Employee Shares – Avoiding the Traps

With politicians once again promoting the wider benefits of extending share ownership to the workforce, few are aware of the many ways which already exist to bring this about. Benefits of a share-owning workforce are clear to see. Knowing that the employer’s success will filter through to personal reward is likely to keep staff more engaged and motivated, and although the tax benefits over traditional salary and wages have narrowed in recent times, there are still advantages to be had for both the worker and the company.

There are two broad ways to bring this into effect. You can either issue new shares to your employees now, or give them the right to acquire shares at some point in the future once something tangible takes place, such as hitting performance targets.

But just before you go ahead, it is essential to seek proper legal and tax advice about your plans before you put anything into place to avoid the many traps.

Owners should consider that a greater the pool of employee shares will reduce the portion of the company owned by the existing shareholders. Small amounts of minority employee shares may not significantly change the voting dynamics, but any dip below the 75% voting threshold would remove an owner’s unilateral ability to pass special company resolutions.

That point aside, the next aspect for an employer to consider is how the shares will be treated following a termination of employment. A situation where an ex-employee, particularly one who has been dismissed, still has a say in the company’s affairs and financially benefit from its performance is best avoided. Sadly, most company constitutions adopted at incorporation fail to prevent this, requiring new bespoke documents to be put in place.

Similarly, consideration should be given to the owner’s future plans. If a sale is on the cards, then buyers tend to require ownership of the entire share capital rather than just part of it. Again, provisions need to be included to require smaller employee shareholders to sell in such a situation.

Whether or not to give employee shareholders any additional rights over and above their statutory shareholder rights will be a matter for each company to decide on a case by case basis. But to increase employee engagement, attract talent and assist with retention, and boost morale, employee share ownership cannot be ignored for growing and ambitious companies.

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If you feel that your company is ready to offer shares to its employees, please contact our Corporate Law Department who can provide specialist guidance and advice – call us or email by using the form to the right. This article was written by Edward Garston, Senior Associate at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of October 2018.​