When employee shareholder status (ESS) was introduced in 2013, it wasn’t exactly to resounding plaudits. The trade-off between employment rights and the grant of shares seemed rather awkward and the share valuation requirement potentially undermined the attractiveness of ESS as an incentive tool for widespread use within a small company.
But there’s a place for everything, you might say and, in our experience, ESS has developed into a useful form of incentive for management teams in private companies, whether as part of a transaction (such as an MBO) or as a standalone initiative. ESS has of course been used to create wide employee ownership within small but growing companies – arguably its intended application – but it’s most common use seems to be as a means of allotting (additional) shares to management teams.
In addition to the potentially significant tax breaks, the advantages of ESS include the following:
- the shares are free to participating employees
- there is no minimum shareholding requirement (although at issue the ESS shares must be worth not less than £2,000)
- it is relatively simple to document and there is no ongoing administration for the company
- now that private companies can hold treasury shares in certain circumstances, shares bought back from a leaver could be used under ESS to give other employees a shareholding that carries a significant tax advantage.
Its main disadvantages are that:
- performing a share valuation is essential
- the company law problems with issuing fully paid-up shares that the employee does not pay for have not been fully resolved, although there are a number of solutions in practice that have not so far been challenged either by HMRC or the courts
- the requirement that the company pay the reasonable costs of the employee’s independent legal advice can push up the cost of spreading ESS to a large group of employees
- the seven day compulsory cooling off period must be factored into transaction timetables.
For more detailed information about ESS schemes, please contact: