A Itroductio to Employee Share Trust Services
Why create a Employee ShareTrust? A public compay ca buy its ow shares ad hold them i treasury. However it has limited optios as to how it ca use those shares. It ca sell them for cash (but ot without first offerig them to all shareholders i proportio to their existig holdigs); cacel them; or trasfer them for the purposes of a employees share scheme. However, so it ca set up a Employee Share Trust ( EST ), for example, to or grat or satisfy share optios or awards; offer more protectio to its employees As log as the compay holds the shares, it will be registered as the ower, but the shares will carry o votes ad will attract o divideds. Also, a public compay caot issue ew shares at a price below their omial value, so it must fud a third party (e.g. a EST) to acquire shares. The EST ca the pass them o to employees free of charge. A private compay, o the other had, caot hold its ow shares i treasury : ay shares it purchases from existig shareholders are immediately cacelled. If a private compay wishes to warehouse its ow shares pedig makig them available to employees by way of gift or sale (whether immediately or upo the exercise of share optios), it must do so through a third party. A EST with a trustee chose by the compay is a ideal vehicle for this. The proprietors of a private compay might be willig to ecourage employees to ow shares ad beefit from the growth i their value for as log as they remai employees. While the Articles of Associatio or a shareholders agreemet could impose a obligatio o a employee-shareholder to offer his shares for sale o leavig the compay, this is of o use if there is obody willig ad able to buy them. A EST ca provide the mechaism for repurchasig shares from existig or former employees ad eablig them to be redistributed amog existig or ew employees by the operatio of a share scheme. This is kow as a iteral market for shares i a private compay. Key term A Employee Share Trust (EST) is a specialised form of discretioary trust for the beefit of employees (preset ad/or past); ad (possibly) their spouses or civil parters A trust deed sets out powers & duties of the trustee.
Advatages of usig a EST A EST ca eable a compay to capture its shares at a advatageous price for subsequet use i oe or more share schemes. Ay subsequet gai i the value of the shares ca the be used to reduce the cost of operatig such schemes, or to icrease the value of the beefits give to employees uder the schemes. A EST ca also be used as a coveiet mechaism for holdig shares available to be used for the purposes of differet types of share scheme tailored to satisfy the varyig tax regimes ad legal requiremets i differet jurisdictios. Legislatio for the operatio of a Share Icetive Pla (a particular type of HMRC approved allemployee share scheme) actually requires that shares are held via a EST. If a private compay s pricipal shareholder retires or dies with o childre or o obvious successor, a EST ca alleviate (or eve solve altogether) the problem of successio by itself acquirig a shareholdig i the compay from the pricipal shareholder or his estate. If ecessary, acquisitio ca be made over a period of time. Offshore or Oshore? A EST could either be established oshore i the UK or offshore i a iteratioal fiace cetre such as Guersey. Offshore status ca be advatageous as a EST should the be exempt from Capital Gais Tax, as the trust is either residet or ordiarily residet i the UK. Corporatio tax relief uder Fiace Act 2003 should still be available to the compay, whether the EST is established offshore or oshore. Eve where a offshore trust caot be used directly (e.g. for the admiistratio of certai types of share schemes which require a oshore trust), a offshore arragemet could still be used to "warehouse" shares prior to sale to the oshore trust whe eeded. Such oward sale should be exempt from Capital Gais Tax. Professioal advice should always be take o the legal ad taxatio aspects of scheme desig ad EST arragemets. Typical holdigs of a EST The holdigs of a EST ca iclude shares i sposorig compay cash agaist cash elemets of Awards to purchase additioal shares loa facility grated by sposorig compay
How a basic EST works Sposorig Compay 1Cash 2 Cash Shares Trust 3Shares Existig Shareholders Employees 1. The sposorig compay makes a cash cotributio to the Trust. This ca either be by way of gift or as a loa. 2. The Trust uses the cash to purchase shares from existig shareholders. 3. The Trust uses the shares to satisfy Awards grated i favour of a class of beeficiaries, which will cosist of some or all of the employees of the sposorig compay. The cosequeces of this arragemet are: cash is trasferred from the sposorig compay to existig shareholders via the trust shares are trasferred from existig shareholders to employees via the trust Depedig o the circumstaces the arragemet may offer tax relief as follows: Corporatio Tax relief for the compay i the year shares are trasferred to employees Capital Gais Tax relief for the existig shareholders o the sale of their shares Icome Tax relief for the employees through a boa fide employee share scheme Idepedet tax advice should always be sought prior to establishig a EST.
The EST work cycle The operatio of differet types of share schemes uder a EST is drive by the fiacial year-eds ad results of the sposorig compay. The overall profitability of the compay is obviously a prime factor i determiig the size of the compay s overall provisio for staff rewards. So, to this extet, EST admiistratio is cyclical i ature. The compay declares its aual results ad the existig Awards vest wholly or partially (or ot at all) depedig o terms of the award ad the compay s performace ew Awards will be grated participats will be advised. Share Awards Share Awards will have a defied class of beeficiaries, determied by the scheme rules a lifespa betwee the grat date ad the vestig date, which will ormally be 3 years but may vary Awards may be subject to performace coditios, either persoal or more commoly corporate evetually vest wholly, partially or (if the compay s results are particularly poor) ot at all.
A typical Award Grat process Oce the decisio has bee take to award shares ad at the other ed of the Award s life: The Remueratio Committee ( RemCo ) of sposorig compay meets to approve the level of the proposed Awards The RemCo meets to assess performace agaist ay criteria laid dow i the Scheme Rules ad the Award Certificate The award schedule is provided to the Trustees, with the RemCo miutes, draft Award Certificate, etc The Trustees meet formally to approve the gratig of Awards Certified copy Award Certificates are set to participats (sometimes via sposorig compay) The Trustees receive RemCo cofirmatio of the extet to which Awards are to vest The Trustees the agree the schedule of outstadig Awards receive participats details (addresses, PAYE & NIC rates, vestig choices) The Awards (or a scaled percetage of them) vest i favour of relevat participats Awards are ormally made from the existig Trust holdig of uallocated shares The Trustees may accept a idemity from the sposorig compay to provide shares, or fuds to purchase them if ad whe Awards vest The Trust records would the show a overdraw positio of uallocated shares Key term The Remueratio Committee (RemCo) is a subcommittee of the Board of Directors. Cosistig of at least 3 idepedet o-executive directors, the RemCo will have delegated resposibility for settig remueratio for all executive directors ad the Chairma, icludig pesio rights ad ay compesatio paymets. The RemCo should also recommed ad moitor the level ad structure of remueratio for seior maagemet. Source: FSA Combied Code o Corporate Goverace.
Participat choices o Vestig Scheme Rules ad/or the preferece of the sposorig compay may ot provide for the participats to have much, or ideed ay, choice as to what happes to their Awards o vestig. Where there is a choice, the Trustees will cotact participats 2 to 3 weeks prior to the vestig date to ask what optio they wish to take. The available optios are ormally as follows: Optio 1: Sell all Here, the Trustees sell sufficiet of the vestig shares to cover the participat s liabilities to PAYE & NIC (or iteratioal equivalets) at the rates advised by the sposorig compay. This ca either be doe as a market trasactio or as a offmarket trasactio whereby the Trustees purchased participats tax shares at the agreed vestig price. I a o-market trasactio, the sale would also cover brokerage costs. Optio 2: Trasfer all Here, the participat udertakes to settle the persoal tax liability direct (ormally via the sposorig compay s payroll system). The Trustees will trasfer all of the vestig shares to the participat or as the participat directs. Optio 3: Part sell, part trasfer The Trustees sell sufficiet shares to cover the participat s liabilities to PAYE & NIC (or iteratioal equivalet), plus costs if it s a omarket trasactio, ad remit the proceeds to the sposorig compay as before. The Trustees the trasfer the remaider of the vestig shares to the participat or to his omiated beeficiary or omiee accout Proceeds of the tax sale would ormally be remitted to the sposorig compay, which would the accout to the relevat tax authorities. The Trustees would also sell the balace of the vestig shares ad accout to the participat for the proceeds. What if a participat leaves? If a participat leaves the compay durig the lifespa of a Award, the effect o that Award of their departure will deped o the circumstaces of the departure; ad/or the Pla Rules. The outstadig Award may the lapse partially, whe the participat will receive a proportio of the Award (ormally related to the proportio of its lifespa for which he has bee employed), either immediately or at the origial vestig date; The participat may be termed a good leaver (redudacy, retiremet) or a bad leaver (dismissal, resigatio). lapse wholly, i which case the participat will ot receive ay proportio of the Award; or be released i full, either immediately or at the origial vestig date
BWCI s Participat ad Award Data System BWCI operates a dedicated participat ad award data system, kow as EBS, for the admiistratio of its EST cliets. Summary of features Simplified data hadlig processes Particularly i the area of bulk trasactios o a vestig, a statemet detailig how each participat s Award has bee dealt with plus coverig letters to all participats Other Cliet reportig Quarterly Admiistratio Report ew Award grats Award vestigs A two-way process ivolves cliets who ca furish BWCI with updated data for automated re-import ito EBS. Improved reportig capabilities For cliet: Trust documetatio Loa facility Facility agreemet Maximum facility available Curret balace Status of preparatio of fiacial statemets Activity durig the quarter Outstadig issues at quarter-ed Award data reports from EBS list of all outstadig Awards uder however may differet schemes, either i summary or full detail quarterly movemets schedule summary of Awards, detailig total umbers of shares & participats covered by outstadig Awards For idividual participats: details of each outstadig Award i their ame Award & vestig statemets geerated automatically at the time readily replaceable if ad whe ecessary Quarterly Net Assets Statemet Valuatio of assets held at quarter-ed Summary of movemets durig the quarter Breakdow of bak balaces debtors ad creditors Aual Fiacial Statemets Audited or ot as required by cliet Balace Sheet Fud Accout (equivalet to profit & loss accout) Automated documetatio System ca be tailored to geerate stadard documets, e.g. o a Award grat, Award statemets for all cocered
Compay profile The BWCI Group was established i 1979. We are the largest firm of actuaries ad cosultats i the Chael Islads, employig over 100 staff i Guersey ad Jersey. We are a idepedet firm, providig a broad rage of employee beefits, ivestmet ad isurace cosultacy services to corporate ad istitutioal cliets based i the Chael Islads, the UK ad iteratioally. BWCI is the Chael Islads member firm of Abelica Global, the iteratioal etwork of firms providig actuarial ad cosultig services aroud the world. Our Abelica Global liks eable us to provide a global service to our cliets, while still retaiig our idepedece as BWCI. We are also a leadig provider of specialist admiistratio services for: pesio plas employee share plas life assurace compaies These complemet our cosultacy services ad eable us to offer complete solutios to our cliets. For further iformatio For further iformatio, cotact the BWCI Share Trust Admiistratio team at estservices@bwcigroup.com or by post to: BWCI Trust Compay Limited PO Box 68 Albert House South Esplaade St peter Port GY1 3BY
A member of Abelica Global Frot cover image courtesy of VisitGuersey 2010 BWCI Group Limited G23071.1 Guersey office Tel Fax Web PO Box 68, Albert House South Esplaade, St Peter Port Guersey, GY1 3BY +44 (0)1481 728432 +44 (0)1481 724082 www.bwcigroup.com