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?
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.