Market Abuse Regulation ("MAR") Employee Benefit Trusts and their participation in Corporate Transactions

The implementation of MAR earlier this year has led to a significant amount of guidance on this developing area – recently in connection with employee benefit trusts (EBTs) and their participation in corporate transactions such as rights issues, open offers or bonus issues.

This is an area of particular interest for those following the implementation of MAR as EBTs typically to include ‘persons discharging managerial responsibilities’ (PDMRs) or their persons closely associated (PCAs) among their beneficiaries who may be subject to restrictions under the new regulations.

We’ve summarised a few issues that we’ve addressed on recent transactions on this issue:

•  Can PDMRs participate in corporate transactions such as rights issues, open offer or bonus issues during a closed period?

 MAR provides that a PDMR ‘shall not conduct any transactions on its own account or for the account of a third party, directly or indirectly’ during a closed period.

Notwithstanding this prohibition, our interpretation is that an entitlement under a rights issue, open offer or bonus issue can fall within an exception to the prohibition; namely under 19(12)(b) which provides that an issuer may permit a PDMR to trade in a MAR closed period due to a ‘qualification or entitlement of shares’.

Article 9(f) of the Delegated Regulations provides further details saying that an issuer may permit a PDMR to trade in a closed period where the “final date for such an acquisition, under the issuer’s statute or bye-law falls during the closed period, provided that the PDMR submits evidence to the issuer of the reasons for the acquisition not taking place at another time, and the issuer is satisfied with the provided explanation.”

Our view is that the take up of an ‘entitlement of shares’ during a specified offer period would be a satisfactory reason for the acquisition not taking place at another time and that clearance to deal can be given in these circumstances.

This is a view supported Market Abuse Regulation (EU MAR): Questions and Answers, published by CLLS and Law Society Company Law Committees’ Joint Working Parties on Market Abuse, Share Plans and Takeovers Code on 6 July 2016.

It is also the approach adopted in the Specimen Dealing Procedures Manual published by ICSA, the QCA and GC100 which specifically provides that a PDMR can be permitted to deal during a MAR Closed Period for ‘the take up of entitlements under a rights issue or other offer’.

• Are EBTs under which PDMRs are beneficiaries caught by the definition of PCAs?

This question is relevant for ascertaining whether EBTs must notify transactions as a PCA. MAR requires PDMRs, as well as their PCAs, to notify the company and the competent authority (being the FCA for the UK) of transactions. The notification requirement will only apply once a PDMR’s dealings (and those of their PCAs) amount to a total of EUR5,000 within a calendar year. However, we expect that many companies will, for practical purposes, require disclosure of all PDMR dealings regardless of whether the EUR5,000 threshold has been met.

The definition of PCAs includes “a trust ..the managerial responsibilities of which are discharged by a person discharging managerial responsibilities ..which is directly or indirectly controlled by such a person, which is set up for the benefit of such a person, or the economic interests of which are substantially equivalent to those of such a person.”

At first reading, this appears to catch EBTs under which PDMRs are beneficiaries. As a result any share purchases or sales by an EBT could be subject to the notification requirements.

However, an alternative view is that an EBT is not automatically a PCA with a PDMR, as although a PDMR may be a beneficiary of an EBT, he does not have control of it, nor is it set up solely for the benefit of the PDMR (but rather the employees of a group as a whole), and the economic interests of an EBT are not substantially equivalent to that of a PDMR. This seems a sensible conclusion to us, although the point is not free from doubt.

• Will PDMRs (who are beneficiaries under an EBT) be required to notify the transaction if the EBT takes up their entitlement to shares?

PDMRs are required to notify ‘all transactions conducted on their own account’, an undefined terms which is potentially wide in scope. There are no express carve-outs and the list of notifiable transactions is non-exhaustive.

Based on current guidance a sensible approach would be to distinguish between: (i) transactions conducted by the trustees of the EBT on the account of a PDMR, directly or indirectly (which we think are likely to be notifiable); and (ii) transactions conducted by the trustees of the EBT for the benefit of all beneficiaries without any particular regard to a particular PDMR (which we think are unlikely to be notifiable). Again, this point is not entirely free from doubt.

A more prudent approach and the approach we have adopted until further guidance is available, is to advise that any dealing by an EBT on behalf of a PDMR beneficiary is a notifiable transaction.

Authored by George Pendarves and Kieran Stone