All Employee Share Plans And The Impact Of A Merger Or Acquisition
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All Employee Share Plans And The Impact Of A Merger Or Acquisition

30 July 2018

by Graham Bull, Managing Director, All Employee Share Plans, Equiniti

In the first of our series of articles about the impact of corporate actions on employee share plans, Graham Bull looks at mergers and acquisitions and identifies the key points to consider both from an employee’s and a company’s perspective.

A change of control for a company will often affect not only a company’s shareholders, but also employees participating in its various share plans. The event can be daunting and may result in an acceleration of decisions normally made at maturity. In this article we look at corporate actions, specifically takeovers, and what you, as an employee, will need to consider. We look in detail at the two main all employee UK tax-advantaged plans, Sharesave (also known as SAYE) and Share Incentive Plans (SIP).

What’s a corporate action?

A corporate action can take many shapes, though essentially it’s an activity that brings material change to a company and its share capital. Examples include, raising additional capital through rights issues, share consolidations, share splits, acquisitions, mergers and takeovers. The change is generally approved by a company's board of directors, with shareholders voting on it at an EGM or accepting the takeover offer.

What’s the impact on employees of a corporate action?

As an employee, you may hold shares in your company and so will receive shareholder information and have an opportunity to vote or make elections. You may also be a participant in one or more of your company’s employee share plans and scheme rules set out what will happen in the event of a corporate action. Your company will arrange to send you a set of employee share plan documents detailing impacts, choices available and any actions you’ll need to take.

What’s a merger or acquisition?

A company merger or acquisition involves one company (acquiring company) making a bid to take control of another company (target company) usually through acquisition of the target company’s shares.

Recommended - If recommended by the target company, the merger or acquisition task will be completed by either a Court sanctioned scheme of arrangement or a takeover by acceptance (a takeover).

Scheme of arrangement - It is important to note that when undertaking a transaction via a scheme of arrangement, it is conditional on the approval of the company’s shareholders, approval by the High Court, and meeting any other conditions that have been set (e.g. clearance by regulators, completing some activity set between the acquiring and target companies), before completion can occur.

Not recommended - Should the offer not be recommended by the target company then the acquiring company can launch a hostile takeover.

The offer – The acquiring company will make an offer to the target company’s shareholders. This can take the form of offering shares in the acquiring company, a mixture of cash and shares or an all cash offer, although other considerations, such as loan notes (a form of deferred payment), can be offered.

Timing and outcome - Depending on the structure of the transaction and regulatory approval, a merger or acquisition can take a number of months to complete. If the offer/acquisition completes, the acquiring company becomes responsible for the target company’s operation.

Trigger for employee share plans - Should the transaction be completed by a takeover, then the key trigger for employee share plans will be when any conditions of the offer have been met and the acquiring company receives acceptances to the offer from the target company shareholders of at least 50% plus one share in the issued share capital of the target company. Once this has occurred, the acquiring company can declare the offer wholly unconditional. Should the transaction take the form of a takeover, employee share plan options will not usually be exercisable until the transaction goes wholly unconditional.

If the transaction is completed via a scheme of arrangement, the transaction is formally approved on the Court sanction date, whereupon employees are able to exercise their employee share plan options.

What’s the impact on Sharesave where there is a cash-only offer/acquisition?

Key is whether the cash offer per share is greater than your plan’s option price. You may have more than one Sharesave plan, with different option prices and, therefore, different decisions to make per plan.

A period of up to six months is usually given during which you can choose whether or not to exercise and accept an offer. Instructions are usually batched together and processed once a month during this period. It’s usually beneficial to carry on making your weekly/monthly Sharesave contributions during this election period to maximise the number of shares (and value) you can exercise.

There are, however, other factors to consider depending on your circumstances and what else is being offered as part of an offer. For instance, you’ll only be able to buy shares under option with your Sharesave savings and any remaining shares under option will lapse. Occasionally, there will be a cash compensation payment (which is likely to be taxable) for any lapsed part of your option. This compensation may only be offered for a short period after approval of the takeover. You’ll need to calculate the net value of the shares you could obtain by using your additional savings, and compare this to the value of any compensation payment.

You should also consider your own personal circumstances. There can be quite a bit of reorganisation at this time and you may decide to leave your current employment. If you choose to continue saving and during the six-month election period decide to leave, you’ll need to ensure that you exercise your option before your leaving date otherwise your option may lapse. 

You should also check within your offer/acquisition documentation whether there are any income tax liabilities.

What can make a cash offer acquisition more complex?

a) Rollover - without a choice to immediately exercise

‘Rollover’ means that your option to buy shares is converted into an option to buy shares in the acquiring company. Although an adjustment is made to both the number of shares under option and the option price, this will not impact the value of your option. You may not be given an immediate choice to exercise your existing option, so you’ll need to continue saving and exercise your option at the normal maturity date.

b) Rollover - with a choice to immediately exercise

A variation on the above is where your option is rolled over, however, there is a one-off opportunity to exercise immediately and receive cash. You’ll have a decision to make as to whether or not to use your current savings to partially exercise your option, or continue saving until the normal maturity date and exercise your option in full. This can be tricky, as you’ll have to decide whether to close out your option early, using a reduced amount of savings, or continue in the plan with an expectation that the share price remains positive.

What happens with a share offer, or an offer with a mixture of cash and shares?

As part of a takeover, the acquiring company may, instead of offering cash, offer shares in the new company or a mixture of shares and cash. It’s likely with an all-share offer that your Sharesave option will rollover as described above. If you are allowed to exercise early as part of a takeover, the main difference is that you’ll receive the new company’s shares, rather than cash. If these shares are listed and traded through the London Stock Exchange, it should be relatively straightforward after exercising your option to either hold or sell shares as you would do normally.

Similar principles apply if there is a mixture of shares and cash being offered. If you exercise your option as part of a takeover, instead of receiving just shares you’ll receive some cash and some shares.

If ordinary shareholders are being offered a special dividend, then it may be in your interest to exercise early to enable you to receive this too. You’ll need to calculate the net value of the shares you could obtain by using your additional savings, and compare this to the value of any special dividend.

What happens if the acquiring company is a foreign company?

If your employing company is taken over by a foreign company and you receive the acquiring company’s shares, you’ll need additional information about how you can hold those shares. It’s not as daunting as it may seem as many overseas stocks can be traded on the London Stock Exchange using arrangements such as CREST Depository Interests (CDIs) or Depository Interests (DIs). A number of UK financial organisations offer nominee facilities and can hold these types of shares on your behalf.

Questions to ask of your new employer include: what arrangements are in place to enable you to keep shares; how easy will it be to sell shares; what are the associated costs; if I hold shares in a foreign country will I need to complete any paperwork/obtain permissions; and can a dealing service be offered as part of an exercise process to allow you to sell those shares easily. 

What about Share Incentive Plans?

The impact of a takeover on your SIP shares is relatively straightforward - your shares will be treated like those of an ordinary shareholder and you’ll receive the same cash and/or share offer. In addition to any Partnership and Dividend shares you may have, any Free and Matching shares you’ve been awarded will also be included within an offer.

Shares will be converted into the acquiring company’s shares, with any holding, forfeiture and tax conditions remaining the same within the SIP, whilst cash will be payable on the same basis and, as far as possible, at the same time as ordinary shareholders. There are unlikely to be tax implications for cash received for your SIP shares on takeover.

Summary

Mergers or acquisitions can appear confusing, but once you’ve received information, understood how it impacts you and the choices available, it’s a relatively straightforward process. Key stages are:

  • Receiving documentation - As soon as is practicable after a takeover has been announced, you should receive documentation explaining how your share plans will be impacted and choices available. Documentation you receive is likely to be quite formal and sometimes lengthy but internal briefings, questions and answers and document summaries can help. Announcements in the media and investor pages on company websites can also provide useful information.
  • Understanding it - An important thing is to understand how your shares and options will be impacted and to consider timeframes. A takeover follows a legal process that includes a strict timeframe for completion of transactions which means you may have to respond quickly to documentation you receive. There’s always help at hand. Although they are unable to give you financial advice, it’s likely that both your company and your share plan administrator will be able to explain what to do.
  • Responding within set timeframes - It can be a stressful time for everybody, but the offer/acquisition price offered is usually at a premium to the share price and, therefore, your shares and options may gain in value. Whilst it’s tempting not to do so, please read through the paperwork and make your choices. Finally, do not forget this vital step, you need to complete and return your election form(s) within the specified period of time.

If you would like more information please email graham.bull@equiniti.com. 

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