seen as attractive and flexible schemes with CSOP/EMI both offering ways for employers to retain valued staff in senior positions. 
  - Holding periods of these schemes can often act as a deterrent for some employees.
• SAYE
  - Where SAYE is offered there is some evidence of improved motivation among employees.
  - Lack of bonus rates and the perceived inflexibility of this scheme may have limited use.

Suggested improvements and encouraging uptake

In terms of improving participation, the report suggests:

• Further tax incentives, especially for smaller firms.
• SAYE: increased flexibility with the rules and features, including:
  - the ability to increase the upper monthly contribution limit; 
  - offering a reduction on the three-year holding period;
  - increasing interest and bonus rates to be more competitive with ISAs; and
  - offering a financial incentive from the government/employer to encourage lower paid employees to consider SAYE plans.
• SIP: increased flexibility with the rules and features, including:
  - the ability for smaller employers to receive an additional tax incentive when providing free shares to employees; and
  - offering employers the ability to increase partnership share limits.
• Education
  - Possible HMRC education for employers on the benefits of tax qualified plans.
  - A focus on better communication with employers and employees (especially younger and less senior staff).
  - HMRC could even take the opportunity to communicate the plans to young people whilst they are still in education.

Tapestry Comment
While the UK’s current range of tax qualified plans offer great benefits for both employers and employees, and we commonly see them in the market today, Ipsos MORI’s report for HMRC is a breath of fresh air. It is great that HMRC have carried out this research and that the results indicate positive things for UK tax qualified plans.

The benefits of tax qualified plans identified by the report, such as improved motivation, retention and the financial benefits, would only multiply with some loosening of the existing rules. With more flexibility, clarity and education we expect these plans will gain a renewed interest. 

This is definitely one to watch. It isn’t currently clear if and when any of these suggestions will be taken forward, but a rejuvenation of the available tax qualified arrangements has been long requested and would open up exciting opportunities for share plans in the UK.

If we can help you with your tax qualified arrangements (in the UK or globally), please do let us know.

Carla

4 September 2020

In May 2019, Uber’s long awaited IPO took place. Last week, 190 current and former Uber employees filed a lawsuit against the ride-hailing firm in relation to their RSUs that were settled on the IPO date.
 
The plaintiffs are arguing that Uber unfairly accelerated the settlement of these RSUs by six months, resulting in a significantly higher tax burden for the employees. The full complaint can be read here.
 
Whether or not Uber had the contractual right to accelerate the employees’ RSUs is yet to be seen. The company have said the claims are “without merit”. Regardless of the outcome, the case provides a reminder of key thinking points for companies when making decisions about in-flight awards on a corporate event, the terms of their award documents more generally, and expectations regarding anticipated share price movements.

Summary

The background facts forming the basis of the lawsuit are:

• Prior to its IPO, Uber granted restricted stock units (RSUs) to many of its employees and contractors. These awards were due to vest following the IPO, with the shares delivered six months after the IPO, subject to a further six month holding period.
• Three days pre-IPO, Uber issued a memo stating it would be in the best interests of the company, and the award holders, to accelerate the settlement of the RSUs to the IPO date.
• Uber issued the shares at the time of the IPO at a price of $45 per share. Award holders were taxed on this value (and it is claimed that only the minimum income tax that might be due was withheld). Six months later, when participants were actually able to sell their shares, the Uber share price had dropped to $27 a share.
• The lawsuit is seeking compensation for the additional income tax incurred by the participants due to the acceleration of the RSUs, which is estimated in excess of $9 million.

Why did Uber accelerate the settlement of the RSUs?

The memo sent to RSU holders set out the following reasons for accelerating settlement:

• Accelerating the settlement locked in the amount of tax Uber would have to pay on behalf of employees. This mitigated any risk of the company having to pay a higher amount in taxes, should the share price increase post IPO.
• Uber was required to withhold taxes when the RSUs vested and were settled (depending on the jurisdiction). Uber opted to “net settle” the RSUs, by delivering a lower number of shares and paying the relevant taxes out of the IPO proceeds. Uber said this was to reduce the number of shares flowing into the market, following the six month holding period on the shares.
• Separately, Uber suggested that accelerating settlement may be beneficial to employees if the stock price increased - any increase in value would typically be subject to lower capital gains tax rates (on sale).

Whilst Uber’s memo set out their reasons for the acceleration, and suggested the acceleration would be in the best interests of the award holders and Uber - the plaintiffs allege that Uber was acting purely in its own interests. They also claim that Uber would have known a drop in share price was more likely than a rise, so the acceleration created a risk that award holders could ultimately have paid more in income tax than they could realise from the sale of the underlying shares (once they could be sold).

Did Uber have a right to accelerate settlement?

This is to be determined: 

• The RSU agreements stated that, subject to certain exceptions, modifications or amendments that would materially and adversely affect participants were not permitted, unless the amendment was agreed to in writing.
• The plaintiffs claim, and the memo itself state, that the acceleration was not something RSU holders were asked to agree to – the decision was made unilaterally and no consent was obtained.

Tapestry comment
This will be a very interesting case to watch, irrespective of the outcome. Whenever we see high profile cases relating to share plans, there are a number of learning points for all companies to consider when operating their own plans.
 
For many companies, IPOs and other corporate events can trigger the accelerated vesting and settlement of their incentive awards, or the desire to do this. Understanding how your awards work during these events is vital – any mistakes could result in legal action. Companies should map out how their awards would be impacted by a corporate transaction, and ensure their documents are consistent and provide sufficient flexibility. Although it is not always possible to know when a transaction is about to happen, it is a good idea to carry out this analysis well in advance of any transaction taking place, or as part of your usual document health check process.
 
More broadly, this case should act as a reminder for all companies to regularly review and update plan rules and award agreements, to ensure they suit your needs and are contractually enforceable. If you are making changes that impact outstanding awards, you need to work carefully within the amendment provisions and specified processes that you have and if in any doubt, act with caution and seek legal advice. Expectations of share price movements are also hard to judge, especially during the current climate.

We will monitor this case and keep you updated with any useful developments.

If you have questions or concerns regarding your own award documents, in the context of a corporate event or more generally, please do let us know. No company wants to be the subject of a lawsuit, especially from their own employees!

Sally & Tom