gannons iod in association with esop centre implementing employee share plans without racking up...

GANNONS

IOD in Association with ESOP Centre

Implementing Employee Share Plans

Without Racking up Legal Costs

This session covers

• Background information

• Implementation checklist

• Common pitfalls

Collation of basic ‘core’ details

• Company/group• Employee(s) / non executives / consultants• Articles • Share capital• Constitution of the company & powers

Current shareholders

• What are the % of current holdings?

• Informal promises?

• Dilution

Exercise and take up of shares

• What if the employee leaves/is dismissed/dies?o Transfer?o Buy back?o Price?

• Powers of attorney

Implementation

Division of share capital• Will this be necessary to:-

o Accommodate desired percentage split between current/future shareholders

o Make the award look more appealing

New class of shares?

Authority to allot shares?

• Authorityo Articleso Members ordinary resolutiono Automatic under the Companies Act

• Is the authority current?

• Maximum number of shares that can be allotted?

Share valuation

• HMRC valuation

• Commercial valuation

• What basis are you usingo Commercial valueo Minority/majority valuationso Actual market valueo Tax market value

Paying for shares

• Exit – usually out of proceeds of sale

• Entrepreneurs’ relief – tax advantages but will require funding

• Acquisition in other circumstanceso Vote a bonus? o Nil paid shares o £10,000 loans to directors exempt from shareholder approval

• Financial assistance abolished for private companies (but not for plcs)

Documentation - unavoidable

• Award documentation

• Subscription letters

• Employee loan agreements

• Corporate documentso Articles/shareholder’s agreemento Resolutions/power of attorney

More documentation

• Elections required to preserve CGT treatment

• NIC joint election – form to be approved by HMRC in advance

• Notification to HMRC

• Notice of for shareholder approval

Don’t overlook

• Investment advice – prohibited

• Discretion to award must be used fairly

• Supporting evidence of justification

• Clear communication – dilution in particular

The board meeting

• Can the director vote?

• Directors duties – reasoned approval

• Duty to promote the success of the company for the benefit of its members:-o Long term consequenceso Interests of the company’s employeeso The need to act fairly at between members

Resolutions that may be required

• Increase in share capital

• Division of share capital

• Extension of authority to allot

• Consent to dis-apply pre emption provisions

• Revision to articles

• Shareholder approvals

Resolutions – private companies

• Alternative procedureso Written resolution – will be the most usualo Resolution at a meeting

• Filings required at Companies House

Final steps

• Execution of documentso Date of grant = execution of the option by the

companyo New rules for execution where 1 director

• Companies House filings (note – penalties for late filing)o Is a statement of capital required?

Traps and pitfalls – in no particular order

• Employee holding shares – what will this mean?

• Have you got your corporate history correct?

• Did you get authority and deal with allotment issues?

• Have you considered the tax issues – notoriously complicated area

Traps and pitfalls

• If employees are to hold shareso Unintended consequences – giving away more than

intendedo Articles and shareholder’s agreement not fit for the job

• Timing

• HMRC reporting – missing the deadline and facing increased tax liabilities

ANY QUESTIONS?

MORE INFORMATION ON OUR WEBSITE

WWW.GANNONS.CO.UK