Case Study B: A Quoted Public Limited Company

Market Services Plc is a company that is quoted on The London Stock Exchange and The New York Stock Exchange and as a multi-national company provides marketing services to businesses across thirty countries. The company had developed through ad hoc acquisition and as a consequence the directors wished to introduce some form of all-employee scheme that had the capacity to unite the whole international workforce under the incentive of share growth.

The group had an inspirational leader in the office of chief executive who was supported by a high calibre chairman who also required an incentive that was linked to shares. However, the company had a plethora of executive share option schemes in place and had, therefore, virtually exhausted its headroom under the institutional investor guidelines on new issue shares. The company needed advice, therefore, on how to service any new schemes with shares.

The operation worldwide had separate country boards and the main link to head office in London was through the local finance directors. There was a clear requirement for local advice on scheme implementation and an equally clear requirement for local communications for the employee populations. Although the stated language of the company worldwide was English there was a multiplicity of languages spoken across the world group and concern, therefore, particularly in the Far East that the detail of any scheme that was introduced may not be fully understood.

The company had a history of high quality in the services that it provided to its clients and a pedigree of outstanding success as a business. The chief executive had set a three year target for growth and profitability and communicated freely and regularly with the employees across the world through corporate e-mail messages and through regular visits to local offices.

Once the scheme had been introduced, the company some years later was acquired by a foreign company that was prepared to see the scheme continue throughout the natural term that had been agreed for the scheme at the original launch. Unless the optionholder wanted to take the cash exit offer from the scheme the option was converted into a new option over shares in the acquiring company. The option price and the number of shares was redefined on the basis of the share-for-share exchange ratio offered by the acquiring company on takeover.

The questions that the company directors asked to be addressed were as follows:

What share scheme(s) would be appropriate for the company?

The company required a scheme that could unify the world group around a common cause and focus employees on the achievement of the three year plan. This was a key corporate objective. The choice of scheme was influenced to a large degree by the extent to which the scheme could be easily and readily exported to other countries without losing its essential features. The company settled on ShareSave as a tried and tested structure in the U.K. which it considered to be compatible or at least not incompatible with the cultures to which the group companies were exposed. It gave to the scheme its own internal brand name.

Would the scheme structure vary around the world?

The company was intent initially on offering a 20% discount to all employees around the world group. However, the U.S. advisers explained that for accounting reasons in the U.S.A. the maximum discount offered there should not exceed 15%. The directors resolved, therefore, to offer 15% universally in order to ensure consistency throughout the group. In essence the U.K. model was exported with whatever tax exposure prevailed in any country with the exception that if there was a tax exposure at the date of grant then the scheme structure would be amended accordingly.

How would shares be made available for the scheme?

Given that the investor institutional headroom was limited the company established an employee share trust offshore in Jersey to purchase existing shares through the stock exchange. A further motivation to service the scheme with existing shares was to avoid the need to secure shareholder approval in general meeting which would be required for new issue shares. Careful financial modeling was given to the decision on the funding of the trust and eventually it was decided to fund the trust piecemeal over time. The early funding that coincided with the date of grant allowed a hedge on the growth of the share price while the deferred funding enabled the company to allocate the cash on an opportunity cost basis to capital projects that were anticipated to produce a higher financial return to the company.

What share scheme(s) would be appropriate for the chairman?

The chairman was offered a straightforward phantom arrangement without, surprisingly, any linkage to performance conditions. The growth in the share price was considered to be an adequate incentive. The same employee share trust was used to purchase shares specifically for hedging purposes. On exercise the trust sold the shares and distributed the cash directly to the chairman.

How would the employee communications operate around the world?

The link person in each country for the distribution of documents and the transfer of information both ways was identified as the local finance director. This approach used the communication channels that existed for document distribution and information flow in relation to all corporate matters. All employee communication documents were written in English. However, where necessary the local finance director provided a verbal explanation to employees in the local language.

Do the savings arrangements have to differ around the world?

Wherever possible it was decided that the savings would be in sterling which was the currency of the option price. However, in most countries this was not considered practical so the employees in those countries saved through a monthly local currency contribution that was fixed at the outset of the arrangement on the basis of the exchange rate at the date of grant. When the employees came to exercise their options they were allowed to make up any deficiency arising on the exchange of their local funds into sterling. This was done through an additional top-up contribution. Any surplus on exchange at exercise was paid back to the employees in cash as a return of contributions.

Will different securities laws and exchange controls complicate matters?

The employees in the countries of the Far East - China, Malaysia, Thailand and Vietnam - and also India were offered a phantom arrangement which was given the far more attractive name of share appreciation rights. Under this arrangement the employees were required to save through monthly contributions in a local savings account and then at the date of exercise provide evidence of that saving to qualify for a company payment from the employee share trust. The payment was based on the calculation of multiplying the increase in the share price by a notional number of shares that had been calculated at the outset by dividing for each individual the option price into the total expected savings contributions. In this way the phantom arrangement mirrored the real savings-related share option arrangements that operated in the other countries.