RUSSIA: LONG TERM INCENTIVE PLANS: IMPACT OF CHANGES TO THE RUSSIAN SECURITIES MARKET LEGISLATION - 10 July 2009

LONG TERM INCENTIVE PLANS: IMPACT OF CHANGES TO THE RUSSIAN
SECURITIES MARKET LEGISLATION

Background

Amendments to the Russian Securities Market Law, which came
into effect on May 16, 2009, may impact foreign companies granting equity
incentives to their employees in the Russian Federation
(“Russia”). Grants of foreign securities to Russian employees
under the terms of a Long Term Incentive Plan (“LTIP”) (including
stock options, restricted stock/units and employee stock purchase plans)
could be significantly impacted by the changes, which are explained in brief
below.

Historical Position

Prior to May 16, 2009, the Russian securities market
legislation restricted the circulation of foreign-issued securities (except
for the securities of international financial organizations) with regard to
public circulation in Russia. Public circulation would only be possible if
there was an international agreement between Russia or the Federal Service
for the Financial Markets (“FSFM”, the Federal executive body for
the securities market) and the appropriate body in the foreign issuer’s
country of residence. However, in practice there were no valid international
agreements with regard to public circulation of foreign-issued securities in
Russia.

Distribution of foreign securities to Russian employees under
the terms of an LTIP was unlikely to be considered as public circulation in
Russia because the securities were distributed to specific individuals who
were employees of the foreign issuer or its business in Russia, and they were
not available for public purchase. As such, many foreign companies granting
equity incentives did not register their plans with the FSFM.

The above mentioned ‘international agreement’
conditions for the circulation of foreign securities have been carried
through into the amended legislation largely unchanged. It will now be all
but impossible for foreign securities to be circulated without creating legal
implications under this law.

Summary of Changes

The May 16, 2009 amendments to the Russian securities market
legislation includes a provision that foreign financial instruments may be
admitted for circulation in Russia under two main conditions:

·         
Assignment of an
International Securities Identification Number (ISIN) and Classification
of Financial Instruments code (CFI); and

·         
The international financial
instruments must qualify as securities per the stipulations of the FSFM.

While the legislation prior to amendment referred to the
public circulation of securities, the latest version includes both
‘public circulation’ and ‘circulation’ terms. The
above conditions should apply to any circulation, i.e., not only public.

The legislation does not specify when a distribution will be
considered to be on the territory of Russia. As such, it gives no guidance as
to when a distribution from an LTIP will constitute the circulation of
foreign securities, thereby falling under the Russian regulations.

Nevertheless, granting foreign securities to Russian employees
under the terms of an LTIP would appear to fall within the literal
interpretation of 'circulation of securities' within Russia at the point of
exercise. This occurs when title transfers to the Russian employee, and
should therefore now be performed in accordance with new rules.

We believe that foreign companies with LTIPs which are
currently in place (with unexercised options outstanding) and those with
plans to implement a foreign stock-based LTIP for Russian employees should
immediately seek further advice as to how the amendments to the Russian
securities market legislation may impact their arrangements.

Our current interpretation of the changes suggests that
Russian employees may not be able to accept title of foreign securities
without breaching the letter of the revised legislation. Thus participation
by a Russian employee in an affected LTIP will either:

·         
expose the individual and
the business to risk if title is transferred; or

·         
realize no eventual benefit
if title is not transferred.

It is possible that the FSFM will issue further clarifications
regarding the application of the amended legislation to LTIPs for Russian
employees, but in the meantime we would urge our clients to consider the
potential impact that the amended legislation may have on the effectiveness
of their equity-based incentive programs.

ACTION

Companies
should:

·         
Assess their future grant
practices in light of the updates to Russian securities legislation.

·         
Review their outstanding
equity incentives to determine how best to settle these awards.

People to Contact

For assistance in this
matter or any other issue related to the operation of your global rewards
plans, please contact your local Deloitte global rewards consulting services
advisor or email us at: globalequity@deloitte.com and a global rewards consultant will contact you.

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