Sharing success: The legal considerations of setting up employee share schemes - Palmers Solicitors

Sharing success: The legal considerations of setting up employee share schemes

Sharing success: The legal considerations of setting up employee share schemes

In the evolving landscape of corporate governance and employee incentives, employee share schemes (ESS) are gaining traction as a means for companies to align the interests of their employees with those of the business.

Among these, the Enterprise Management Incentive (EMI) and Employee Ownership Trust (EOT) schemes stand out for their potential to drive growth, enhance employee engagement, and facilitate succession planning.

As more and more businesses explore the benefits of ESS, it is important that they consider the unique legal implications of passing on part of their business to their team.

The Rise of Employee Share Schemes

The increasing popularity of ESS is no coincidence. In an era where talent retention and motivation are paramount, these schemes offer a tangible way to reward employees not just for their present contributions but also for their role in the company’s future success.

The EMI and EOT, in particular, have garnered attention for their favourable tax treatment and flexibility, making them attractive options for both employers and employees.

The ESS have also been shown to be a positive way to encourage employee “buy in” and commitment, as staff feel a stronger connection to their place of work, thanks to the financial opportunities on offer.

Enterprise Management Incentives (EMI)

The EMI scheme is designed for small to medium-sized enterprises (SMEs) with high growth potential, allowing them to grant share options to key employees as a form of non-cash remuneration.

The legal framework governing EMIs is intricate, with strict eligibility criteria for both companies and employees.

Companies must navigate these regulations carefully to ensure compliance and maximise the scheme’s benefits, which include tax advantages for both the employer and the employee.

Key considerations for setting up an EMI include:

  • Company eligibility: The company’s gross assets must not exceed £30 million, and it must operate in a qualifying trade. Your company needs to operate independently, meaning another company should not own or control over 50 per cent of its ordinary share capital. Additionally, there must be no existing arrangements for such ownership or control to occur. If your company owns any subsidiary companies, these subsidiaries must also meet the criteria for EMI eligibility. Specifically, if they are subsidiaries managing property, your company must own and control at least 90 per cent of them.
  • Employee eligibility: EMI options are available exclusively to employees who commit to working a minimum of 25 hours per week. For those working fewer hours, at least 75 per cent of their total working time must be dedicated to the company. Additionally, employees holding a ‘material interest’ in more than 30 per cent of the company’s share capital prior to the granting of options are ineligible to participate.
  • Limitations: There is a limit on the value of shares that can be held under EMI options, which currently stands at £250,000 per employee.
  • Granting Options: The process of granting options must comply with specific legal requirements, including the terms of the option and how it is communicated to the employee. The most that a company can grant is £3m in unexercised options at any one time.

Employee Ownership Trusts (EOT)

EOTs represent a different approach to employee share ownership, where a trust acquires a significant stake in the company on behalf of all employees.

This model promotes a collective ownership culture, with employees benefiting indirectly through the trust.

The EOT has become a popular mechanism for succession planning, particularly among companies looking to preserve their legacy while ensuring their workforce is invested in the company’s future.

Legal considerations for establishing an EOT include:

  • Structure: The trust must be established with the sole purpose of holding shares for the benefit of the employees.
  • Control: There are specific requirements regarding the company’s control and the trust’s operation, including the appointment of trustees.
  • Benefits: While the EOT offers tax efficiencies, such as relief from Capital Gains Tax on the sale of shares to the trust, companies must comply with various conditions to qualify for these benefits.

Additional legal considerations

Setting up an EMI or EOT scheme is not without its challenges. Companies must consider the legal implications, including compliance with tax laws, corporate governance standards, and employment regulations.

Additionally, the process involves meticulous planning and documentation to ensure the scheme is implemented effectively and aligns with the company’s strategic objectives.

The decision by owner-managers to create ESS may also bring them in conflict with other shareholders without proper consultation, leaving them open to litigation in the most serious circumstances.

These two share schemes are only part of several share schemes made available to employees and there may be other options that are more suited to your business.

Ultimately…

Employee share schemes like EMI and EOT are powerful tools for fostering a shared sense of ownership and commitment among employees.

However, the success of these schemes hinges on a thorough understanding of the legal landscape and meticulous planning.

Companies contemplating the introduction of an ESS should seek expert legal advice to navigate the complexities involved and ensure that their scheme not only complies with the law but also aligns with their business goals and culture.

To find out more about our corporate legal services, including our expertise in shareholder arrangements and company structures, please contact us.