Employee Share Plans in Europe and the USA - Sorainen

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Employee Share Plans in Europe and the USARussian FederationUnder the current regulatory regime, a qualified investor (e.g. a broker) is notpermitted to buy foreign securities or foreign financial instruments for, and holdthem on behalf of, an individual non-qualified investor (e.g. an employee).However, the Securities Market Law allows an individual to obtain the status of aqualified investor. The criteria which an individual must satisfy to obtain thisstatus includes, in particular, reference to the value of securities owned by theinvestor or the amount (value) of obligations under derivative contracts to whichhe is a party and the volume of his dealings in securities and derivatives. 5There is a considerable degree of ambiguity in the new rules governing theoffering of foreign financial instruments and securities in Russia. The applicationof these provisions will depend in particular on their interpretation by the FSFM 6 .for the said securities, currency or goods (as the case may be) and such transaction stipulates thatit should be treated as a derivative transaction.5An individual can be recognised as a qualified investor if such individual satisfies any two of thefollowing requirements:• an individual owns securities and/or other financial instruments with an aggregate value in excessof 3 million roubles; or• an individual has working experience in a Russian or foreign company which is dealing insecurities or other financial instruments, provided that the work experience should be at least: (i) 1year in a company, which is a qualified investor by operation of law (rather than a company thatobtained that status), if he or she has already ceased working with that company; (ii) 3 months in acompany, that is a qualified investor by operation of law, if he or she is still an employee of thatcompany; or (iii) 2 years in any other case; or• an individual (i) has been a party to at least 10 transactions with securities and other financialinstruments during the last 4 quarters provided that the aggregate value of such deals is at least300,000 roubles; or (ii) has been a party to at least 5 transactions with securities and otherfinancial instruments during the last 3 years provided that the aggregate value of such deals is atleast 3 million roubles.6One possible interpretation could be that the basic purpose of the amendments to the SecuritiesMarket Law is to protect Russian investors against the risk of losses as a result of investments inunfamiliar financial instruments. On this basis, arguably, where an acquisition of foreignsecurities/financial instruments does not constitute an investment (e.g. such securities are acquiredsolely for the purpose of establishing an offshore SPV in a holding structure), such acquisition shouldnot be caught by the restrictions on the offering of foreign securities/financial instruments. Taking intoaccount this approach, the offering of options to buy shares should not be restricted where suchoptions are offered to a limited number of employees free of charge. A similar exemption is unlikely tobe available in relation to the exercise of an option relating to foreign shares, as an employee isnormally asked to pay consideration for the shares when exercising the option (i.e. asked to invest).Therefore, in order to be eligible for offering to non-qualified investors, the underlying shares are likelyto still have to comply with the requirements regarding the offering of foreign securities/financialinstruments to non-qualified investors. We note that while this approach seems reasonable to us, it isuntested and there is no guarantee that it will be shared by Russian authorities or courts.UK/1729295/03 161 September 2010
Employee Share Plans in Europe and the USARussian FederationSo far the FSFM has not issued any relevant clarifications. Once suchclarifications have been issued, the interpretation and implementation of theSecurities Market Law may change. Therefore, advice in relation to the proposedlaunch of an employee share plan in Russia should always be sought on a caseby-casebasis.One possible alternative to an international employee share option plan forRussian employees would be to use a discretionary bonus plan (with thebonuses being calculated by reference to the value of a number of shares).Shares in Russian companies and options relating to shares in RussiancompaniesThe Securities Market Law allows the offer of shares in a Russian company toemployees subject to compliance with certain regulatory and corporaterequirements.Depending on how an employee share option plan is structured, options relatingto shares in a Russian company may be categorised as "mass-issued securities"under Russian law 7 . If this is the case, their offer in Russia will be subject to thegeneral requirements and restrictions of the Russian securities marketlegislation.1.1 Regulatory issuesShares in foreign companiesAs discussed above, shares in a foreign company which are not admitted topublic placement and/or public circulation in Russia may only be offered toqualified investors in Russia and the relevant transactions should be undertakenthrough a Russian broker. Furthermore, where shares transferred to theemployees are newly issued shares, there is a requirement to register aprospectus in respect of those shares with FSFM.Options relating to shares in foreign companiesTo the extent that an option to buy shares in a foreign company is treated as a"foreign financial instrument" under the Securities Market Law, such options mayonly be offered to qualified investors in Russia.7Broadly, according to the Securities Market Law, "mass-issued securities" are securities that: (i) confercertain proprietary rights to the holder of such securities; (ii) grant the same rights within one issue ofsuch securities; and (iii) provide for the same term for enforcement of these rights, irrespective of thetime when securities were acquired.UK/1729295/03 162 September 2010
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Employee Share Plans in Europe and the USA - Sorainen

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