Employee Share Incentives

Recruiting and retaining key employees is challenging in competitive sectors where employers are chasing a finite supply of highly qualified and sought-after individuals. Share Options and Employee Incentives can provide a differentiator for employers and Geldards can assist with the drafting and implementing a wide range of these arrangements.

Share options are a right to buy shares at today’s value with the right to be exercised at some point in the future. The exercise of the options can be linked to a period of time and/or the satisfaction of performance conditions (to ensure that the company has increased in value and the option holder has made a positive impact on the company’s performance). The granting of options should not be seen as the current owners giving something away as the optionholders will have to pay for the shares. The options are a way of sharing the future growth in value of the company.

For company owners worried about having employees as minority shareholders and interfering in the control of the company, the exercise of the options can be linked to a sale of the company so that the options are exercised in conjunction with the sale. Accordingly, the employees will only own the shares for a very short period of time

Geldards can advise on:

• the wide range of share option arrangements including the Enterprise Management Incentives (EMI) scheme and the Company Share Option Plan (CSOP), including ensuring that your company documentation (e.g. articles of association) work with the share option documents;
• all employee share option schemes such as the Share Incentive Plan and the Share Save scheme;
• developing performance criteria that must be satisfied before the options may be exercised with the potential to link exercise of the options to a sale or exit event;
• considering the ability of “good leavers” to exercise the options on cessation of employment or the operation of an “in it to win it” attitude so no leavers can exercise or retain the options;
• the tax treatment of the various share option schemes to ensure that the employees benefit from the full tax reliefs and rates that can apply to share options.

Where a company needs to warehouse shares or purchase shares from departing shareholders, we can assist by advising on the setting up of employee benefit trusts to act as a buyer of shares and a method of creating an internal market for shares.

When “tax-approved” share option schemes do not meet your requirements, we can advise on unapproved arrangements including longer-term incentive plans (LTIPs), phantom share option schemes and cash bonus schemes which can provide high-value rewards in the appropriate circumstances. Geldards also advise on the issue of growth shares to create a growth in value of the shares that will be subject to capital gains tax rather than income tax.

We work closely with your accountants to ensure that appropriate share valuations are prepared and agreed upon with HMRC and to ensure that all necessary returns regarding the share options are filed with the tax authorities.

A key part of the work is to ensure that share options do not hold up a sale to a third party and prevent an option holder from holding the majority shareholder to ransom. Correctly drafted articles of association are essential to ensure that option holders can be forced to sell their shares in conjunction with the exercise of the option by including “drag along” provisions. The option paperwork should also ensure that appropriate deductions for tax liabilities can be made from the share sale proceeds, including income tax, National Insurance Contributions and the exercise price for the shares.

Why choose Geldards?

Geldards has an established track record on advising companies on the adoption of share option schemes and the award of share options, particularly EMI options for small and medium-sized businesses. Our Corporate and Tax teams work together to ensure that the share option arrangements are not adopted in isolation and that the articles of association are drafted to provide the share rights for the option holder and provide the correct level of protection for the owners of the company. Careful drafting is particularly important when issuing growth shares to key employees.