Employee Share Schemes: A Guide for Directors

ABI

Association of British Insurers.  See page 6.

accelerated vesting

Where a share option become capable of exercise earlier than normally permitted by the vesting schedule or performance conditions.

Accumulation Period

A period not exceeding 12 months during which deductions from employee salaries are accumulated towards the purchase of Partnership Shares in an Approved  Share Incentive Plan.

AAG

The Anti-Avoidance Group of HM Revenue &Customs.

AIM

The Alternative Investment Market, a public market run by the London Stock Exchange.  Its information and reporting requirements are less stringent than those for the main Exchange.  Shares traded on AIM are quoted but not listed.

allot (shares)

Where a company transfers new shares to a person, usually in return for cash (but see “scrip”).

appropriate (Approved Share Incentive Plan)

When shares are placed in trust to be held for the benefit of a named employee.

associate

For share schemes other than EMI, a relative (being a spouse, parent, child, remoter antecedent or descendant, brother or sister), partner or the trustee of any settlement of which the individual or any relative is or has been a settler or beneficiary, but excluding the trustees of discretionary employee trusts or Approved Share Incentive Plans.  Note that for EMI schemes, siblings are not associates.

associated company

A company is associated with another if either controls the other if they are both controlled by the same person(s).

bad leaver

An employee who leaves employment and is not a good leaver.

close company

Very broadly, a company under the control of five or fewer persons or any number of persons who are shareholder/directors.  However a company is (probably) not close if one of the “five or fewer” is a non-close company or if more than 35 per cent. of the equity is quoted and traded on a public market.

close period

A period prior to the company’s release of its interim or preliminary results, during which London Stock Exchange Model Code for Directors’ Dealings does not permit directors or senior managers to trade in the shares of their companies.  This period is normally 60 days, or, if shorter, the period from the relevant financial period end up to and including the time of such publication.  The ABI guidelines are more restrictive (see page 8).

control

Control is defined by section 840 ICTA 1988 as the ability to control a company’s affairs exercised by any means (either alone or with associates).  This could be achieved by control of the Board even if there is no shareholding control.  This definition is regarded as distinct from the definition of control contained in section 416 ICTA 1988 which refers specifically to rights over share capital or assets (although it also refers to control in the general sense).

connected party

In summary, the following are connected parties: the wife or husband of the individual, a relative of the wife or husband, the wife or husband of relative, the trustee of a trust settled by the individual, a commercial partner, or the wife or husband of a commercial partner.  A company is connected with another company if the same person, or persons connected with that person, has control of both companies.  A company is connected to a person if that person controls it or does so together with connected persons.  Any two or more persons are connected if they act together to secure control of a company.

CSOP Scheme

A statutory company share option scheme.  See page 64.

deferred purchase plan

A non-statutory arrangement where an employee acquires shares at fair value, but pays only a small initial deposit.  See page 51.

distributable reserves

The reserves of a company available as distribution from profit, normally representing the accumulated profits of the business less losses.

Dividend Shares (Approved Share Incentive Plan)

Employer shares that can be appropriated to an employee for whom shares are already held in trust; as an alternative to paying cash dividends.

employee-control shares

A controlling shareholding in a company held by employees or directors of that company (together with any employees or directors of subsidiaries). 

employee related securities

Securities acquired where the right or opportunity to do so has arisen by reason of employment.

employee benefit trust (“EBT”)

A trust which holds shares or other assets for the benefit of employees (and usually former employees) and their families.  Unless it is an Approved Share Incentive Plan trust, it is normally discretionary (i.e. the trustees decide who will receive benefit and when) and this prevents income tax crystallising on the initial payments into trust. 

Enterprise Management Incentive or EMI

A statutory share option scheme.  See page 57.

ESOP

Strictly “employee share ownership plan”, or any share incentive plan that provides employees with direct share ownership.  Also the name of the Share Incentive Plan (op cit) prior to October 2001.

ESOT

Employee share ownership trust – broadly, another name for an employee benefit trust..

ESSU

Employee Shares and Securities Unit – an office of HM Revenue & Customs which deals with statutory and non-statutory employee share schemes (see Contacts page 127).

Financial Reporting Council

The umbrella body for the Accounting Standards Board, the Auditing Practices Board, the Professional Oversight Board for Accountancy, the Financial Reporting Review Panel and the Accountancy Investigation and Discipline Board.

Free Shares (Approved Share Incentive Plan)

Employer shares appropriated under the Plan in trust for an employee free of charge to the employee.

good leaver

In relation to an Approved Share Incentive Plan or SAYE Option Scheme, an employee who leaves due to illness, injury, disability, redundancy (as defined in the Employment Rights Act 1996), retirement, death or transfer of employment (to which the Transfer of Undertaking (Protection of Employment) regulations 1981 apply).  Otherwise, defined at the employer’s discretion.

Holding Period

In an Approved Share Incentive Plan, a period of normally three years (up to five years at employer’s discretion) during which Free, Matching or Dividend Shares cannot be withdrawn from the Plan trust.

ITEPA

Income Tax (Earnings and Pensions) Act 2003.

listed

In the context of the Taxes Acts this normally means listed on an exchange “recognised” by HMRC.  These include the London Stock Exchange, most of the national bourses of the developed countries, and NASDAQ but not the UK’s Alternative Investment Market (“AIM”).

Listing Authority

The UK Listing Authority is a division of the Financial Services Authority (FSA) and is responsible for regulating and approving applications for admission to the official list of the London Stock Exchange. 

market value

If the shares are listed, an average of mid-market prices.  If the shares are quoted but not listed, the market value may need to be adjusted to allow for distortions in the quoted price.  Unquoted shares must be valued by a process of analysis (see page 90).

Matching Shares (Approved Share Incentive Plan)

Employer shares that can be appropriated in trust for an employee free of charge when the employee purchases Partnership Shares.

NICs

National insurance contributions. “Primary” NICs are those paid by the employee; “secondary” NICs are paid by the employer.

nominal value

The face value of a share.  This is usually a nominal amount such as £1 or 1p.  It bears no relation to the market value of the share or the amount paid up on it.

ordinary resolution

A shareholder resolution requiring agreement by holders of a simple majority of the issued share capital.

ordinary shares

Shares that confer rights to the income and or capital of a company, other than shares which have a right to receive a fixed income (“preference shares”).

participator

Broadly, any person who has or who is entitled to acquire, directly or indirectly or with associates any benefit from a company in relation to its share capital, voting rights, profits or debt obligations. 

Partnership Shares (Approved Share Incentive Plan)

Employer shares that an employee is permitted to buy from gross income under the Plan.

PAYE

Pay As You Earn (income tax).

phantom options

The employer agrees to make a cash payment to an employee, conditional on or related to movements in the value of company shares.

pre-emption rights

Rights of first refusal of existing shareholders when new shares become available for sale and/or when existing shares are to be transferred.

preference share

Normally, a security with a right to a fixed dividend from the profits of a business, paid in priority to the dividends on ordinary shares.  The dividend rights can be cumulative, so that any unpaid amounts are carried forward.  Preference shares cannot be used for statutory employee share schemes.

Profit Sharing Scheme

A statutory scheme: employees could receive free shares or purchase shares in the employer.  No longer available.

ratchet

An investment structure where the rights attaching to some or all of the company’s shares become more valuable if the company achieves preset performance targets, or vice versa.  For example, the value of equity held by management may be reduced by causing part of their equity to convert into worthless deferred shares; or increased if part of the equity held by venture capital backers converts into worthless shares. 

readily convertible asset (definition applied to a share for tax purposes)

A share is a readily convertible asset if it can be converted to cash through sale on a public market, or to an employee trust or by another means (e.g. to an acquiror if the company is being sold), or if conversion arrangements are likely to come into existence (e.g. a firm plan to float).  Shares are also deemed readily convertible if they are not corporation tax deductible.

recognised stock exchange

A stock exchange included on a list of recognised exchanges published from time to time by HM Revenue & Customs and available on its website.  Most significant national exchanges are included.  NASDAQ is included but the UK’s AIM market is not included.

restricted shares

Shares which have restricted rights, for example a provision for forfeiture if loyalty or performance targets are not met, or a restriction on the holder’s ability to sell.

retirement age

For statutory schemes, retirement age can be set at between 60 and 75 years, at the discretion of the employer.

Savings Related (or SAYE) Option Scheme

A statutory scheme where the cash to exercise a share option is accumulated through a save-as-you-earn savings scheme.  See page 47.

scrip or bonus (issue of shares)

An allotment of free new shares to existing shareholders in proportion to current holdings.  Since by law shares cannot be allotted for no consideration, they must be paid up first by the company. 

share appreciation rights

Where the profit on the exercise of a share option is satisfied by the issue of shares.  This requires fewer shares than those needed for full exercise of a conventional option. 

Share Incentive Plan (“SIP”)

A statutory all-employee share scheme under which employees are appropriated shares in trust, and/or have the opportunity to purchase shares.  Known as an ESOP prior to October 2001.  See page 39.

share option

The right (but not the obligation) to acquire a share, usually at a future date or dates, at a price or on terms agreed at the time the option is granted.  A nil cost option is the right to acquire the shares for no consideration.

similar terms

The requirement that awards can be varied from one employee to another only in relation to certain specified variables (for SIP see page 42 and SAYE page 51).

special resolution

A shareholder resolution requiring agreement by holders of at least 75 per cent. of the issued share capital (can also be passed as a written resolution.  Required for important decisions such as changes to the share capital or articles of association.

statutory and non-statutory (employee share schemes)

Statutory share schemes offer tax advantages laid down in statute but are subject to limits and regulations.  Non-statutory schemes have no specific tax advantages but their terms and the levels of award are not limited by legislation.

TCGA 1992

The Taxation of Capital Gains Tax Act 1992.

treasury shares

Shares held by a company in itself.  See page 71.

UITF

Urgent Issues Task Force (a committee of the UK Accounting Standards Board).

“under water” (of a share option)

When the exercise price of a share option is higher than the value of the underlying share.

vested

When a right to acquire shares is capable of being exercised (usually applied to share options).  See also accelerated vesting.

written resolution

A resolution signed by all the shareholders entitled to attend and vote at general meetings of the company.  No meeting need be held, different copies can be signed by different shareholders and the resolution has effect from the date of last signature.