Partner Mark Williams provides an overview of the issues private companies need to consider when implementing or operating an employee share plan.
Why should private companies consider a share plan?
Employee share plans are not only used to recruit, retain and motivate employees. They are also used to help align the interests of employees, particularly senior executives, with those of shareholders. Some types of share scheme attract tax and national insurance contributions (NICs) advantages and can be used to make payroll savings.
The advantages of offering a share plan can include:
- Helping to attract and retain high-calibre staff.
- Providing incentives to meet key business and financial targets.
- Achieving tax and NICs savings.
- Managing succession planning, by gradually transferring ownership to employees, rather than to new outside shareholders, if wished. For example, an employee-ownership trust can be a tax-efficient way of disposing of shares to a collective vehicle for employees.
- Conserving cash. There may be less pressure on salaries if a share plan is offered.
Private companies often (wrongly) assume that there are too many obstacles to operate share plans
Despite the fact that tax-advantaged schemes are available to private companies, many assume that it is difficult for them to operate share plans. Although there can be difficulties, with planning, these can be overcome.
Common areas of concern about employee share plans and private companies include:
- The legal requirements for tax-advantaged share plans can cause difficulties for some private companies, depending on their shareholding structure. These issues can usually be overcome.
- The original owners wish to keep control and ownership. This concern can be addressed, for example, by using non-voting shares for the share plan or by ensuring that the number of voting shares issued under a share plan will not cause the loss of voting control.
- Limited or no market for shares. This can make a share plan unattractive to employees. The two main solutions are to tie share awards to an exit event (so that employees can only exercise options or receive shares when the company is sold or its shares are listed) or to use an employee benefit trust (EBT) to buy shares from employees, thereby creating an internal market.
- Shareholders’ agreements may prevent or limit the use of shares for employee share schemes, or restrict the disposal of shares. If this is the case, a specific exemption for employee share plans may be agreed with the consent of all shareholders.
- Valuation issues.
- Confidentiality concerns.
- Tax issues, such as the potential application of disguised remuneration legislation.
If there is still a reluctance to offer shares to employees, employees can be given cash-based incentives linked to the value of the company. These are known as phantom share plans.
Our specialist solicitors at Gaby Hardwicke have vast experience in advising on, implementing and drafting the documentation required in connection with a variety of different share schemes including Enterprise Management Incentive Schemes, Employee Ownership Trusts and Growth Share Schemes.
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