Employee Shareholders

Corporate lawyer Cathy Cook gives an overview of employee shareholders.

Despite the fanfare when this employee share ownership scheme was announced back in 2012 it is only recently that we have seen them being implemented. The idea was that employees would surrender specific statutory employment rights in exchange for shares in their employing company and provided that the shares had a market value of at least £2000 at issue then any growth in the value of the shares would be exempt from capital gains tax if disposed of at a value of £50,000 or less.

It was anticipated that the scheme would be principally intended for fast-growing small and medium sized companies that wanted a flexible workforce. In our experience the scheme is used as a tax efficient way to incentivise employees when it was always the intention that such employees would be shareholders.

There are a number of statutory conditions which must be satisfied in order to be classified as an employee shareholders specifically:

• The individual must be an employee of a company with a share capital and can either already be an employee or recruited in the knowledge that they are intended to be an employee shareholder;
• The Company will provide the individual with a written statement setting out the particulars of the status of the employee shareholder and of the rights which attach to their shares;
• On receipt of the written statement the individual is required to receive independent advice at the expense of the company.
• Not less than 7 days following receipt of the independent advice and in consideration of the individuals agreement to become an employee shareholder, the company issues or allots fully paid up shares which have a value on the day of issue of no less than ¬£2,000.
• The only consideration given by the individual for the shares is entering into the agreement to become an employee shareholder.

In advising on this type of scheme the main areas causing concern from a legal perspective are:

Ensuring that the only consideration given by the individual is entering into the employee shareholder agreement. If the individual is found to have given any consideration then they will not be employee shareholders and will not qualify for the tax reliefs. The legislation is not clear and areas under discussion include:

• Whether adjusting an individual's remuneration package to reflect the value of the shares being issued amounts to consideration; and
• Whether entering into a separate shareholders agreement at the time of the allotment of the shares amounts to consideration. The consensus view appears to be that any rights or obligations attaching to the shares should be reflected in the Company's articles of association to avoid any possibility of consideration.

That the statutory statement of terms includes information relating to the loss of employment rights as well as rights attaching to shares. Unless specifically caveated the advice can probably not be given solely by an employment lawyer and will need corporate advice. Even if caveated it is uncertain whether advice solely in connection with the surrender of employment rights would satisfy the legislative requirements.

Interestingly, although the employee shareholders are required to surrender specific statutory rights including the rights not be unfairly dismissed and the rights to a statutory redundancy payment it is possible for the employer to give a contractual right to the statutory employment rights that are being surrendered.

This article just provides an overview of the law in this area. You should talk to our Corporate team for a complete understanding of how it may affect your particular circumstances.

Call Cathy now on 0113 238 4042 oremail ku.oc1701790364.fcl@1701790364koocc1701790364 to arrange a call with the Corporate lawexperts at LCF Law today.