WPP plc

Consultation on the review of the Prospectus Directive (Directive 2003/71/EC)

We have set out below our comments on paragraph 3.3 of the consultation document, relating to Article 4 – exemptions for employee share schemes.

Context for WPP’s response

By way of context for our comments on the proposals, WPP plc (WPP) is a FTSE 100 company listed on the London Stock Exchange. The group of which WPP is the holding company operates in over 100 countries around the world and employs over 100,000 people. Within the EU, WPP has operations in 22 EU countries employing significant numbers of individuals in each of those countries. WPP’s philosophy is to develop a stronger shared ownership culture across its workforce and it grants share incentive awards to a large proportion of its workforce as part of its efforts to encourage and support that ownership culture.

As a company listed on the London Stock Exchange, WPP benefits from the share scheme exemption under the Prospectus Directive. WPP is, therefore, able to provide an information document for participants in those countries in which there is not a separate complete exemption from the requirement to provide supporting information.

Summary of WPP’s response

We welcome the proposals to reduce the burden of disclosure on companies that are unable to qualify for the employee share scheme exemption granted by Article 4 (1)(e) of the Prospectus Directive, because they do not have securities admitted to trading on a regulated market. The proposals seem to be consistent with the aims of the simplification and administrative burden reduction initiative.

The proposals are combined with suggested new guidance from CESR in relation to what information should be included where the exemption from producing a full prospectus is available. The proposed changes to Article 4 of the Prospectus Directive when combined with the level of disclosure suggested by the CESR would significantly increase the costs to WPP of granting share incentives to employees in EU countries in which there is not an alternative exemption from the requirement to provide supporting information when operating employee share schemes.

This seems to us to be contrary to the intentions of the simplification and administrative burden reduction initiative. For companies like WPP the proposals will, if implemented, increase the costs and administrative requirements of granting share based employee incentives without creating any benefit for the participants.

Impact of the proposals

The current wording of Article 4 (1)(e) allows a company “which has securities already admitted to trading on a regulated market” to offer securities to employees provided that the issuer makes available a document containing information about the securities and the reasons for and details of the offer (the “Information Document”).

There have been significant differences in the way that the various MemberStates and their securities laws regulators have interpreted this and related provisions. However, there are a significant number of Member States where the use of Information Documents is essential to the operation of employee share schemes where there are more than 100 participants. This affects WPP in at least 6 countries in the EU.

It is proposed that Article 4 (1)(e) is amended by removal of the words in italics above. As noted above the key issue on which we wish to make representations is the combination of the changes proposed to the Prospectus Directive and the new guidance published by the CESR. The short-form prospectus proposed by CESR imposes a significantly more onerous burden on companies than the disclosures currently required by the Information Document. The extra requirements relate not only to the amount and type of information provided, but are also likely to result in a need to update some of the disclosures in the short-form prospectus on a regular basis (for example financial information, risk factors, working capital statement, capitalisation and indebtedness). In addition, the short-form prospectus will need to be approved by the competent authority.

This means that:

  • the cost of producing and maintaining such a short-form prospectus would be greatly in excess of the very modest costs currently incurred on producing and maintaining Information Documents; and
  • the administrative burden will be meaningfully increased due to the need to obtain the approval of the competent authority.

Companies such as WPP that wish to offer shares to more than 100 participants in an affected EU jurisdiction will have to issue the short-form prospectus if the suggested change is made. This burden will fall on WPP, as a company offering both broad-based share incentive schemes and with a large number of managers participating in more targeted plans. We do not consider it likely that the employees to whom WPP’s broad based schemes are offered will obtain any greater benefit from (or indeed be as likely to read) the short-form prospectus than from an Information Document, and we are also extremely doubtful whether such a document could fulfil any useful purpose for managers.

In our view, the extra administration and costs (which would be at least annual and sometimes bi-annual for WPP) involved in producing the short-form prospectus rather than the Information Document would be a completely unnecessary burden with no benefit to the share scheme participants. Indeed, at the extreme, this may dissuade WPP from offering share participation to some of the employees simply because they happen to be located in a jurisdiction affected by these proposals. This means that the change is likely to adversely affect the very people whom the disclosure requirements are intended to benefit and protect.

This proposal is particularly worrying in the current economic climate, where companies are turning to shares, rather than cash, to provide motivational awards to their employees. Indeed, from a corporate governance perspective, there is public and governmental pressure to move away from cash-based remuneration in certain circumstances in favour of granting awards over shares, and it is important not to place unnecessary barriers in the way of this aim.

Suggested amendment to the proposals

We propose that in order to achieve the desired effect of reducing the burden on companies that do not qualify for the employee share scheme exemption, without increasing the burden on companies that do, Article 4(1)(e) is amended to provide, in addition to the existing wording, that only companies that do not have securities already admitted to trading on a regulated market need to produce a short-form prospectus rather than the usual long form; companies with securities admitted to trading on a regulated market still only need to produce the Information Documents.

If you need any further information on any of the issues referred to in this submission, please do not hesitate to contact Andrea Harris, Group General Counsel, WPP 2005 Limited, .

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