Losing control, and other shareholder concerns
Shareholders can often be understandably nervous about involving employees as shareholders in the business, especially when a company is thinking about an all employee share plan, such as a Share Incentive Plan (SIP). The most frequent concerns we hear are about losing control of the business, or the extent to which existing shareholders’ interest will be diluted.
In fact, these worries can usually be easily dealt with at the outset when the plan is designed. For example:
Use non-voting shares
If you wish, you can use non-voting shares in a SIP, so the original shareholders can keep control of the company.
Limit the amount of equity
It is up to the shareholders to decide when awards are made under the plan and to what extent, so you can decide on the percentage of equity you wish to use (or consider the amount of “investment” you seek from employees) before any offer is made. For example, you could choose to make a one-off award of Partnership Shares to employees, which could result in the trustee holding equity for the employees up to a certain value without ever going over a desired percentage and in particular over 25% which would permit the blocking of a special resolution.
Remember the role of the trustee
The shares in a SIP are held in a trust on behalf of the employees and will not usually be transferred out to employees until at least five years have passed. Although the SIP trustees must act in the best interests of the beneficiaries (i.e. the employees), it is unlikely that the SIP trustees will vote their shares in a manner completely at odds with the interests of the shareholders and the company.
Deal with leavers
Free or Matching Shares awarded under a SIP to an employee can be usually be forfeited if the employee ceases employment within 3 years of the date of an award (unless the employee leaves for reasons such as disability, death, retirement or redundancy). Partnership Shares cannot be forfeited – because the employee has actually paid for them. However, if an employee shareholder leaves the company, it is possible to ensure (under the company’s articles of association) that she must sell her shares back to the SIP trustee if she ceases employment.
If you want employees to become shareholders in the company, using a SIP is supremely tax efficient and can help save the company significant amounts of NICs. But it need not involve losing control of the business. As long as there is a clear idea of what protections shareholders seek, and the limits they are prepared to accept, it is usually possible to design the SIP in such a way as to satisfy those concerns.
For more information on any of the content covered in this article, please contact a member of the RM2 team directly on 020 8949 5522.