Employee share plans are incentive schemes designed to encourage retention and long-term interdependence between the business and its employees by enhancing business performance, engaging employees and stimulating employee commitment. They aim to align economic interests of the business and its employees and many do this by offering shares in the company.
Ownership, particularly in start-up companies, is to be encouraged especially where cashflow for salaries is limited.
What follows is an overview of employee share plan arrangements to keep in mind when you are considering to canvass your remuneration strategies in relation to your employees.
How to Provide Employees an Interest in Your Business
There are 5 ways to provide your employees with an interest in your business via a share plan arrangement:
1.1 Free Shares
You can choose to issue free shares to particular selected employees or those employees who have satisfied certain eligibility requirements, e.g. achieved KPIs set up for this purpose.
You could 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 but are exercisable after a fixed period has elapsed.
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 price when the option is exercised and the option exercise price.
1.3 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 market price. If the loan is not repaid, the business’s recourse is generally limited to the value of the equity interest.
1.4 Partly-Paid Shares
Your business can issue partly-paid shares to employees. The shares can either be zero-paid or employees can pay a small amount of the issue price of the shares upfront. Employees then pay up the shares over time, usually out of income declared on the shares.
1.5 Unit Trust
A unit trust is set up to hold shares in the business. 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 to redeem 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.
2.1 Implications under the Corporations Act
You should consider whether your employee share plan suits your business circumstances, including long term perspectives.
If your business operates as a proprietary company (as opposite to a public 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 designed 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 loose its eligibility to remain registered as a proprietary company.
In addition, a proprietary company with more than 50 members (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.
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 tax exemptions and tax deferral and their conditions need to be considered as part of your employee share plan design 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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