Employee share plans (also known as employee share schemes or equity schemes) are incentive schemes designed to encourage retention and long-term interdependence between a business and its employees. Such plans provide a long term incentive for the employees to stay with the business and improve its performance, engage the employees and motivate their commitment.
Employee share plans aim to align economic interests of the owners of the business and its employees by offering them shares in the company. Employees can benefit financially if their company performs well. The company can attract and retain talent it needs to grow without high salaries.
Employee share plans are of particular interest for start-up companies where financial resources to offer high salaries are limited.
What follows is an overview of how to structure your employee share plan and other considerations you make to consider in respect of an Employee Share Plan.
How to Structure Your Employee Share Plan
There are different ways to provide your employees with an interest in your business via a share plan arrangement. It can be structured in the following ways:
You can choose to issue free shares to particular key employees or those employees who have satisfied certain eligibility requirements, e.g. achieved KPIs set up for this purpose. Such shares can be issued as a performance bonus or a form of remuneration as an alternative to a salary increase.
An employee share plan can offer eligible employees ordinary shares in the company that provide a full equity interest in it. Alternatively, only preference shares that pay dividends but do not give voting rights may be offered.
You can also choose to offer selected employees options (a right to buy or sell an interest) over the shares in your business. Options are usually issued for free and are exercisable at a fixed price after certain period of time has elapsed.
Such period can be, for example, three years after the options are issued. If employees have performed well and the business value has increased, the option exercise price will be less than the then prevailing share price. By exercising the option, the employee will achieve a profit equal to the difference between the share price when the option is exercised and the option exercise price.
Fully-Paid Shares and Loans
Your business can offer loans that allow employees to purchase shares in the business. This equity interest in the business is then used to repay the loan. As an incentive, the loan is usually provided at a low or zero interest rate. In addition, the shares may be offered at a discount to the then prevailing share price. If the loan is not repaid, the business’s recourse is generally limited to the value of the equity interest.
Your business can issue partly-paid shares to employees. The shares can either be zero-paid upfront or employees can pay a small amount of the issue price of the shares upfront. Employees then pay up the shares over time through salary sacrifice over a set period or out of the dividends declared on the shares.
A unit trust can be set up to hold shares in the business allocated to the employees. Employees are issued with units in the trust, rather than shares in the business. The rights for employees are governed by the unit trust deed which allows an employee request redemption of the units after a set period has elapsed or on the termination of the employee’s employment. Redeeming units usually requires the sale of the underlying interest in the shares in the business and the distribution of the sale proceeds to the employee.
Implications under the Corporations Act
You should consider whether your employee share plan suits your business structure and circumstances, including long term objectives and plans.
For example, if your business operates as a Pty Ltd (proprietary limited) company as opposed to an Ltd (public limited) company then it must not have more than 50 non-employee shareholders. The definition of the ‘employee’ under section 113(2) of the Corporations Act 2001 (Cth) may not cover all participants of your employee share plan, which is intended to increase the number of shareholders of your company. Therefore, your employee share plan needs to avoid a situation where the number of non-employee shareholders can be increased to more than 50 and your company can unintentionally lose its eligibility to remain registered as a proprietary company.
In addition, a proprietary company with more than 50 shareholders (regardless of whether or not they are employees) is subject to the takeover provisions in Chapter 6 of the Corporations Act 2001 (Cth). Therefore, if a trade sale is a real perspective for your business you may want to avoid a situation of having more than 50 shareholders and be subject to the takeover provisions.
Specific Terms and Conditions
When introducing an employee share plan, you need to work out its specific terms and conditions in order to satisfy your business circumstances and requirements. These include employee eligibility requirements, conditions on when and how employees can acquire, sell or otherwise dispose of the shares, procedure to follow and timeline. Your employee share plan can also provide that employees can retain their share acquired under the plan as long as they remain with the company, and must sell them back if they leave.
There are a range of tax implications you need to consider if you plan to introduce an employee share plan or if you are already implementing one.
Any discount or deemed discount in relation to an option or share issued under an employee share plan is treated as assessable income of the employee. In this respect, available start-up concessions, tax deferral and tax upfront payment and their conditions need to be considered as part of your employee share plan structure and implementation.
Employment Lawyers Sydney at Pavuk Legal can provide you with a sound legal advice in respect of your Employee Share Plan appropriate to your business circumstances. We can assist you with establishing, implementing and changing your Employee Share Plan and preparing all necessary documentation.
We can provide assistance for a range of related legal matters, including: corporate and employment law advice, shareholders, partnership and joint venture agreements, transferring, buying and selling a business, lease agreements, asset protection, estate and succession planning, business management and administration, employment contracts, employee rights, unfair dismissal and confidentiality agreements, advice in regard to tax law including capital gain tax.
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