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BREXIT: Market volatility may undermine effectiveness of share awards, expert says

Companies planning new employee share options and awards over the coming months must be mindful of the impact of post-referendum market volatility on the value of those packages, an expert has said.24 Jun 2016

This is part of Out-Law's series of news and insights from Pinsent Masons' experts on the impact of the UK's EU referendum. Watch our video on the issues facing businesses and sign up to receive our 'What next?' checklist.

Volatile stock markets and currency exchange rates could affect company share prices, with particular consequences for executive pay packages based on performance targets, according to share plans and incentives expert Suzannah Crookes of Pinsent Masons, the law firm behind Out-Law.com.

"Setting performance targets at grant, and measurement at vesting, may be affected by any movements in stock markets and currency exchange rates," she said. "Where executives are subject to shareholding guidelines, as these are generally measured on share value the timing of measurement in a volatile market may be a factor in monitoring the extent to which the guidelines are met."

The summer months tend to be a quieter period for new grants and vesting of executive share awards among UK listed companies, which would lessen these concerns to some degree, Crookes said.

Share price volatility could also impact on UK tax-advantaged share schemes for employees, particularly Sharesave/Save As You Earn (SAYE) and Share Incentive Plan (SIP), Crookes said. Sharesave allows employees to save up their own money before deciding whether to use this to acquire shares in their company at a discount, while SIP allows employers to award free shares and/or offer their staff the opportunity to purchase shares out of gross salary.

"Any volatility in share price may dictate whether or not Sharesave options are 'in the money' at any given time," Crookes said. "In an international plan, currency exchange rates will also have a role to play."

"Under UK SIPs, a lower share price may lead to a larger number of shares being acquired by participants with their agreed partnership share deduction, and so potentially a larger number of matching shares where offered. Companies will need to be prepared, should this occur, to keep careful track of dilution limits where using new issue shares and of the relative significance of the SIP trust as a shareholder and its rate of growth," she said.

Economic factors, rather than legal changes, would have the biggest impact on equity incentives and share plans in the short term, with the latter dependent on whatever form the future relationship between the UK and EU would take, Crookes said. Financial services regulation, employment laws, market abuse rules, data protection, prospectus and shareholder rights requirements are all governed to a greater or lesser extent by EU law, she said.

"Clearly it is too early to speculate on how the UK's position will change, if at all, in these areas," she said. "However, where the EU position currently reflects UK domestic legislation in any event, we are unlikely to see significant difference initially - although there is now the potential, subject to the shape of the on-going relationship with the EU, for a separate UK regime to develop differently over time."