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?

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WWW.GANNONS.CO.UK