Dutch listed companies: did you update your employee participation plan?

The consistent policy (“bestedige gedragslijn”) for employee participation plans under the new Market Abuse Regulation.

The new EU rules on market abused laid down in the Market Abuse Regulation (MAR) have come into effect in the Netherlands as of the 3th of July of this year.[1] MAR brings a new compulsory regime regarding closed periods, trading restrictions and exemptions for certain employees of listed companies. This new regime impacts Dutch listed companies’ option, saving and share plans (employee schemes) that have been drafted in compliance with the old Dutch rules and the predecessor of MAR, the Market Abuse Directive (MAD).

What should a Dutch listed company be doing?

To make sure that its employee scheme and its insider trading policy is compliant with MAR, the listed company should check its policies against at least the following:

• The compulsory 30 days closed period regime;
• The new prohibition against trading during a closed period by certain employees and their connected persons;
• The extended transaction reporting obligations for certain employees and their connected persons; and
• The new shape of the ‘consistent policy’ (“bestendige gedragslijn”) safe harbour for operating employee schemes.

Especially this last item has caused some uncertainty amongst Dutch listed companies.[2]  Some argue that with MAR the good old Dutch ‘consistent policy’ (“bestendige gedragslijn”) safe harbour is gone. That safe harbour followed from a Dutch Decree and protected both the listed company and its employees from breaching the insider trading prohibition, provided that both acted in line with a consistent policy relating to granting and vesting of options or (restricted) shares. AFM guidance provided further information on the various elements that Dutch employee schemes had to comply with. Other exemptions were available relating to the exercise of employee options and the (subsequent) sale of shares by employees. This Dutch employee scheme regime has worked fine for many years and has not resulted in any major concern or incident in the past years. Not surprisingly, the apparent loss of this trusted regime has caused some uncertainty amongst Dutch listed companies. The fact that what MAR brings in return is buried away in a new trading ‘approval regime’, does not particularly help either. Having said this, the old regime is not gone. It just has taken a different shape with MAR.

The ‘consistent policy’ (“bestendige gedragslijn”) under MAR

What MAR offers is a regime for prior approval by listed companies for trading by their employees during closed periods.[3] In this ‘approval regime’ lays the MAR ‘consistent policy’ (“bestendige gedragslijn”). I believe that this ‘approval regime’ under MAR can be summarised in the following way.

The issuer is allowed to approve trades during a closed period if the trades relate to (non-exhaustive list and briefly put):

• Awards and grants under (i) a fixed or one-off scheme (ii) that has been approved by the issuer outside of a closed period, (iii) whereby the employees have no discretion as to the acceptance of the awards or grants.
• Awards and grants during a closed period whereby a consistent policy is followed. The consistent policy must be laid down in a defined framework setting out (i) the conditions, (ii) the periodicity, (iii) the timing (iv) the entitled group, and (v) the amounts.
• The exercise of options during a closed period for options that would otherwise expire, provided that (i) the option holder has given irrevocable notice to the issuer of the decision to exercise, (ii) that notice has been given to the issuer at least four months before the option expiration date lapses.
• Acquisition of shares under an employee saving scheme (such as a monthly share purchase scheme), whereby the employee (i) entered into the scheme outside of a closed period, (ii) does not alter its participation conditions during a closed period, (iii) and follows a clearly organised scheme that cannot be altered during a closed period.

How to implement this MAR regime?

Listed companies should identify the type of employee scheme they operate and subsequently check their scheme terms and conditions against the approval regime that MAR has introduced for their type of employee scheme. When doing this, listed companies effectively amend their old Dutch employee scheme’s consistent policy (“bestedige gedragslijn”) to become compliant with MAR.

To do so, at least the following four questions should be addressed:

1. Are the employee scheme terms and conditions described precise enough;
2. Are the employee scheme terms and conditions compliant with the relevant scheme approval regime under MAR;
3. Is the employee scheme completely laid down in writing in a scheme policy; and
4. Does the listed company in practice always follow the employee scheme terms and conditions?

These questions should, for example, flag when an employee scheme has too broad granting conditions or reveal that the listed company in practice grants at its discretion. If so, these schemes will not meet the predefined ‘conditions’-requirement of MAR as summarised above (second bullet point under (i)). If a scheme is not compliant with MAR, insider trading by the listed company and its employees is at risk.

To avoid this, employee scheme terms and conditions should be set and followed so tight that rightfully meeting the approval criteria should only be possible in case both the listed company and the trading employee cannot be driven by inside information (even when they possess inside information during the grant, award or trade). In other words, if the terms and conditions are rightfully met by both the listed company and the employee, both should be able to rightfully argue that they are not trading while using inside information.

As a final remark, MAR does not prohibit trades outside closed periods other than trades that are captured by the general insider trading prohibition. This means that listed companies can adopt somewhat less stringent terms and conditions for trades by employees outside of closed periods.

Footnotes:

[1] Persons discharging managerial responsibilities

[2] I already flagged this as a potential issue in my late 2013 publication on the draft MAR text (see p. 48-49), which can be downloaded at: https://www.afm.nl/~/profmedia/files/publicaties/2013/johannes-de-jong-mar.ashx

[3] As laid down in article 19(12)(b) of MAR and in article 7 and most notably article 9 of Delegated Regulation 2016/522 of 17 December 2015.