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2 October 2018
Awarding shares for employees is one of our leading specialist areas. We look at implementation, operation and providing an incentive for the employee when the shares are sold. We can work with employers or personally with directors and employees who ask us to review.
We are always happy to give you a steer and a cost estimation. Please do call us to discuss.
Based on the types of questions we are asked and problems we solve we have set out a brief guide of core issues to think about when awarding shares or options to employees.
Awarding shares to employees is a big step which does require some forethought. The type of questions to consider include:
The choice on how much to give away rests with shareholders. We prepare share capital tables to show the shareholders the dilution under the share scheme. If employees leave usually they will lose entitlement. The shares surrendered by former employees can, if that is desired, return to the pool to provide for new awards.
There is plenty of discretion on this point and no legislative requirements.
You need to decide what happens on:
Should special provision be made for death, injury, disability or redundancy – usually these decisions are left to the directors.
There are no fixed rules. Shares can be gifted for free. Linked into this consideration is should employee enjoy inherent value accumulated pre-award? Another consideration is do you plan for a tax charge for your employees upon the award of shares?
There is a choice of newly issued which dilutes existing shareholders . Or, to avoid dilution existing shares can be used if shareholders are prepared to allow for a transfer.
For new share issues it is necessary to consider whether the directors have the requisite shareholder approvals to issue shares pursuant to the option/share awards.
If existing shares are being used it is usually necessary to consider the tax position of the transferors. Some companies link equity awards to share buy backs under which existing shares are cancelled.
A badly designed award of shares gives away more equity than intended and does not enhance shareholder value. You risk demotivating employees and driving them into the arms of competitors, if you fail to meet their expectations. The directors can expect a backlash from investors.
Known disaster areas surrounding awarding shares to employees can include:
Lack of a share capital dilution table plotting the fully diluted position if all options and share rights are taken up. The share capital dilution table helps companies to monitor the position and meet the demands of investors.
Common problems arise when the drafting of the terms of the award of shares is not clear. For example getting the performance criteria and vesting schedule can be tricky and if poorly drafted lead to unintended consequences.
Employers do sometimes failing to review the articles and shareholders’ agreement to make sure they obtain the requisite shareholder approvals. Similarly employers can overlook the various requirements under the Companies Act which have to be met when there has been an issue of shares to anyone including employees.
If the objectives are unclear it is possible to over look the bigger picture. The usual end game is what benefit should the employees receive under the award of shares if the business is sold.
There are various time limits for the reporting and payment of tax on the award of shares to employees. If the time limits are missed so can the tax benefits be lost. And, or, a charge to interest and penalties is imposed by HMRC for failure to report and or failure to pay tax on time.
Gannons implemented an EMI scheme for us. My experience of the firm is very positive. They are very responsive and friendly and I enjoyed working with them.
Gannons looked over my share scheme documentation. They were very good at answering the questions I had.