Chamber of Horrors
Here at RM2 we felt that we should warn you as to how some companies are getting it so wrong with their employee share schemes, despite having 'Professional Advice'.
Whilst it is always advisable to seek professional advice, be warned that when it comes to share schemes some very big names are making some very big mistakes!
This article has been prepared as unfortunately more and more of our client base is made up of companies who have come to us once their existing share scheme has gone wrong. We can run a review of companies existing schemes and if we find major design flaws we can unravel and re-design the plans.
Most common mistakes made
1. Failing to amend or add appropriate transfer provisions to the articles of association. This oversight effectively means that companies are allowing employees to become shareholders but have no mechanism for clawing the shares back even when employee departs. This epic oversight can result in individuals leaving the company they have shares in (sometimes with high levels of equity) and perhaps moving abroad or becoming uncontactable. This obviously can lead to substantial problems come sale time!
2. Implementing a scheme for which the company does not qualify. For example we have seen EMI schemes implemented when in fact the company is not qualified for the scheme. Unfortunately simply calling a scheme an Enterprise Management Incentive (EMI) does not make it one. The result is that the scheme then operates as an unapproved scheme and placing participants in the income tax rather than capital gains tax regime.
3. Global plans can be tricky and each country has different tax implications. These need to be checked before granting options as in some countries you are taxed on the grant of an option and not on exercise. It is also worth noting that a UK approved plan cannot be used in other countries. The only caveat to this is where the individual is only in another country for the time being but will be back in the UK to exercise their options.
4. Administration mistakes are also numerous and can prove to be costly particularly to the participant if the scheme does not qualify for Capital Gains Tax (CGT) treatment but instead falls into income tax! Once the paperwork is signed the scheme is not always implemented. For example a grant of EMI options needs to be registered with 92 days of the grant to be a valid option. All schemes also require annual reporting.
5. Advising a company that a simple bonus scheme would be more appropriate than a share option scheme. Quite simply, without exploring the other options, this is lazy advice. A bonus scheme may be the simplest scheme but will rarely ever be the most tax advantageous method. In almost all cases the longer you delay implementing an employee share scheme the lower the potential for gain for the participants.
6. Not having an appropriate share capital to offer equity/options is a clear oversight. We have come across cases where people are offered percentages of a share, an impressive offer of the impossible. This is very easily resolved but advisors who do not thoroughly assess the share capital are creating more work for the company in the future.
When looking for professional advice relating to share schemes you need to be sure that your advisors are looking at the bigger picture. How will a share scheme affect the company? Why are you implementing the scheme? Professional advice and help on the various aspects of design, implementation and administration is crucial.
If you have an existing share scheme that was not put in place by us and don't wish to fall foul of the above pitfalls, why visit the share scheme health check page on our website and give us a call on 020 8949 5522?