SMEs and unlisted companies the why and how of share plans

Transcription

1 The RM2 Partnership Employee Share Scheme Specialists SMEs and unlisted companies the why and how of share plans Tuesday 3 October 2017 Sarah Anderson & Nigel Mason

2 Topics covered Why introduce a share plan? Some perceived challenges to adoption in private companies and how to meet them Case study: Insync Technology Case Study: IT Co Limited Case Study: Heron Limited Questions 2

3 Why introduce a share plan the evidence All studies cited deal in averages, there are always exceptions to the rule, some are old or are based on small samples, and it is difficult to isolate the EO effect from other factors. Correlation does not imply causality. The value of your shares can go down as well as up 3

4 Why introduce a share plan the evidence Individual employee owners: more engaged, more loyal and less likely to take unplanned absence [London School of Economics survey for Computershare (2014)] Teams of employee owners: more creative and collaborative, more autonomous (= less supervision and management [ We Think by Charles Leadbeater (2009)] Employee owned businesses: more sustainable and resilient through economic cycles [ Does employee ownership confer long term resilience? by Cass Business School (2014)] higher productivity growth [ The employee ownership effect: a review of the evidence by Matrix Evidence (2010)] demonstrate consistently stronger sales growth and employment (NCEO.org). Listed companies with higher levels of broad based employee share ownership beat the market benchmarks in terms of shareholder returns 4

5 Why private companies want share plans Engage, incentivise, motivate employees Corporate objectives? Increase company growth and profitability Drive towards an exit Rewards for individual / divisional / company performance Dividends Succession/retirement planning Employee ownership! 5

6 Perceived challenges for private companies Losing control Dilution Leavers Valuation No market for the shares/liquidity Complexity and ongoing costs 6

7 Case study: Insync Technology Founded 2003 Software and hardware for video image processing Transfer to majority employee ownership in October employees 7

8 Case study: Insync Technology Founders 100% Company 8

9 Case study: Insync Technology Founders EBT Board appointed trustee Employee trustee Independent trustee 25% 75% Company 9

10 Case study: Insync Technology Founders EBT 25% 75% Company SIP 10

11 Case study: Insync Technology Founders EBT 25% 71% Company 4% SIP Employees 11

12 Case study: Insync Technology Founders EBT 16% 75% Company 9% SIP Employees 12

13 Case study: Insync Technology Founders EBT 16% 75% Company 9% SIP Employees 13

14 Case study: IT Co Ltd Rita Sue Bob 1,000,000 shares 1,000,000 shares 1,000,000 shares Company 14

15 Objectives Plan to sell company in 3 5 years Introduce tax efficient share plan for all employees to enable share in proceeds on exit Share plan should allow differentiation between employees Manage dilution Reduce Rita/Sue/Bob s shareholdings in specific proportions to reflect ongoing involvement in business 15

16 Case study: IT Co step 1 - options EBT Grants EMI options (market value exercise price, exit only, good leaver provisions) Employees 16

17 Case study: IT Co Step 2 - EBT EBT Founders agree to satisfy option exercise in the following proportions: 55% of max (948,750 shares) 35% of max (603,750) 10% of max (172,500 shares) Rita Sue Bob 17

18 IT Co. Time passes. Between 2012 and 2016 EBT makes 7 EMI option awards to employees on average twice a year All options granted at market value (ranging from 7p to 22p exercise price) Around 25 employees participate during the period (some with multiple awards) Some bad leavers options lapsed Some good leavers options exercised under good leaver provisions and shares retained Towards the end of 2016 offer for sale is accepted 18

19 Case study: It Co Step 3 - sale 1. Exercise options over total 534,000 options 2. Total exercise price 834k (variable exercise prices) Employees EBT 19

20 Case study: IT Co Step 3 - sale EBT 3. EBT pays exercise price under Call Option Agreement 187,075 shares 3. Founders transfer shares to EBT in numbers agreed Rita Sue Bob 20

21 Case study: IT Co step 3 - sale Employees 5. EBT transfers 534,500 shares to employees EBT 21

22 Case study: IT Co step 4 - outcome Rita Sue Bob Employees Approx 24% (originally 33%) Approx 27% (originally 33%) Approx 31% (originally 33%) Company Approx 18% (originally 0%) 22

23 Outcome EMI provided exit only award for employees Tax efficiency for company and employees Structure provided appropriate dilution levels for founders the first time we have been involved in a scheme which actually meant something to the members! 23

24 Case study: Heron Limited Heron Family 100% Company 24

25 Objectives No particular plans to sell company Establish succession plan transfer some shares to 5 key directors Provide targeted incentives for other key employees Strengthen commitment & loyalty across workforce Provide clear economic benefit for participants Focus on the long term Retain interest for the Herons (including their children) 25

26 Incentives structure 2003 For key employees: Establish discretionary Employee Benefit Trust (EBT) Establish EMI option plan EBT grants EMI options to key employees and directors Options are exercisable after a certain time period (typically, 3 years after date of grant) On exercise, Mr Heron transfers the appropriate number of shares into the EBT in order to satisfy the option grant Employees may sell shares back to the EBT Deferred Share Purchase Plan (DSPP) introduced for directors who cannot benefit under EMI (EBT not used!) For all employees Establish Share Incentive Plan (SIP) and SIP Trust Award Free Shares to all employees (based on points system length of service & salary band) Leavers shares recycled through SIP Trust Employees may sell shares back to the SIP 26

27 Heron Limited - structure Mr Heron Buy/sell shares EBT Buy/sell shares % reduced Company % increased Buy/sell shares Grant/ exercise options % increased % increased SIP Award Free Shares/ buy back from employees Receive Free Shares/sell back to SIP for recycling Employees 27

28 Time passes Free Share Awards made annually under the SIP to all employees (around 45) EMI option awards made annually to key employees up to 2012; DSPP awards made to key directors from 2012 (new issue shares) HMRC valuations agreed for SIP and EMI simultaneously (six month duration for SIP) Post 2012 post transaction valuation agreed with HMRC for DSPP awards based on SIP/EMI valuation SIP shares bought back at latest agreed market value EMI options lapsed or EMI shares bought back by EBT (or by SIP in which case ring fenced for all, not discretionary) Dividends paid to all shareholders annually Company sold

29 Heron Limited shareholding at sale Mr Heron Heron children 16% Employees 65% Company 19% Key employees/directors around 10% Remaining employees, including SIP around 9% 29

30 Company sold outcome Herons retain majority interest Only two key directors remained 5% interest guarantees Entrepreneurs Relief SIP shareholders gains on sale free of CGT More importantly? Owner transferred significant part of shareholding over the period Staff retained over more than 10 year period Economic benefit to staff via Internal share market Dividend payments Significant impact on company culture and reward Owner s vision achieved 30

31 Three things to take away The bigger picture? Long term vision Communication 31

32 How RM2 can help Identify your requirements Recommend most appropriate share plan arrangements Design, draft, implement share plan Assist with launch, option grant and share awards Manage all HMRC registrations Administer your share plan post-implementation (including employee benefit trusts) Help with the sale process Be on standby for corporate actions 32

33 Questions? If you do think of any follow up questions after today s session, please do not hesitate to contact us sarah.anderson@rm2.co.uk nigel.mason@rm2.co.uk or