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Corporate Secretarial Practice > Chapter 15: Employee Share Schemes > Flashcards

Chapter 15: Employee Share Schemes Flashcards

1
Q

How is an employee share scheme defined in SA s1166?

A

A scheme for encouraging or facilitating the holding of shares or debentures in the company by or for the benefit of:

  • bona fide employees or former employees of the company or group
  • the spouses, civil partners, surviving spouses, or former employees.
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2
Q

What is an all employee share scheme?

A

A scheme in which all (or substantially all) employees may participate.

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3
Q

What is a discretionary employee share scheme?

A

A scheme which can only be accessed by select employees, usually defined by seniority or service length.

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4
Q

What is a “bad” or “voluntary” leaver?

A

An employee who leaves the company, and whose right to any benefit under a share scheme is limited.

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5
Q

What is meant by “dilution”?

A

The shares used in employee share schemes are usually new shares, and therefore dilutes the existing shareholding.

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6
Q

What is meant by “exercise”?

A

The process by which participants take up their right to convert an option into a share.

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7
Q

What is meant by the “exercise period”?

A

The window of opportunity in which participants may exercise their option.

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8
Q

What is meant by the “exercise price”?

A

The price at which a share option may be exercised.

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9
Q

What is meant by a “grant”?

A

The process of awarding an employee with an option.

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10
Q

What is meant by an “in the money” option?

A

When the market value of a share is greater than the exercise value,

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11
Q

What is the opposite of an “in the money” option?

A

An underwater option.

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12
Q

What is a HMRC approved share scheme?

A

A scheme designed and administered according to HMRC rules.

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13
Q

What is meant by a “lapse”?

A

Once a benefit is no longer available (i.e. expiry of an option), it is considered to have lapsed.

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14
Q

What is an “option”?

A

The right granted by a company giving the participant in the scheme an opportunity to purchase shares at a fixed price.

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15
Q

What is meant by “performance condition”?

A

Conditions that must be met prior to the option being exercised.

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16
Q

What is meant by a “scaleback”?

A

If an employee applies for more options than are available, their application will be reduced the amount available.

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17
Q

What is meant by “scheme rules”?

A

The rules which govern an employee share scheme.

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18
Q

What is meant by “vest”?

A

A minimum waiting period applies prior to which the option becomes available to the employee - the point at which is becomes available is the vesting point.

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19
Q

Name 7 employee share schemes.

A 
1 Share incentive plan (SIP)
2 Savings-related scheme (Sharesave)
3 Profit sharing schemes
4 Company share options plans (CSOP)
5 Enterprise management incentives
6 Long term incentive plans (LTIP)
7 Employee shareholder schemes
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20
Q

What are the key types of shares that can be offered under a share incentive plan? (SIP)

A

1 Free shares (up to £3600 annually)
2 Partnership shares (up to £1800 annually)
3 Matching shares (to match partnership shares)

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21
Q

Are SIPs HMRC approved schemes?

A

Yes, although the concept of a SIP is somewhat flexible allowing some latitude for the company to create a plan for its circumstances.

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22
Q

What HMRC rules are set around free shares in a SIP?

A
  • annual limit of £3600
  • distribution must be based on individual, divisional or corporate targets
  • must not focus on highly paid individuals
  • if employee leaves the company within three years, the shares can be forfeited.
  • shares are free of tax and NIC
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23
Q

What HMRC rules are set around partnership shares in a SIP?

A
  • annual limit of £1800 or 10% salary (whichever is lowest)
  • there must be a minimum saving level (but not higher than £120 a year)
  • partnership shares a deducted pre-tax giving a tax saving
  • accumulated savings over a 12-month period can be used to purchase shares
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24
Q

What HMRC rules are set around matching shares in a SIP?

A
  • free shares given by the company to match partnership shares
  • ration must not exceed 2:1 of matching:partnership
  • matching must be offered on the same term to all employees
  • if an employee leaves within 3 years, the company can forfeit the shares.
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25
Q

For how long must the different types of shares be held in a plan for a SIP?

A

Partnership shares can be taken out immediately.

Matching and free shares can be taken between 3 and 5 years.

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26
Q

What are the tax benefits of a SIP?

A

Employees do not pay tax on free, matching or partnership shares, provided they are kept in the plan for at least 3 years.
Companies receive corporation tax relief for their costs in setting up the scheme.

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27
Q

What are the key features of a Sharesave (savings-related/SAYE) scheme?

A
  • all-employee scheme
  • employees save up to £500 per month through a savings contract for 3 or 5 years
  • savings are kept at a bank or buildings society
  • employees receive a bonus at the end of the saving period.
  • tax exemptions are available when the employee exercises the option.
  • HMRC approved
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28
Q

What discount can the company offer to employees on share options under a Sharesave scheme?

A

Up to 20% below market price

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29
Q

How much may an employee save each month under a Sharesave scheme?

A

Between £5 and £500.

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30
Q

Following the end of the savings period in a Sharesave scheme, how long do employees have to exercise their option?

A

Usually six months.

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31
Q

In the event of death of an employee who is a Sharesave participant, how long does the personal representative have the exercise the option?

A

12 months from the date of death.

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32
Q

Does the employee have to exercise their option in a Sharesave scheme?

A

No, they may just take the savings plus the bonus and use the money as they see fit.

33
Q

What are the tax implications of a Sharesave scheme?

A

Employees do not pay income or NIC tax on the bonus or interest.

34
Q

What are the key differences between a SIP and Sharesave scheme?

A
  • SIP savings are pre-tax and NIC, making them more tax-efficient
  • SIPs offer more design flexibility
  • Sharesave schemes are low risk to employees, as they can take their savings.
  • Sharesave schemes are simpler to understand.
35
Q

WHat are the key features of a profit-sharing scheme?

A
  • no longer HMRC approved, as replaced by SIPS
  • gives all employees a company profit target
  • if met, shares are held in a trust for 2 or 3 years before being released to the employee
  • no tax relief
36
Q

Can a profit-sharing scheme still be operated since HMRC approval has been withdrawn?

A

Yes, but the benefits are now reduced.

37
Q

What are the key features of a company share option plan (CSOP)?

A
  • discretionary plan - usually senior managers/directors
  • employees receive up to £30000 of tax-approved options
  • options can be exercised between three and ten years of grant
  • usually subject to performance conditions
38
Q

What is another common name for a CSOP?

A

ESOP - executive share option plan

39
Q

Upon what conditions is the vesting of CSOP options dependant?

A

Usually performance targets set by the company.

40
Q

With what HMRC must a company comply to offer a CSOP?

A
  • participation limited to employees holding less than 30% of a close company
  • options granted at no less than fair market value at the time of grant
  • options are not transferable
  • shares must be fully paid and ordinary
  • options are exercisable for between 3 and 10 years
  • options must not exceed £30000 per employee
41
Q

What are the tax implications of a CSOP for the employee?

A
  • income tax is not chargeable and there is no income or capital gains tax on the increase in value of the shares
  • gains tax may apply when the shares are sold
42
Q

What are the tax implications of a CSOP for the company?

A
  • the company can deduct the cost of establishing the scheme from the company’s profits for the purpose of calculating tax.
43
Q

What is the process of “cashless exercise” under a CSOP?

A

If the employee wants to exercise their option, but does not have the cash to buy the shares, they may immediately sell some shares to cover the purchase cost, funded by a short term loan by the company or a broker.

44
Q

What are the key features of enterprise management incentives (EMI)?

A
  • suited to smaller companies
  • allow employees to receive up to £250,000 worth of options
  • options can be exercised between 3 and 10 years of grant
  • provide larger awards than CSOPs
45
Q

What is the purpose of EMIs?

A

To help smaller, high-risk companies to recruit and retain high-calibre employees

46
Q

What criteria must a company meet to qualify for an EMI scheme?

A

Must have less than 250 employees, who work at least 25 hours per week

47
Q

Are EMIs HMRC approved?

A

Yes

48
Q

What must an EMI do to achieve HMRC approval?

A

Nothing, other than notifying HMRC when a grant is made (within 92 days)

49
Q

What documents must be sent to HMRC when a grant is issued through an EMI scheme?

A
  • notification of grant
  • declaration from the employee that they meet the 25 hours work week requirement
  • declaration from a secretary or director confirming company meets requirements
  • copy of the option agreement
50
Q

Are EMI schemes all-employee or discretionary?

A

They can be either, provided the total options do not exceed £3,000,000

51
Q

What are the tax implications of an EMI scheme?

A
  • there is usually no NIC or income tax charge, unless shares are sold under market value at the time of grant
52
Q

Is a long term incentive plan (LTIP) an all-employee or discretionary scheme?

A

Usually discretionary, although there is no reason a company could not apply it to all employees.

53
Q

Are LTIPs HMRC-approved schemes?

A

No, therefore there are no tax exemptions

54
Q

What does a typical LTIP arrangement involve?

A
  • shares allocated to a trust (rather than providing an option)
  • when participant meets LTIP targets, they can exercise the award
  • the participant does not typically pay for the grant (i.e. it is nil-cost)
  • share awards are usually spread over two, three or four years
  • shares must sometimes remain in trust for another 2 to three years prior to release
55
Q

In what ways does an LTIP differ from an option plan?

A
  • in an LTIP, the employer usually needs to provide cash upfront and then store the shares in a trust. In an option plan, shares are issued at the time of exercise.
  • in an option plan, the value to the participant is any share value above market price. If shares are underwater they are valueless. In an LTIP, the shares are free and so are always of value
56
Q

Is an “employee shareholder” a type of share scheme?

A

No, it is a different class of emmployee

57
Q

What is an employee shareholder?

A

An employee who works under an employee shareholder contract

58
Q

What is the typical arrangement of an employee shareholder contract?

A

The company must give free, fully-paid shares to the employee of at least £2000, and up to £50000 (although anything over £2000 is subject to income tax.

The employee gives up certain employment rights in exchange.

59
Q

What must be voluntary signed by both parties in an employee shareholder contract?

A

A binding contract, including a written statement setting out information about the shares, such as:

  • voting rights
  • rights to dividends
  • redeemability
  • transferability
60
Q

What matters should the CoSec consider relating to employee shareholder contracts?

A
  • whether the articles allow for it
  • whether the company wishes to introduce a new class of shares for the purpose of the contract
  • whether the board has allotment authority (e.g. have pre-emption rights been disapplied)
  • if the company is listed, whether giving shares would contravene the Market Abuse Regulations
61
Q

What happens to the shares when an employee with an employee shareholder contract leaves the company?

A

They are typically sold or re-purchased by the company, but if there is no provision for this in the contract, the employee may keep the shares.

62
Q

What is the overall aim of implementing an employee share scheme?

A

TO provide a meaningful incentive to employees which the company can afford and the shareholders can endorse.

63
Q

What key design features should the CoSec consider before implementing an employee share scheme?

A
  • how will any new employee scheme complement existing schemes or benefits?
  • will the scheme target the desired employee audiences
  • will the scheme be all-employee or discretionary
64
Q

Why might a company choose not to operate an HMRC approved scheme?

A

To gain increased flexibility in the operation of the scheme.

65
Q

What factors must the company consider when designing an employee share scheme?

A
  • whether to operate an HMRC approved scheme
  • how the scheme will affect company finances
  • whether shareholders will tolerate share dilution
  • general cost and administrative burden
  • potential for discrimination
66
Q

How might an employee share scheme affect the finances of a company?

A

By requiring purchase of shares in the market at the outset.

67
Q

Can a company purchase its own shares for the purpose of administering an employee share scheme?

A

Yes, this is an exemption to the general rule that the company cannot purchase its own shares (CA S 682)

68
Q

Why might existing shareholders object to the commencement of an employee share scheme?

A

Because their shareholding will be diluted. They are only likely to consent if the positive motivational benefits outweigh the dilution issues.

69
Q

Why is it important that participants in a discretionary employee share scheme are selected fairly?

A

To avoid any issues of discrimination, e.g. on the basis of gender.

70
Q

What are the typical features of the rules for an employee share scheme?

A
  • name
  • duration
  • authority to make grants
  • number of shares/options available
  • definition of eligibility
  • form of documentation
  • description of option price, shares, incentives or other benefit
  • concessionary features for involuntary leavers
  • loss of benefits for voluntary leavers
  • exercise period and procedure
  • power to modify scheme rules
  • variations of share capital
  • takeover or change of control in the company
  • treatment of incentive in case of winding up, insolvency, scheme of arrangement etc.
71
Q

What is the role of HMRC in employee share schemes?

A

Sets qualifying conditions for the operation of approved schemes, and receives tax returns relating to the schemes from companies. HMRC also carried out compliance checks on companies.

72
Q

What steps must a company take prior to obtaining approval for an employee share scheme?

A
  • consider most appropriate scheme
  • draft documentation
  • check articles of association and amend as necessary
  • consult HMRC for advice (if an approved scheme)
  • consult with major shareholders
73
Q

How should a company obtain approval and make an initial grant in an employee share scheme?

A
  • obtain board approval
  • obtain shareholder approval
  • certify to HMRC that plan meets requirements (if an approved scheme)
  • board approves first grant
  • prepare and issue documentation and begin employee briefings
74
Q

What is the role of the CoSec in establishing and administering an employee share scheme?

A

1 Establish and maintain register of participants
2 Establish and maintain a central file for documentation
3 Issue grant documentation
4 Monitor achievement of performance conditions, vesting and lapses
5 Deal with queries
6 Complete HMRC registrations and submit tax returns
7 Manage ad hoc events such as scalebacks.
8 Prepare and issue maturity packs
9 Issue ad hoc documentation

75
Q

Can treasury shares be used in satisfaction of an employee share scheme?

A

Yes

76
Q

What do the UKCGC and Listing Rules state regarding employee share schemes?

A

Shareholders should approve any new schemes.

77
Q

What do the TIA/PLSA guidelines on share incentive schemes in listed companies recommend?

A

1 No more than 10% of issued share capital should go to employee schemes in any 10 year period
2 Grants should be phased and stretched on a sliding scale of performance
3 Running costs should be transparent
4 Participation should be restricted to bona fide employees and EDs
5 NEDs should never participate
6 Options should be granted in the window following the announcement of half/annual reports.

78
Q

What MAR considerations are involved in employee share schemes for listed companies?

A

Grant/exercise of options will be considered as “dealing” for the purpose of MAR, which will affect directors and certain employees

MAR also requires announcements relating to changes to directors’ interests.

Corporate Secretarial Practice (20 decks)

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