The Fundamentals of ESOPs & LTIPs for UAE Listed Companies

Many of the UAE-listed companies are actively considering or implementing either a long-term incentive plan (“LTIP”) or an employee share ownership plan (“ESOP”) in a bid to keep and retain their most valuable assets, which are their top employees.   This article seeks to reference the important rules and steps of implementation and management of the same.

The rules of law applicable to UAE onshore companies listed on the Abu Dhabi Securities Exchange (“ADX”) and the Dubai Financial Market (“DFM”) about LTIPs and ESOPs (either of them hereinafter referred to jointly as a “Scheme”) are referenced and reflected in Article (228) of the Federal Decree-Law No. (32) of 2021 on Commercial Companies (“CCL”) and Articles (30), (30 bis 1), (30 bis 2), (30 bis 3), and (30 bis 4) of the SCA Chairman Resolution No. (22/R.M) of 2016 on the Regulations for Issuing and Offering Shares of Public Joint Stock Companies (“SCA Decision”).

Conditions Of Issuing Company

As a starting point, the issuing company will need to satisfy the following conditions and requirements to be eligible to implement a Scheme:

1. the issuing company’s capital should be fully paid up, the net shareholders’ equity is not less than the paid-up capital, and the market value is not less than the nominal value of the original shares;
2. the volume of issued incentive shares per Scheme does not exceed (2.5%) of the paid-up capital;
3. the Securities and Commodities Authority (“SCA”) approves the Scheme and its terms before presenting the same to the company’s general meeting for approval. The application for the SCA’s approval should be submitted on the regulatory form prepared by the SCA and enclosed to it are all the supporting information, data, and documents. The SCA may add any requirements, conditions, or exemptions according to the requirements of the public interest; and
4. The board of directors of the issuing company submits the Scheme and its terms to the general meeting for approval by way of a special resolution which means that no less than 75% of the votes attending that general meeting should approve the Scheme to be valid.

Documentation Terms

The terms of the Scheme must include the following as minimum requirements,

1. The number of incentive shares intended to be issued and the maximum number of incentive shares included in the Scheme.
2. The Scheme period provided that the period is not less than three (3) years and not more than ten (10) years.
3. The Scheme’s estimated value is based on the number of issued incentive shares, and the average market value per share during the six months preceding the general meeting date.
4. Objective and measurable conditions and criteria to involve the employees in the Scheme.
5. The maximum limit of the entitlement of each job category of the participants in the Scheme.
6. The annual disclosure to the employees participating in the Scheme includes the number of incentive shares allocated to each employee.
7. The mechanism of calculating the incentive share issue price, without prejudice to the applicable laws and regulations including the CCL and SCA Decision.
8. The mechanism of distributing the incentive shares to the employee participating in the Scheme and the maximum number of incentive shares that can be granted to each participating employee.
9. Defining the performance objectives required to be achieved during the stated effective period of the Scheme as a condition for the entitlement of the participating employee for the incentive shares, provided that they are associated with the general performance level of the issuing company and the performance level of each employee participating in the Scheme.
10. Formation of a committee of members who are not Board members that includes specialists in human resources, financial and legal affairs. The committee should enforce the provisions and criteria of the Scheme terms and follow up on the fulfillment of the criteria of entitlement to the incentive shares by the employees. The committee has to submit its report to the board of directors after being reviewed by the company’s auditor.
11. Defining the review, control, and governance procedures, which should be taken by the issuing company to ensure the Scheme is objectively, accurately, and fairly implemented.
12. Cases of terminating or postponing the commencement or extension of the Scheme and cases and mechanisms of removing a participating employee from the Scheme.
13. The issuing company committed to regularly disclose the following information and data.

             i.  names of the committee members that manage and supervise the Scheme; and

           ii.  information about the employees participating in the Scheme who were granted (5%) or more of the total number of incentive shares. In particular, such information should include the employee’s name, position, number of incentive shares allocated to him/her during the year, the total number of incentive shares allocated thereto since the inception of the Scheme, and the total number of incentive shares allocated thereto at the end of the Scheme.

Eligible And Excluded Employees

It should be noted that the issuing company’s permanent employees who have special potential and have been employed with the issuing company for not less than 2 years are entitled to participate in the Scheme according to the conditions and criteria of participation.

An employee can participate in the Scheme under a contract concluded between the employee and the issuing company to determine the number of incentive shares, the mechanism of calculating the issue price, the date of issue, the conditions of the Scheme, and any other contractual terms that do not conflict with the Scheme conditions.

Having said this, an employee who participates in the Scheme will have the same rights and privileges that match his/her job category.  It should be noted that the employee’s right to the Scheme should neither be traded nor assigned to a third party, except in the cases of a will or inheritance.

In addition, the Rules exclude the following employees:

1. Members of the company’s board of directors.
2. Employees appointed under temporary contracts or seconded employees, or those whose retirement date falls during the Scheme term.
3. An employee whose equity, or his/her equity plus the equity of the Associated Group, amounts to (5%) or more of the issuing company’s shares which have the voting rights. “Associated Group” is defined under the SCA Decision as the natural person and his/her minor children, and the legal person who is influenced or controlled, directly or indirectly, by any of them by way of holding equity not less than 30% of its capital, or by controlling the same ratio.

Post Issuance

The issuing company may launch several Schemes subject to a minimum interval of 3 years between the Schemes and provided that the total incentive shares issued under all Schemes which were or will be issued by the issuing company do not exceed (10%) of the total paid-up capital.

The issuing company will be required as well to disclose in the notes of the annual financial statements and the government reports the data of the Scheme, including the names of each employee who received incentive shares, his/her employment period, the number of his/her incentive shares, the sum paid by the employee, the market value of the incentive shares on the due date and his/her percentage of the Scheme, as well as the total market value of the incentive shares granted to the employee in the previous schemes.

A point to note is that the SCA Decision allows the issuing company, subject to the SCA’s approval, to outsource to a specialized third party (such as the DFM, authorized custodians, or specialized consultation companies) the management of the Scheme and that such third party may assume the functions of the regulatory committee required to be formed by the issuing company for this purpose, provided that there is no relationship between such third parties or their employees on one side and the other side the members of the company’s board of directors or its senior management such as the CEO or CFO.

In all events, the activities of such third parties managing the Scheme will have to be reviewed and audited by the company’s auditor.

Amending the Scheme

The terms of the Scheme may not be amended unless a new approval is obtained from the SCA and the general meeting (by way of special resolution) and the board of directors of the issuing company are not authorized to determine or amend any of the Scheme’s terms by themselves.

How can we help?

At GLA & Co, we have partners in the UAE who have had long and wonderful experiences working with SCA.  In terms of how we can specifically help, we can assist with:

• holding the pen on the Scheme’s documents and ensuring the same is in line with the applicable laws and regulations;
• liaising with the SCA for submitting the formal application and obtaining the necessary approvals and consents;
• liaising with the ADX or the DFM for issuing the Scheme’s shares;
• preparing the paperwork and obtaining the approvals for convening the general meeting adopting the Scheme;
• drafting the necessary disclosures and general meeting invitations;
• advising the board and senior management on the onshore requirements of the Scheme and required resolutions for adopting the same; and
• providing the necessary legal advice as and when necessary

For further information, please contact Alex Saleh at alex.saleh@glaco.com or Yousef Al Amy at y.alamly@glaco.com