Employee trust announcement obligations

Companies on the main list now no longer necessarily have to make announcements when their employee trusts acquire shares or transfer shares to their employees.

This is due to a recent change in the Disclosure and Transparency Rules (DTRs) following on from changes in company law that took effect earlier this year, and is a welcome relaxation for companies operating these trusts on a regular basis. Announcements will only be needed when the counterparty to a dealing is a Person Discharging Managerial Responsibilities (PDMR). This includes all directors as well as certain other senior employees determined on a company by company basis.

DTR 3.1.4 and its predecessor in the old Listing Rules had for some time required listed companies (ie companies listed on the Official List of the United Kingdom Listing Authority) to announce changes in the shareholdings of its directors in the company as notified under section 324 of the Companies Act 1985.

Changes in directors’ shareholdings included changes in the number of shares held by trusts of which the directors were beneficiaries, including employee trusts. Each time an employee trust bought or transferred shares, each director’s interest in the shares of the company changed accordingly and an announcement was needed – although a combined announcement for all directors could be made. Although some companies appeared to ignore this requirement without apparent sanction (unless a director was a counterparty to the transfer), this was strictly contrary to company law and was not best practice.

The revision of the Listing Rules and DTRs earlier this year (see Law-Now on 20 August 2007) had caused further confusion since the underlying company law reporting requirement for directors had been removed from the Companies Act 1985 on 6 April 2007 (but was not reflected by similar express relaxations in the DTRs). However, with effect from 6 October 2007, the FSA has finally amended DTR 3.1.4 to reflect the deletion of section 324 so that listed companies do not have to report dealings by their employee trusts unless PDMRs are directly involved in the transaction - for example, because they have exercised an option or shares have vested under an LTIP award.

There still remains a discrepancy, however, in respect of treasury shares, where there is a reporting requirement each time treasury shares are transferred in or out of treasury, whoever the parties to the transfer are. When listed companies wish to operate employee share schemes using existing shares, they have a choice between using shares held in treasury or shares acquired by employee trusts. The additional reporting requirement with treasury shares is perhaps a factor that may tilt the balance towards employee trusts being perceived as easier to operate.