EU Prospectus Regulation & Brexit update

UPDATE AS AT MIDDAY 29.03.2019 - Overlooked by much of the press this week, Parliament yesterday did manage to pass legislation removing 29 March as the 'cliff edge' date, replacing it with 12 April 2019 (if today's 'MV3' meaningful vote #3 doesn't pass) or 22 May if it does get passed. The vote will take place at 2.30pm today, 29 March.

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In February’s ProShare newsletter we shared an article written by Jeremy Edwards and colleagues at Baker McKenzie, about the impact of a ‘No Deal’ Brexit on this aspect of pan-European employee share plans. Although much has happened since then – it’s a truism that a week is a long time in politics – and we still seem no closer to knowing what type of Brexit that the UK may be subject to, or indeed, when.

The risk of an accidental ‘No Deal’ Brexit increases with every day that goes by without the UK Government a) unilaterally revoking its Article 50 notice, or b) calling a second/confirmatory referendum or General Election and/or c) gaining the agreement of the EU to an extension to the Article 50 period.

May v. Erskine May

The UK Government last week had its hands tied somewhat by the Speaker, John Bercow, invoking a centuries-old parliamentary precedent which prevented Mrs May’s withdrawal deal being brought back to the House of Commons for a third time (having been voted down by significant majorities twice already) unless significantly altered. The EU has to date been steadfast in its refusal to re-open negotiations on the withdrawal agreement. Yesterday (28 March) the Government opted to split the Withdrawal Agreement from the Declaration covering the terms of the UK & EU's future relationship, so MPs will be voting only on the former this afternoon.

The EU also has the not-so-small matter of the EU Parliamentary elections coming up in the last week of May 2019, which even a modest Article 50 extension would complicate, to say the least. If the UK was still a part of the EU and failed to hold MEP elections then it could technically be held to be in breach of its treaty obligations. If the UK did hold MEP elections, the vexed matter of Brexit would threaten to swamp any efforts to shift the debate onto the EU’s role in defeating populism and the far-right in Europe, and tackling the growing unrest with financial inequality.

Extending Article 50

Earlier this week UK PM May wrote to Donald Tusk, EU Council President to formally request an extension to the Article 50 notice period (here’s the text of the letter). Whilst in the letter itself she didn’t specify the length of the extension being sought, she notes the unpalatable prospect of the UK holding MEP elections, which would imply on the face of it that she expects/needs only a short extension (currently 12 April or 22 May 2019). She reiterates her intention to bring back her deal to the House of Commons for a further vote, implying that this would be possible (in light of the Speaker’s views) if the European Council approves the supplementary documents she agreed with EU Commission President Juncker in Strasbourg earlier in March. The letter goes on to state that this third vote and, if passed, the approval of legislation via the Houses of Commons and Lords would not be possible by 29 March – hence the request for an extension.

It’s worth noting the position of the EU’s chief Brexit negotiator, Michel Barnier, as expressed at a press conference yesterday: “It is our duty to ask whether this extension will be useful. Because an extension will be something that will extend uncertainty, and uncertainty costs. It has a cost for everybody. And we can’t prolong uncertainty without having a good reason for it”. Any and all extensions, lengthy or otherwise, require the consent of all other 27 EU Member States.

Whether the PM’s request for a short extension, on the grounds she has stated, will fly with the European Council or indeed, the House of Commons Speaker, is yet to be determined.

Back to share plans.

With or without an extension, any ‘gap’ (accidental or otherwise) between

a)     the expiry of the Article 50 period, 29 March 2019, or an agreed extension date which currently may be 12 April or 22 May 2019, and

b)     the date on which the EU Prospectus Regulation becomes fully applied, 21 July 2019,

still poses a potential problem requiring urgent action for many share plan issuers, in particular those offering an employee share purchase plan to EU-resident employees. For affected employers, the clock will be ticking loudly as regards the impending instruction, payroll deduction and purchase dates, and what to communicate to participating employees. With an extension, the shortened gap becomes less significant, though still undesirable.

ESMA, the European Securities and Markets Authority, issued an updated Q&A in January and, in light of the UK’s still unresolved situation regarding Brexit, there are some key sections worthy of close review by anyone with concerns regarding the aforementioned ‘gap’ in the event of a ‘No Deal’ Brexit:

·        Point 103: Choice of PD home Member State for third country issuers, and

·        104: Use of prospectuses approved by the UK.

ProShare has previously written to ESMA and the EU to respectfully request that they consider ‘closing the gap’ by bringing forward the full application of the more broadly drawn exemption in the EU Prospectus Regulation, to no avail. Whilst this response is perhaps unsurprising given that it could be seen to erode (albeit in a minor way) the EU’s united position as regards Brexit, it offers no comfort to the millions of EU citizens whose UK parent company employers may have to temporarily suspend their participation in ESPPs. 

Efforts are also being made by other bodies, including the QCA, who are engaging with ESMA, the European Commission and relevant MEPs on recommending that National Competent Authorities simply do not prioritise enforcement of the relevant obligations in EU law, as regards the ‘gap’ period. This is an eminently pragmatic and practical suggestion that has ProShare’s full support, and we hope that it is heard and considered carefully by decision-makers in the EU. If an extension to the Article 50 notice period is granted by the EU then it may make this particular suggestion more palatable to the EU and therefore more likely to be agreed.

ProShare remains committed to keeping its members up-to-date on all Brexit-related developments with an impact on employee share ownership.

NB: Whilst this matter has been covered several times in ProShare publications and at events including our focus groups and our Annual Conference, this is general information only and should not be construed, relied or acted upon as advice. Plan issuers with concerns regarding this matter should seek guidance from their legal advisors.