Helping employees max the benefit from their share awards

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Directors and employees often ask us to look over the share incentive offers they receive from their employers. If it is planned that the share award will form a substantial proportion of overall remuneration they expect to receive, then it is helpful to know what exactly they will receive. We routinely improve the position of employees – especially around the provisions applied in the event that their employment is terminated before the business is sold.

In all cases what we are looking to secure via the issue of equity incentives is to take advantage of the more generous capital gains tax regime (compared with the rates of income tax and national insurance) when the shares are sold.

We have recently advised employees in the following cases on their share awards:

Gift of shares

Gannons negotiated a gift of shares and an unapproved options grant for a confectionery business director. We negotiated less onerous leaver provisions. As a result, his options were vested in tranches after he completed a certain number of years of service.

Corporate transaction

We ensured a specialist technology company’s employees received similar share option rights after a TUPE transfer.

EMI Options

EMI options generally work well for incentivising and keeping valued employees on. EMI options are affordable for employees and offer the company the flexibility to design what rights would be attached to the EMI shares once exercised.  We took our client through the exercise of checking that the employer and the employee met the qualifying conditions for EMI.  The conclusion reached was that the EMI qualifying conditions were met.

Loss of an option

Gannons recouped options for an employee who lost his share option because of his company’s negligence. In this case, the promise of an option was not followed up with the paperwork. The business was then sold, and the buyer of the business tried to deny that the option existed.

Amending the terms of an EMI option

We dealt with issues arising when an employer attempted to change the terms of an EMI option. The change would have disqualified the EMI option from tax approved status. Following our advice, the employer changed his mind.

Advising a director offered EMI options and growth shares

Our client was offered a combination of EMI options and growth shares and with a company sale planned within three years this meant a significant portion of the client remuneration would come from participating in the future growth of the company.

We reviewed the equity incentive documents including the articles and shareholders agreement.  This led us to challenge the drafting of the requirements to be satisfied under the growth shares.  We looked at the good and bad leaver provisions which were very tilted in the employers favour.  Concerns were raised over the provisions for valuing the shares in the event our client left employment before the sale of the business.

Outcome

We then set to improve our client’s position mainly around:

  • Negotiating less onerous leaver provisions – being a ‘good leaver’ or a ‘bad leaver’ will have a dramatic effect on the value attached to the shares (market value or deferred);
  • Vesting provisions; and
  • Who determines the market value of the shares and whether such valuation can be challenged.
  • With some help from us our client went onto agree much more favourable terms which left him feeling more in control.

International executive

We advised an employee, who had been granted shares before emigrating abroad to a different country, on the tax implications arising on the exercising of his options in his new country of residence.