Fast Track to Growth has been developed by SouthWestfd, PR, Astley Media and Exeter Innovation Centre, and Stephens Scown is supporting the programme. Simon Morris, partner in the corporate team in Exeter, has written a series of articles to highlight certain challenges to successful business growth and how to overcome them- today we publish part two of his article about employee shares.
In my first article I set out some potential pitfalls relating to issuing shares to employees. The below note follows on from the first note and highlights further matters to consider when issuing shares to employees.
What are the company’s long term aims?
Is the intention that the employee holds shares without any restriction? When issuing shares to an employee make sure that you don’t give the employee a disproportionate amount of influence or the ability to impact on management or other key decisions.
If an employee leaves employment of the company does the employee still retain the shares? A company will consider a number of matters before issuing shares to employees and one will be to incentivise and retain them, encouraging loyalty. If the employee leaves, this incentive hasn’t worked and the following should be considered:
- A “leaver” continuing to own shares will no longer be contributing to the future growth of the business of the company. Do the company, and other stakeholders, want that person to benefit from any increase in value created after he or she leaves?
- Would the company want to ensure that the employee leaver’s shares are then freely available to incentivise the remaining or new members of the team?
Shares are personal property, and much like personal property unless there are specific obligations in law, or within contractual documents, such as a shareholders’ agreement or the company’s articles of association, once issued there is no way to force a shareholder to sell his shares.
Shareholders’ Agreement and Articles of Association
A company issuing shares to an employee should consider putting in place a shareholders’ agreement and/or detailing rights and obligations within the articles of association of the company.
A company could consider the following (non exhaustive list of) matters to include within a shareholders’ agreement and/or the company’s articles of association:
- Pre-emption rights – preventing a shareholder from selling or transferring his or her shares without first offering them to the other shareholders. There may be permitted exceptions to this, but generally speaking the company and stakeholders will want to control who the leaving employee transfers shares to;
- Good leaver and bad leaver provisions relating to employee shareholders and the obligatory transfer of their shares, and the price at which the shares are transferred, in certain “leaver” circumstances;
- Drag along rights – if the majority, or the controlling, shareholders want to sell the company then this “drag along” right allows the majority to oblige the minority to sell their shares too. This prevents the employees, or other minority shareholders from effectively blocking the sale of the company;
- Dividend, voting and capital rights – which will likely be contained in the articles of association – perhaps consider altering the rights attaching to employee shares, or methods of valuing the shares, in order to protect the controlling shareholders. This could have knock on tax implications which would need to be considered on a case by case basis.
If you would like to contact Simon to find out more about the Fast Track to Growth programme, then please call 01392 210700 or email firstname.lastname@example.org.