Newsletter - Page 5 - Tapestry - Global Legal Compliance Partners

UK - Bonuses to return for SAYE contracts? New developments!

What is happening?

HMRC, the UK tax authority, has announced that it will be reviewing how it could simplify the mechanism for calculating the bonus rate applicable to a UK tax advantaged SAYE plan (sometimes called Sharesave, or Save as you Earn).

Remind me - what is the ‘bonus rate’?

Essentially, it’s interest.

Individuals who wish to participate in a UK SAYE must enter into a linked savings arrangement with an authorised savings carrier to save a specified amount per month. It is possible for the linked savings arrangement to provide that the participant will become entitled to a tax-free bonus - essentially this is interest which accrues on their savings, and is paid at maturity of the contract. The bonus is calculated based on a rate which is fixed at the start of the savings contract.

Why is this happening now?

The bonus rate is currently nil and has been set at this level for many years (since 2014). The bonus rate is set in accordance with an automatic mechanism, linked to market swap rates.

Whilst the announcement by HMRC does not specifically confirm that bonuses will become payable in future, in the current economic climate, this is something which seems more likely than in recent times. The timing of the review of the mechanism for calculating the bonus rate may not be coincidental.

What are HMRC actually reviewing – and when do we hear more?

HMRC are reviewing the mechanism for calculating the bonus rate. In HMRC’s ERS Bulletin 43, HMRC note that the current mechanism is “extremely complex”. The aim of the review will therefore be to simplify the method of calculating the applicable bonus rate.

In the meantime, HMRC have issued a new prospectus (the document which governs the terms of the savings contracts), which comes into effect for savings contracts entered into from 30 June onwards. The reference to the current bonus rate mechanism has been removed from this new savings prospectus.

HMRC have said they will provide an update (in a further bulletin) by the end of the summer. In the meantime, bonus rates are being held at nil.

If bonuses do become payable, what will this mean for UK SAYE?

The obvious implication is that, going forwards, participants will normally become entitled to receive interest on their savings, in the form of a tax-free bonus.

However, there is another potential benefit too. Where a bonus is payable, it can also be included in the amount of the savings the participant will make over the life of the savings arrangement. This amount is called the ‘expected repayment’. The ‘expected repayment’ is used to calculate the number of shares subject to the SAYE option. A bigger expected repayment therefore ultimately increases the number of shares subject to an SAYE option. This means a participant can buy more shares and maximise the value they are receiving from the SAYE plan.

Tapestry comment
A simplification of the bonus rate calculation mechanism is likely to be seen as good news. However, for SAYE participants, this may be tempered in the event that any change reduces the bonus rate which would otherwise have been due under the current mechanism.

There will be a number of things to think about in this context:

Will HMRC apply the change to existing SAYE contracts, or only those entered after the change takes effect? Generally, a change will only apply to savings contracts entered into on or after the date on which it comes into effect. Any change in the mechanism for calculating the bonus rates will not of itself impact existing contracts in any case, as the rate has already been specified at nil. If there is an increase in the rate itself (calculated under the new mechanism), we anticipate this is likely only to apply to savings contracts which are entered into after a further new savings prospectus, which specifies the new rates, takes effect.
Will a company need to amend its plan rules? A company would not normally need to amend its UK SAYE plan rules in relation to any change in bonus rate calculation, as this is not generally set out in the rules. Again, amendments are unlikely to be needed if bonuses start becoming payable, as rules are usually drafted flexibly to accommodate payment of bonuses, in line with the legislation. However, it will depend on exactly what has been included on certain points – so specific advice should be taken. A company may also need to update its pro-forma grant minutes (e.g. to allow bonus to be included in the ‘expected repayment’ to maximise the number of shares employees can buy). Given the early stages of this review, it’s probably too early for companies to make any updates just yet – but it is one to keep on the radar.
Will the employee communications need updating? If bonuses become payable again, then almost certainly, yes. Given there has been no bonus payable for many years, plan communications such as brochures, FAQs and invitation documents/application forms are unlikely to cater for this adequately at the moment. As rates are being held at nil whilst HMRC undertakes its review of the calculation, companies and administrators may want to wait and see whether HMRC’s further update later in the summer gives any indication of when rates may rise above nil before putting pen to paper on this. However, in an economic context where a rate rise is perhaps anticipated, companies and administrators may want to plan ahead.
What do companies need to do about their international SAYE arrangements? Whilst it does depend on how the plan rules are drafted, any change in UK SAYE bonus rates may not automatically apply to an international SAYE plan. A company which wants to track its UK SAYE plan will therefore need to check its plan rules and savings paperwork for the international arrangement, to see whether changes would need to be made. Legal advice would be needed – the position will be company specific.

Watch this space!

If you have any questions, please do contact us and we would be happy to help.

Suzannah Crookes and Emma Parker

Tapestry Team News - Hannah Needle FGE for GEO Board of Directors - Voting now open!

The Global Equity Organization (GEO) has announced that the election process for its Board of Directors is now open. We at Tapestry are big fans of GEO, having been supporters since its inception, and therefore we are delighted that our very own Hannah Needle is up for re-election this year!

Hannah Needle, FGE is a Legal Director and on the Board of Directors at Tapestry. Hannah leads on Tapestry’s legal services, and is therefore instrumental in the delivery, development and quality of the firm’s legal advice, both in the UK and globally.

Hannah brings with her 18 years of experience in the industry, working in global equity and incentives with many of the biggest and best global companies. She is a leading practitioner in this area and holds a number of positions representing the equity industry, amongst practitioners, companies and regulatory bodies.

Hannah has been involved in GEO since her first days in the global equity industry and is honoured to be running for re-election to the Board, after having served her initial 1 year term. She is also a member of GEO’s Provider Alliance Council and, for the last 6 years, has been an active member of GEO’s award-winning UK Chapter, including serving for many of those on the leadership committee.

Please join us in supporting Hannah!

To cast your vote, please visit the GEO election page website: here. Voting closes on 15th June. You must be a member of GEO to be able to vote.

Team Tapestry

Global updates / News / Press Releases - 06/08/2022

UK: Annual share plan return filing deadline approaches

12 May 2022

All employers operating in the UK must submit an employment related securities (ERS) return to HM Revenue & Customs (HMRC) by 6 July following the end of the tax year. The deadline for filing the ERS return for the 2021/22 tax year, which ended on 5 April 2022, is Wednesday 6 July 2022. As the registration and reporting process can take some time, we recommend that employers prepare and file their return with HMRC as soon as possible.

What do I need to do?

Register any new plan or arrangements well in advance of the filing deadline

Before you can submit your ERS return, all relevant share plans must have been registered online with HMRC via the registration services found here. To do this, you will need a Government Gateway user ID and password. Your UK payroll will typically have these details.
You do not need to register each non-tax advantaged plan or arrangement separately. A single registration (and return) covering all existing non-tax advantaged plans will be sufficient. Please note, however, that all UK tax-advantaged plans must be registered separately with separate returns filed.
UK tax-advantaged Share Incentive Plans (SIPs), Save As You Earn plans (SAYE plans) and Company Share Option Plans (CSOPs) must also be ‘self-certified’ online as being compliant with applicable UK tax legislation.
If your plan has been registered and self-certified (if relevant) previously, you will not need to register it again. Registration will only be required for new plans implemented during the 2021/22 tax year. You should be provided with a unique scheme reference number for the plan within 7 days of registration.

File the ERS return – including any nil returns

Once you have the unique scheme reference number for your plan, you will be able to file the ERS return.
To file the return, you must complete the relevant online template located on the UK Government website here.
Each template asks for prescribed information in connection with relevant ‘reportable events’.
The template that you must use will depend on the plan that you are completing the return for. Plans that are not UK tax-advantaged plans will use the “other ERS schemes and arrangements” template and there are specific templates for each of the UK tax-advantaged plans.
Once you have completed the template, you can run it through a formatting check and then submit the return here.

Key points to look out for

Net-settled awards: HMRC has issued specific guidance on the reporting of net-settled awards (see ERS Bulletin 33). You may need to check processes carefully to determine whether tax on awards is funded by net-settlement or a “sell to cover” arrangement, and then organise reporting accordingly.
Mobile employees: make sure you capture all of your plan participants who have been in the UK at any relevant time and have any UK income tax position in relation to their awards.
Transactions: make sure the relevant entities are reporting share award activity related to any corporate transaction and, if your group has acquired a business or company, make sure any share awards in that entity are included in reporting where appropriate.
No plan activity: where you have registered a plan, you must continue to file a return even where there has been no plan activity in the relevant tax year. In these circumstances, a ‘nil return’ should be filed.
Outages: in previous years, the website where the return is submitted has experienced outages. The web page that is found here will notify users of any current and planned issues or outages.
Terminated plans: if you no longer use a share plan, you will still need to make an annual return for outstanding awards. Once all awards have been settled, you can stop filing but only after you have informed HMRC that the plan has terminated. Further information on this is available here.
Templates: we recommend that you always download the most recent templates from here rather than using previously downloaded templates (note file names still have “2015-16” in the title). The templates are format sensitive and so generally no changes should be made. The checking service found here allows companies to check for formatting errors prior to filing the completed templates. We recommend using this service to as it is very helpful in pinpointing particular formatting issues so these can be corrected before any attempt to submit the templates.
EMI plans: there are different (and more onerous) requirements and deadlines for UK tax-advantaged Enterprise Management Incentive (EMI) option plans. Please get in touch if you operate, or are intending to operate, an EMI plan.

Why is it important to register and file accurate returns on time?

Failure to register and/or file the return on time can have serious consequences:

Financial penalties may be applied for returns which are materially inaccurate (potentially including both careless as well as deliberate errors).
Financial penalties automatically apply if you fail to correctly file your ERS returns by the 6 July deadline, even if no reportable events occurred in the tax year.
Newly adopted UK tax-advantaged plans will lose their tax-advantaged status if you fail to register and self-certify them by the deadline where awards have been granted in the 2021/22 tax year. This means that any awards granted under new SIPs, SAYE plans and CSOPs on or after 6 April 2021 would not be tax-advantaged.

Tapestry comment
For some companies, the online ERS return process is now an established part of the annual cycle of share plans activity. Whether or not you are new to the process, the message remains to plan ahead and give plenty of time for gathering data in the correct format and checking the content.

Recent guidance on, for example, reporting of net-settled awards, seems to indicate that HMRC will be looking at areas of alignment between the ERS returns and other elements of a company’s tax affairs (net settlement can in some cases impact the corporation tax treatment for example). We would therefore recommend that those managing the share plan return process should ensure data is aligned with that being used by other parts of the business.

The layout of the returns is inflexible and whilst the error checking service is very helpful in identifying pure formatting errors, there is no facility to include explanation of how awards have been reported in any cases which may be unclear. In these circumstances, we recommend companies keep a note of the approach they have taken and why, to support responses to any enquiries from HMRC in future.

If you have not yet done so, take time to ensure your plans are registered and that you are familiar with the requirements of the return(s) you need to file so that you can meet the 6 July deadline.

If you have any questions, please do contact us and we would be happy to help.

Suzannah Crookes and Paul Abthorpe

Global updates / News / Newsletter / Press Releases - 05/13/2022

Tapestry's Worldwide Wrap-Up: Tap-in to our global knowledge!

May 2022

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, here is our second quarterly Worldwide Wrap-Up of 2022, with some of the most recent changes that should be on your radar. We have summarised these topics briefly in this alert, however they will be covered in more detail along with other recent developments on our 11 May webinar.

Australia - employee share scheme tax reform
As discussed in our recent alert (here), legislation to remove the taxing point on cessation of employment for ESS awards received Royal Assent in February and will take effect from 1 July 2022. The removal of cessation of employment as a taxing point will apply to all existing ESS awards that have not yet reached a taxing point before the new law comes into effect in July.

Tapestry comment
This change brings Australia in line with many other jurisdictions, making administration of leavers much easier for global companies and giving "good leavers" the ability to settle taxes due at the applicable tax point. Where appropriate, companies should consider whether to advise participants with outstanding awards of this change to the tax treatment. Where companies have structured their ESS plans to make provision for the early tax treatment on cessation of employment (e.g., by providing for accelerated vesting or the removal of sale restrictions), they may wish to review those plan terms.

Canada - new date for extended trust reporting

Additional reporting for trusts in Canada was first proposed in 2018 (here) and is now firmly back on the agenda and due to come into force on 30 December 2022. The reporting applies to both resident and non-resident trusts. For non-resident trusts, the reporting will only apply to trusts which are already required to file a T3 return. The trusts will be required to provide additional information, including details of the identity of all trustees, beneficiaries and settlors of the trust, as well as the identity of each person who has the ability to exert control over trustee decisions regarding the appointment of income or capital of the trust.

Tapestry comment
As this change was proposed several years ago, many companies may have already factored it in to their reporting systems. In addition to the additional reporting obligations, there is a risk that trustees will not be able to provide the detailed information, either because they do not have access to the information or because they do not have the relevant consents to provide the data to the Canadian tax authorities. If you use a trust as part of your structure for offering shares to employees in Canada, you should consider whether it would be appropriate or possible to restructure the plan to remove the trust arrangement.

Global tax rates

With several countries starting the 2022 tax year in March and April, and new rates being announced since our last webinar, we will look at where rates have changed. Our international advisors provide us with new rates to update our OnTap database as quickly as they become available. In this Wrap-Up we take a brief look at some of the changes.
Bermuda - changes to payroll rates
New Zealand - increase in employee ACC levy
Singapore - proposal to increase top rate
UK - increase in social security

Tapestry comment
We will discuss the detail of these changes during our 11 May webinar.

Global reporting

Remember to be ahead of the game with global reporting deadlines. Coming up in the next few months:
Australia - ESS statement (employees) - 14 July and ESS report (tax office) - 14 August
India - quarterly tax certificate - 31 July
Portugal - share plan reporting on Form Modelo - 19-30 June
UK - annual employee share plan return - 6 July

Tapestry comment
If you need this information for other jurisdictions not shown above, or if you need any assistance with any global filings, please do get in touch with us.

Portugal - securities filing update

In our 11 May webinar we will discuss the pre and post-offer filings required in Portugal if a company is relying on the securities laws employee exemption. We also wanted to share with you some recent advice we have received regarding the details of those filings, including when they are not required - for example, filings may not be required if it is possible to rely on the financial thresholds exemption.

Tapestry comment
Although this latest confirmation doesn’t go as far as we would like, we are always pleased to see regulators remove unnecessary filings. We look forward to the day that all EU regulators remove the outstanding obligations for filings in relation to employee share plans!

Russia - sanctions and counter-sanctions

As the situation in Ukraine continues, the sanctions imposed both on and by Russia are making it increasingly difficult for companies assessing whether they can, and should, make awards to employees in Russia (see our discussion here). The current counter-sanctions imposed by Russia restrict the ability of companies based in countries deemed by Russia to be unfriendly (including the US, the UK, EU states and Australia) to deliver shares to employees residing in Russia. There is some uncertainty over the application of the current rules to free shares. Even where it may be argued that it is possible to deliver shares under the Russian regulations, the processes being followed by third-party administrators and banks due to other restrictions or sanctions may also make it practically impossible to deliver shares in the normal way.

Tapestry comment
Many commentators do not believe it is possible to deliver shares to Russian residents at the moment without potentially breaching the sanctions and associated rules. The market position for the majority of our clients and listed companies operating globally is that they are considering cash-settling or delaying grants/vests where possible, in order to protect both their Russian employees and the company. This is a sensitive and complex issue and each company will need to decide what is appropriate in the context of its incentive plans, whilst complying with a changing regulatory landscape.

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!

Sally Blanchflower, Matthew Hunter and Rebecca Campsall

Global updates / News / Newsletter / Press Releases - 05/09/2022

Tax - UK Tax-advantaged plan updates

4 May 2022

Spring has sprung by way of recent HMRC updates! HMRC have recently updated their guidance or revised their approach regarding several of the UK tax-advantaged plans. This alert covers:

a helpful update to HMRC’s Share Incentive Plan (SIP) guidance on acceptable SIP share valuation approaches; and
the end of the Covid-19 easements for Save As You Earn (SAYE) and Enterprise Management Incentive (EMI) share option schemes.

HMRC update SIP guidance on acceptable SIP valuation approaches

Prior to 2014, tax-advantaged plans were subject to formal approval by HMRC. Following the move to self-certification of tax-advantaged plans, HMRC highlighted (within its published guidance) some of the approaches which would previously have been agreed through the formal approval process, providing companies with additional certainty on what would be accepted by HMRC as compliant with the relevant legislative requirements. This guidance is important for companies considering what approach will be acceptable to HMRC and so on what basis they can “self-certify” compliance with the legislation.

HMRC have now updated their guidance relating to the market value of listed shares acquired under a SIP.

What are the changes?
HMRC set out what is regarded as an acceptable definition of “market value” in the plan rules of a SIP. The guidance previously stated that for listed shares, only a market value determined according to statutory principles was acceptable. These principles essentially required a company to use the closing mid-market value of the shares on an award date. The guidance also indicated that alternative valuation approaches would be accepted for the purposes of a SIP, being the mid-market value from the dealing day immediately preceding the award date, or an average of such values taken over up to five days. In practice however, these valuation approaches did not capture what many companies were actually doing.

New wording has now therefore been added to the manual to confirm HMRC’s position that additional alternative valuation approaches may be applied, including:

where shares are purchased on one day in a single purchase, the actual amount paid for the shares; and
where shares are purchased by multiple trades over up to five days, the average of the actual amounts paid for the shares.

Why are these changes helpful?
For SIP partnership shares, which are commonly purchased on the market with participants’ contributions from salary, it can be more convenient for companies to use the actual (or averaged) purchase price of the shares as the market value. This approach was previously commonly agreed with HMRC, but not expressly provided for in the guidance.

Following the move to self-certification and greater reliance on published guidance, companies continuing to operate SIPs in this manner would therefore risk the SIP being found to be non-compliant on a strict interpretation of the HMRC manual. As participants’ allocations of partnership shares were being calculated based on the actual prices paid for those shares on the market, not the market value determined according to the statutory principles, this might, amongst other things, have led to the “wrong” number of shares being awarded.

The change is therefore a positive result and gives welcome clarity for companies operating a SIP, enabling companies to choose to use the purchase price approach to determine market value, which can ease administration.

Tapestry comment
The issue with the previous wording in the HMRC manual was flagged to ProShare (the UK non-profit industry group that advocates employee share ownership) by Chris Fallon, Legal Director at Tapestry. ProShare then liaised with HMRC, who confirmed that the wording in the manual was not intended to adversely affect the administration of SIPs and updated the manual accordingly.

HMRC have been increasingly willing to impose penalties for minor perceived failure of tax-advantaged plans to comply with the legislative requirements. Many companies with SIPs were at risk of being penalised for using a common sense valuation approach. It was therefore great to see HMRC engage with ProShare on this issue and respond so positively and promptly on it, giving their blessing to a practical approach to operating SIPs.

HMRC provide new information on the end of the Covid-19 easements for SAYE and EMI share option schemes

SAYE - What are the changes?
Pre-pandemic, participants in a SAYE scheme could delay payment of up to 12 monthly contributions to their savings contract without the contract being cancelled.

In June 2020, HMRC amended the SAYE prospectus to allow SAYE participants to pause contributions for an unlimited period if they were on furlough or unpaid leave as a result of Covid-19.

HMRC have now published their latest Employment Related Securities (ERS) Bulletin, confirming they will bring the Covid-19 SAYE easement to an end. They have issued a new SAYE prospectus (in effect from 6 April 2022), which reverts to the pre-pandemic position. SAYE arrangements entered into before this date will be unaffected by the change.

There are helpful illustrative examples in the latest ERS Bulletin of how this change will apply in practice.

EMI – What are the changes?
Participants in an EMI scheme need to meet a working time requirement of at least 25 hours a week or, if less, 75% of their working time. Failure to meet this requirement makes employees ineligible to be granted EMI options or means that existing EMI options cease to qualify for the full EMI tax-advantages.

HMRC relaxed this requirement from March 2020 for employees who would otherwise have met this requirement but did not do so because of Covid-19. HMRC have now confirmed that the Covid-19 EMI easement has ended (from 5 April 2022), as provided for in the EMI legislation when the easement was brought in. Companies may therefore wish to reconfirm with affected participants that working time requirements will be met from this date.

Tapestry comment
The easements in respect of both SAYE and EMI during the early days of the Covid-19 pandemic were a pragmatic and very welcome response from HMRC to the disruption and uncertainty that the effects of lockdowns and furlough brought to the operation of UK tax-advantaged share schemes. The removal of these easements and therefore the return to the pre-pandemic positions is in line with the Government’s plans for living with Covid, with the hope that the periods of significant disruption to the workplace that it brought are now behind us.

If you have any questions on the above, or would like to discuss the operation of tax-advantaged or other incentive plans more generally, please do get in touch.

Please also watch out for our next alert on the UK's annual ERS return reminder, ahead of the 6 July deadline.

Chris Fallon and Paul Abthorpe

Executive Remuneration updates / Financial Services updates / Newsletter - 05/05/2022

UK - Investment Association statement on the impact of Russian sanctions

22 March 2022

The economic effect of the Russian invasion of Ukraine is having increasing consequences across global markets, as the conflict continues and as further sanctions take effect.

Yesterday, the Investment Association (IA) responded to queries from remuneration consultants in relation to the potential impact of the current economic circumstances on forthcoming LTIP grants. The two key issues are:

The quantum of long-term incentive grants in light of the recent fall in share prices
The ability of companies to set LTIP performance targets against the current economic backdrop, and whether a six-month delay in setting performance targets would be appropriate

LTIP grant sizes

The IA notes that its Principles of Remuneration state that grant sizes should be scaled back following a share price fall, to address the potential for windfall gains to arise where grants are made over a larger number of shares than would otherwise have been the case, due to depressed shares prices. The IA confirms that its members would expect that approach to be followed in the current circumstances.

Delayed target setting

In the context of the COVID pandemic, the IA supported a six-month delay in the setting of LTIP targets, due to the widespread uncertainty across all sectors. The IA notes that the impact of Russian sanctions is more limited and affects a smaller number of companies, principally those with material profits or revenues arising from Russian operations or the Russian economy. It notes that many of its members are willing to support a delay in setting performance targets by companies with a material exposure to Russian operations or the wider Russian economy. There is an expectation that any such delay should be linked to statements from the company on the impact of the current situation, the management of its Russian operations as well as its overall financial position and performance. The IA notes specifically that increased energy costs and other aspects of the macroeconomic impact of the Russian invasion would not be sufficient justification for delaying target setting.

Tapestry comment
The situation in Russia and Ukraine remains highly volatile and the impact of the associated sanctions and restrictions will have a significant and extended impact for some businesses, and will need to be factored into those companies’ remuneration committee decisions. However this publication also makes it clear that, for the much larger number of businesses affected indirectly rather than directly by the current situation, the IA does not expect to see delays for LTIP target setting.

In making these comments, the IA has reiterated to remuneration committees that it believes they should be careful not to insulate executives from the wider impact of the economic uncertainty, particularly in a manner that is inconsistent with the approach taken to the general workforce. Remuneration committees for those companies materially impacted by Russian sanctions will therefore need to consider the position carefully and ensure that executives remain sufficiently aligned with other stakeholders through their remuneration structures.

Our thoughts remain with all those affected by the conflict.

Suzannah Crookes and Sarah Bruce

Executive Remuneration updates / Global updates / News / Newsletter / Press Releases - 03/23/2022

Ukraine, Russia, Belarus - Potential Impact on Incentive Plans

7 March 2022

As a result of the invasion of Ukraine, Russia and Belarus are now subject to sanctions imposed from across the world, including by the US, EU, Japan, Australia and the UK. As a consequence, Russia has also introduced measures which include local currency controls and restrictions on transactions involving securities.

These restrictions impact the operation of any incentive plans which have a link to Russia or Belarus, such as:

plans operated by Russian or Belarusian-headquartered businesses;
plans operated by non-Russian or non-Belarusian businesses with a Russian or Belarusian subsidiary / branch, or that are offered to Russian or Belarusian employees; and
plans that involve sanctioned entities, or that are offered to sanctioned individuals.

The individuals and entities subject to the restrictions from all countries is under constant review and is subject to ongoing changes. They currently include:

Russian banks - the Russian Central Bank has been targeted and many Russian banks have had their assets frozen and have been excluded from international exchange markets. They have, in most cases, lost their access to the SWIFT system (a messaging system which enables international transfers between banks).
Russian and Belarusian companies and individuals - certain individuals and businesses have had their assets frozen and have been prohibited from raising finance in the relevant jurisdictions. Limits have also been imposed in some jurisdictions on the value of bank deposits that Russian individuals are permitted to make.
Non-Russian companies - restrictions are in place relating to the products that companies are permitted to export into Russia (for example the UK has banned exports of certain high-tech items).
Russian controls - Russia has imposed economic measures in response to the sanctions. These measures affect the ability of employees in Russia to participate in incentive plans, limiting transfers of funds and transactions involving securities between Russian residents and foreign persons connected with countries which commit ‘unfriendly’ actions towards Russia. A permit from the Government Commission for Control over Foreign Investments in the Russian Federation would be required to carry out such transactions, which may also specify conditions.

Where your business has any link to Russia or Belarus, you should review the extent to which the restrictions will impact the operation of your incentive plans. The impact of the crisis on Ukrainian participants will also mean that their ability to participate in incentive plans will be affected. You may want to consider the following:

How will each of your existing and, if any, future awards be impacted?
Do you have participants (whether located inside or outside of Russia / Belarus) who may be individually subject to sanctions?
Can you, and should you, consider delaying or cancelling future grants of awards / plan invitations?
Can you, and should you, freeze / suspend / cancel the vesting or delivery of existing awards, and what are the accounting implications?
Will participants be permitted to, and can they practically, take ownership of shares and, if so, how will this work? In Russia, this is currently unlikely to be possible.
Would it be appropriate to cash-settle existing awards locally in Russia and Belarus, do you have the contractual powers to allow you to do this, and what are the wider financing and accounting implications?
What actions do your Ukrainian employees and colleagues need to take in relation to your incentive plans and any outstanding awards, and what can you do if these are not possible?
What cross-border transfers of money will be affected (e.g. contributions for purchase plans, exercise payments for options, recharges of administration and share costs), and what can your administrator and bank currently support?
Are there any alternative ways in which affected currency transfers could be implemented or structured to enable plans to continue to be operated?
What grant price should you use to calculate the number of shares under new awards - is it reasonable to use the current share price if it has been affected by the crisis?
How will the sanctions and restrictions affect performance targets, including e.g. for broader corporate performance targets?
Do you need to send communications to participants to offer explanation, guidance and reassurance?

Tapestry comment
The situtation in Ukraine is highly volatile, and it is not possible to say with any certainty fro how long any restrictions may be in place, and whether additional restrictions may be imposed. The impact of the current situation on companies' incentive plans will be case-specific, but all companies with participants in these jurisidctions should consider how the above points impact the practical operation of their plan events.

We recognise that these are difficult and challenging issues to address. We have been in touch with our Ukrainian counsel who are currently safe, but obtaining advice that will accurately reflect the current (and near-future) position is likely to be difficult at this time. The crisis also means that we may be limited in our ability to source any further Russian or Belarussian advice directly from these countries.

We send our thoughts to all the people affected by the conflict.

Team Tapestry

Global updates / Newsletter - 03/09/2022

UK - Further Investor Guidance Published

4 March 2022

The Investment Association has published its “Shareholder priorities and IVIS approach” for 2022. Both this document and the recently released PLSA’s updated “Stewardship and Voting Guidelines” place emphasis on some key themes, including:

Climate change
Diversity and Inclusion
Stakeholder engagement

Whilst the topics may not come as any surprise, there is some interesting commentary in both documents which may be of interest to companies and their stakeholders.

Remuneration

The PLSA states that the average shareholder dissent to remuneration resolutions in 2021 was double the average in previous years and notes that the highest levels of dissent now apply to remuneration resolutions. This indicates the level of scrutiny of executive pay in particular in the recent context of the Covid-19 pandemic and rising costs of living. The PLSA calls on companies to show restraint on executive remuneration, particularly in the case of companies who have claimed Government support during the pandemic.

This comes in the context of the PLSA describing remuneration as a “litmus test” for wider corporate governance practices, and noting that significant pay discrepancies between senior executives and the rest of the workforce can indicate wider issues with a workplace’s culture and process, in particular where there is any discrepancy based on gender or ethnicity.

The IA “Shareholder Priorities” document does not have specific content on remuneration, as this is covered in its Principles of Remuneration (updated in November 2021). However, it does reference the role of remuneration committees in engagement with stakeholders and welcomes the leadership shown in the pandemic response. It mentions in particular the sensitivity shown to wider shareholder and stakeholder experience by ensuring remuneration outcomes were linked to that wider experience and not just to the outcome based on performance metrics. The IA goes on to reference its letter to Remuneration Committee Chairs in November 2021, noting that this consideration of the experience of major stakeholders will continue to be a critical investor expectation in 2022, as the effects of the pandemic and its aftermath are felt.

Tapestry comment
In addition to the specific comments related to remuneration which are referred to above, companies and investors may find the wider commentary from both the PLSA and the IA helpful in outlining their views around the wider issues of ESG, including specifically around climate change and new reporting requirements, as well as on topics of gender and ethnic diversity. Where these factors are reflected in pay structures and/or performance metrics they may also be of direct relevance for consideration of remuneration and reward throughout the organisation.

If you have any questions on the above, please do get in touch.

Suzannah Crookes

Executive Remuneration updates / Global updates / Newsletter - 03/04/2022

Hot News! Former CEO's awards suspended, pending investigations

23 February 2022

Barclays PLC announced it has “frozen” all of their former CEO’s unvested share awards. We do not normally see share plan stories in the press, so there are useful reminders for all companies in the detail behind the headline.

What has the bank said?

The bank announced in a statement: “In line with its normal procedures, the committee exercised its discretion to suspend the vesting of all of Mr Staley's unvested awards, pending further developments in respect of the regulatory and legal proceedings related to the ongoing Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) investigation regarding Mr Staley.”

Why has this happened?

There are ongoing legal and regulatory investigations regarding connections between former Barclays boss Jes Staley and Jeffrey Epstein.

Separately, the PRA and FCA expect certain firms to freeze the vesting of all awards made to individuals undergoing internal or external investigation that could result in performance adjustments, such as the application of malus and clawback. This is set out in PRA and FCA guidance available in full here and here.

It is also worth noting that the PRA and FCA expect certain firms to be able to extend the clawback periods for certain senior MRTs, where there are ongoing investigations that might lead to the application of clawback. This is set out in the Remuneration part of the PRA Rulebook at 15.20A here, and the FCA Handbook at SYSC 19D.3.61(4) here.

Why does this matter - the broader share plans picture?

Whether we are talking about financial services firms or not, malus and clawback are always a hot topic for executive share awards.

One area that can be overlooked is the impact of ongoing investigations that might result in malus or clawback being applied to awards.

It is widely accepted that malus (reducing or cancelling unvested or unpaid awards) is easier to enforce than clawback (recovering vested or paid awards). Where investigations are ongoing, suspending the vesting of awards is a useful way to extend the period during which malus can be operated. Companies could also extend the applicable clawback period in these circumstances, where necessary.

Companies should ensure they have a clear and robust contractual basis to suspend the vesting of awards and extend clawback periods in these circumstances. This can be achieved through carefully drafted “investigation provisions” in share plan rules and malus and clawback policies.

Tapestry comment
It is not often that we see share plans hitting news headlines – so whenever this happens it is always important to see if any lessons can be learned.

For impacted PRA and FCA regulated firms, this is a useful reminder of the PRA’s expectations when investigations are taking place that might result in performance adjustments - all unvested awards should be frozen until the investigations conclude. In addition, clawback periods for certain MRTs should be extendable where investigations that might lead to clawback are ongoing.

More generally, any companies with malus and clawback provisions should ensure that their plan rules and/or malus and clawback policies clearly provide for the suspension of vesting in the event of investigations, whether internal or external. Companies may also want the power to extend the applicable clawback period in these circumstances.

If you have any questions on the above, or need any help with your own “investigation provisions”, please do get in touch.

Matthew Hunter and Tom Parker

Executive Remuneration updates / Financial Services updates / Newsletter - 02/23/2022

Australia - Good news! Removal of early taxing point confirmed

17 February 2022

We are delighted to update you on a welcome change to the taxation of employee share schemes (ESS) in Australia.

In May last year, we reported on a proposal by the Australian government to remove the tax point for tax-deferred ESS that takes affect on cessation of employment (here). It was hoped that this proposal would come into effect at the start of the last tax year (i.e. 1 July 2021) but the tax change was caught up in a more general consultation on the operation of ESS in Australia. Fortunately, the proposal was split off from that ongoing review and was included in the Corporate Collective Investment Vehicle Framework and Other Measures Bill 2021, which was passed by the Australian Federal parliament on 10 February. The Bill still requires Royal Assent but the tax reform is due to come into affect on 1 July 2022.

What's changing?

Under the current rules, a tax trigger for tax-deferred ESS (i.e. where the moment of tax has been deferred from grant/award to exercise/vesting) arises at the point when an employee ceases to be employed but retains any unvested shares under the ESS. This trigger has long been seen as unfair to employees as it can give rise to a dry tax charge (i.e. an unfunded charge as no share sale proceeds will be available to fund the tax charge), particularly if the employee is restricted from selling the shares under the terms of the ESS.

Under the new rule, the moment of taxation will generally be the point at which the award is no longer at risk of forfeiture and there are no restrictions on disposal (in practice this would be the point of vest of a conditional award or exercise of an option, as is more common globally).

When will the "change" take effect?

One positive result of the delay in implementing the proposal is that the removal of cessation of employment as a taxing point will now apply to all new and existing ESS that have not reached a taxing point before the proposal comes into force on 1 July 2022. Previously, the proposal was only going to apply to awards granted after the date that the reform took effect.

Plans to simplify the securities law exemptions continue to be subject to separate consultation. The most recent consultation period ended on 4 February.

Tapestry comment
This change will help to bring Australia in line with many other jurisdictions, making administration of leavers much easier for global companies and giving "good leavers" the ability to settle taxes due at the applicable tax point. Where appropriate, companies should consider whether to advise participants with outstanding awards of this change to the tax treatment. Where companies have structured their ESS plans to make provision for the early tax treatment on cessation of employment (e.g. by providing for accelerated vesting or the removal of sale restrictions), they may wish to review those plan terms.

If you would like to discuss the effects of the above change on your awards, please get in touch.

Sharon Thwaites

Global updates / Newsletter - 02/18/2022

Tapestry Team News - Hannah Needle FGE for GEO Board of Directors - Voting now open!

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