Traps and loopholes of staff share purchase plans
As with businesses all across the industrial world, employers in Poland continue to search for non-cash incentives to offer their valuable employees. Although employers can choose from a range of incentives, the employee share purchase plan one of the most common forms of incentive programs has not yet found a firm grounding. Indigenous Polish firms have not suffered from a lack of options to maintain employee loyalty, but the situation can be trickier in local subsidiaries of multinational enterprises.
Every now and then a manager of such a subsidiary comes to me with a good news/bad news dilemma. The good news is that the parent company is establishing an employee share purchase plan, giving all eligible employees an opportunity to purchase stock in the parent company on favorable terms. Let's say that the stock is listed on the New York Stock Exchange (NYSE). The bad news? The manager is to implement the program in Poland. He's read the act on public trading in securities and related regulations (the Act) and can't see how it would be possible to offer Polish employees U.S. securities.
The first question is how many employees are to participate in the share purchase plan. If not more than 300, your task just became a lot easier. According to the Act, with some specific exemptions, offering securities to more than 300 persons or to an unspecified number of persons constitutes public trading in those securities. And public trading in securities is not allowed unless the securities are admitted to public trading by the Securities and Stock Exchange Commission (KPWiG). If the number of employees does not exceed 300 and you do not offer the shares publicly (within the meaning of the Act), you may proceed without any worry about Polish securities law problems.
If your business is so healthy that you need to include more than 300 employees in the share purchase plan, we need to roll up our sleeves. Neither current Polish law or business practice offers clues to this riddle.
The issue here is that the parent company shares will be treated as securities under Polish law. According to the KPWiG, if a financial instrument is classified as a security in the country of its issuance, it will also be deemed a security under Polish law when offered in Poland. So if more than 300 employees of the subsidiary were to receive the right to acquire parent company shares, we would have a public offering, and Polish law would require that these shares be admitted to public trading in Poland.
One answer would be to seek the admission of parent company shares to public trading in Poland. Unfortunately, the law does not indicate how shares quoted on a foreign exchange may be admitted to public trading and traded in Poland. An additional problem stems from a general rule that requires any securities that are going to be publicly traded in Poland to first be deposited with the National Securities Deposit (KDPW). If deposited, some of these shares would be "blocked" in the Polish depository system. Yet another issue is the potential difference in price on different exchanges. No guarantee exists that shares listed on the Warsaw Stock Exchange (WSE) would have similar prices as these quoted on the NYSE. Because of the smaller free float on the WSE, it is likely that locally traded shares would be subject to greater price fluctuations.
The only remedy for these problems seems to be the issuance of Polish Depository Receipts (PDRs). In general, depository receipts are used to allow investors to invest in the securities of a foreign company through a local intermediary. In our example, a Polish depository such as a brokerage house or a bank would buy the parent company shares, deposit them in a special account and issue depository receipts evidencing the deposited shares to the chosen employees. PDRs give their owner the same rights as direct shareholders rights, except that these are exercised via the depository. Like other securities, PDRs are fully negotiable. They may be bought and sold on an existing or specially created market, and a holder of a PDR may demand its redemption in exchange for the underlying shares and sell these shares on the NYSE. Thus the PDR's price is to a greater extent tied to the price of the NYSE-listed shares.
But offering PDRs is not a simple task. The parent company would have to enter into agreements with all the entities involved, starting with the depository; prepare an issuance prospectus; apply to the KPWiG to admit the PDRs to public trading; and enter into agreements with entities providing a forum to trade the PDRs, such as the WSE, or a brokerage house. In addition, no PDRs have been issued to date, so we would have do a fair amount of work to turn theoretical law statements into reality and work out details with the KPWiG.
Even if you are not deterred by the amount of hard work involved, there is an additional hurdle that has kept PDRs absent from the Polish securities landscape. According to the law, the issuer (the depository) and the lead manager are liable for any and all damage arising from legal defects in securities due to their own fault or, most importantly, the fault of individuals for whom they are responsible (in other words, the parent company). The depository and lead manager are also liable for any and all damage arising from the release of false information or the concealment of necessary information. It is no wonder that no one has issued PDRs to date. No sane bank or brokerage house would be willing to assume such a wide scope of responsibility for the potential sins of its customer.
Am I suggesting that you give up? No just that you wait. Parliament is considering a bill, which if enacted, would make most of this discussion nothing more than a historical footnote. One of the proposed amendments to the Act would no longer treat offers of foreign parent company shares to the employees of a Polish subsidiary as a public offering. Thus, this amendment would allow for unrestricted distribution of parent company shares under an employee share purchase plan. The amendment may come into force as early as Jan. 1, 2001. In this case, time is on our side.
