Employee Share Participation Seminar

Transcription

1 Employee Share Participation Seminar A joint presentation by: Colin Abercrombie/John Cairns of French Duncan LLP & Graham Bell of Wright, Johnston & Mackenzie LLP 27 April 2016

2 1 Introduction Welcome Timings and running order Employee Share Participation - The Commercial Perspective - The Tax Perspective - The Legal Perspective.

3 2 The Commercial Perspective Why? Incentivisation Key employee attract or retain All employees? Performance reward Align interests of existing owners and employees Drive growth or ensure stability Succession planning Encourage proprietorial attitude and employee engagement Align any scheme with your commercial objectives.

4 3 The Commercial Perspective How? Shares purchased or given shares acquired Funding and tax consequences? Share options Tax planning opportunities? Cash based value tracker (phantom shares) Complex and misunderstood? (not covered today) Other related areas not covered today are Employee Ownership Trusts (EOT s) and Management Buy-Outs (MBO).

5 4 The Commercial Perspective Other issues Share valuation Control Dividend policy Financial privacy Exit and realising value? What if it doesn t work out? Tax and legal issues are often key drivers.

6 Employee Share Participation Seminar - The Tax Perspective John C Cairns Tax Partner, French Duncan LLP

7 6 Issue Shares To Employees Now Either pay market value Or income tax if issued at undervalue Does employee have resources to pay for shares? Perhaps give up bonuses Borrow from bank tax relief for interest Market value - Discount for minority interest - Dividend policy - Other transactions - Agreed with. HMRC post transaction

8 7 Unapproved Options HMRC don t disapprove just no tax advantage Employees don t need to find cash at date of grant At date of exercise, subject to income tax on difference between - Price paid by employee, and - Market value Market value may be close to undiscounted value if close to a sale Income Tax rates up to 45%.

9 8 Can HMRC help? A number of approved share schemes - - Company share option plan targeted - Savings related share option scheme all employee - Share incentive plan all employee - Enterprise management incentives - targeted.

10 9 Why EMI? Popular amongst private companies Many schemes are exit only Employees receive shares just before a sale Encouragement to remain with the company Work hard to increase value of company slice of the action on sale No voting or dividend rights until exercise Can be dependent on performance targets e.g. turnover increases Can be granted over restricted securities.

11 10 EMI Tax Advantages Value of shares at date of grant can be agreed with HMRC up front No income tax on grant of options No income tax on exercise of options provided that exercise price is at least equal to market value of shares at date of grant Capital gains tax on sale based on difference between - Sales proceeds, and - Price paid plus amount subject to income tax.

12 11 Capital gains tax rates 20% from 6 April % entrepreneurs relief rate if - Shares are relevant EMI shares - Options were granted at least one year prior to sale - In the year to date of sale, company was a trading company and individual was an officer or employee No 5% requirement.

13 12 EMI Requirements Maximum value per employee of unexercised options - 250,000 Issuing company can t be a 51% subsidiary Company gross assets NOT more than 30 million NOT more than 250 full time equivalent employees.

14 13 EMI Requirements continued Trading company not all trades qualify e.g. property development, hotels, nursing homes, farming HMRC advance assurance facility Employees - Work at least 25 hours per week - Must not have a material (30%) interest Options must be capable of being exercised within 10 years of grant Shares must be: ordinary fully paid and non redeemable. Terms must be agreed in writing

15 Employee Share Participation Seminar - The Legal Perspective Graham Bell Wright, Johnston & Mackenzie LLP Wright, Johnston & Mackenzie LLP 2016

16 The Lawyer s Perspective Shares or Share Options Impact on value Overview of shareholder issues Types of Share Option Who will buy your shares? Control mechanisms Wright, Johnston & Mackenzie LLP 2016

17 Shareholder issues Balance of power among shareholders Long term view versus pressure for exit For active shareholders only (not passive investors)? Recovering shares from an employee who leaves employment Wright, Johnston & Mackenzie LLP 2016

18 Options Exercise Conditions:- Time Service Targets Exit only Wright, Johnston & Mackenzie LLP 2016

19 The market for share purchase Other shareholders The Company Third parties only on an exit by all We act for:- Communities Small scale developers Utilities Large scale developers Landowners Funders Investors Entrepreneurs Wright, Johnston & Mackenzie LLP 2016

20 Control mechanisms Articles of Association/Shareholder Agreement Permitted Transfers Good Leaver/Bad Leaver Compulsory Transfer Drag/Tag Wright, Johnston & Mackenzie LLP 2016

21 Employee Share Participation Seminar Q&A

22 Contact Details French Duncan LLP 133 Finnieston Street Glasgow G3 8HB Tel: Colin Abercrombie E: John Cairns E:

23 Contact Details: Graham Bell Wright, Johnston & Mackenzie LLP 302 St Vincent Street Glasgow G2 5RZ Tel: E: