Employee Shareholders

21 Aug 2013

The commencement date for a new type of employment status has just been announced.  Employee Shareholders may be created from 1 September 2013.

Any company will be permitted to enter into an agreement with any of its employees under which the employee is given fully paid-up shares in the company (or a parent company) having a value of £2,000-£50,000.  The shares need not have voting or dividend rights and the Shareholder Agreement may require employees to forfeit their shares when they leave the company.

Any capital gain realised on the disposal of the shares will be free from Capital Gains Tax but there are rules to prevent existing shareholders from using this as a CGT loophole.  The first £2,000 of shares will be free from Income Tax and National Insurance.

In return for shares, the employee must waive rights to a Statutory Redundancy Payment, to claim unfair dismissal except where the dismissal is discriminatory, to request flexible working except on returning from parental leave and to request time off for training.  The employee will also have to give 16 weeks notice of intention to return from Maternity or Paternity leave.

Employees must be independently advised on an Employee Shareholder Scheme before agreeing to it and they must be given a cooling off period in which they may change their mind.

Our view:

We foresee a number of tricky issues:

  • valuing the shares when they are issued and when they are re-acquired at the end of the employment.  Since the shares are forfeit on termination it is within the rules of the schemes envisaged by the Government that they may be re-acquired at nil value.  Nevertheless, if that is the case, there is no point in any employee accepting the deal so there will have to be good leaver/bad leaver rules in the Shareholders Agreement;
  • the savings on statutory redundancy payments may be offset by the cost of valuing and buying back the shares;
  • changing employees into shareholders seems likely to change the nature of the relationship between the employer and the employee calling, for more sophisticated HR management techniques than many small or medium sized companies have within their existing infrastructures; and
  • this development is primarily aimed at smaller companies planning fast growth but are the owners of that type of company really going to give away their equity when unfair dismissal is so easily avoided and Statutory Redundancy Payments are modest?