What to Consider when issuing your company’s shares to employee?

What to Consider when issuing your company’s shares to employee?

It is common for an owner of a private company (including family- owned companies) to issue company’s shares to staff in order to inter alia attract and or retain talented employees or align their interests to those of the owner.

No matter that motivation behind such a scheme, issuing shares to employees offers many benefits to both the owners of the company and the employees. With careful planning, clear communication, and thoughtful drafting of employment and shareholders’ agreements, these arrangements can provide great benefits to both parties. In the unfortunate situation where the business relationship ends, advance planning will allow the valuation issues to be settled in a clear and transparent manner, while minimizing potential disputes and costs.

Some of the areas where disputes may arise in such employees share ownership scheme s include:

(a)              The types of shares that will be issued or transferred to the employee;

(b)              The market value of these shares at the date of issue;

(c)               How the shares will be paid for, as well as the tax implications;

(d)         Whether the redundant assets or liabilities (like existing shareholders' loan) will be factored determining the fair value of these shares;

(e)              How the shares will be valued on termination of the business relationship.

In most cases, the owners of the business or the board of director may wish to issues shares to the employees without losing control of the company. Therefore, though these share will entitled to participate in the company's profitability through dividends, they holders may not be granted voting rights.   To achieve this, the board would be obligated to create different classes of shares.  In company law, if a company has different classes of shares then different rights can be ascribed to those different classes as regards payment of dividends, voting rights, even procedures such an issuing new shares or transferring shares.

In order to effectuate such a transaction, a company can re-designate its existing issued shares as 'A' Ordinary Shares and issue new shares called 'B' Ordinary Shares to qualifying employee(s).  Such an assignment may involve amendment of existing articles of association or even adopting brand new articles of association with such provisions. 

In our above example, the 'B' shares would have the rights to dividend (that is, the board would be able to decide to pay one amount on the ‘A’ shares and a different, or no, amount on the ‘B’ shares). Further, the 'B' shares would be not be entitled to shares in any surplus left after repayment of the shareholders in the event of the company being liquidated, otherwise sold to third parties.

Further, if the holder of 'B' shares decides to leave the company’s employ (as an employee and/or as a director) they will be obligated to offer their shares for sale, with any share transfer being at the discretion and control of the board. Moreover, in default thereof within a given period after ceasing to be an employee, the company is bestowed the powers to effect the transfer on their behalf (this is called a “deemed transfer provision”, and ensures that shares do not pass outside the company’s existing shareholders without the approval of the Board and/or the other shareholders).

If you would want to issue shares to your employees or appoint any of your employee as a new director with a right to acquire shares in your company, or to discuss the options that are available, please do not hesitate to contact me via mainacy@gmail.com