Do I need legal help to create a company share scheme?

Giving employees shares in a business can be a great way to incentives and retain staff. However, there are many important considerations when setting up a company share scheme. If not implemented correctly then there can be unintended consequences.

How will it affect future business sales?

If an issue of shares is not properly documented then this may create uncertainty over who owns a company.  This can cause difficulties with prospective buyers who will want to determine:

• who owns the shares in a company;

• the number of shares in issue; and

• the different classes of shares (and their powers).

This will be the most important issue for a prospective buyer in a share sale. They will want to be completely certain that the shares they believe they are purchasing (i.e: the percentage of shareholding and voting rights etc.) reflect the shares they are actually purchasing.

The last thing a buyer will want is an undisclosed third-party emerging after completion, purporting to be a shareholder.

How will the newly issued shares operate?

When issuing shares to employees, you should consider the wider impact. Newly issued shares will dilute existing shareholdings and may grant employee-shareholders certain rights. Therefore, you will need to consider:

• How will company decisions be made? Will certain matters require approval from founder/major shareholders?

• Will there be restrictions on share transfers, especially for employee shareholders?

• Will employee shares be subject to mandatory transfer if employees leave the company?

• What pre-emption rights, if any, will apply?

• Will the founder/major shareholders have "drag-along" rights?

These kinds of questions can be addressed through a Shareholders Agreement and accompanying articles of association.

Is your share scheme compliant?

If the share scheme is designed for tax purposes (i.e. EMI Schemes), it is important that the documentation and scheme structure comply with the requirements needed to qualify for tax incentives.

Providing shares to employees may also be considered a benefit connected with their employment and it is important to take appropriate tax advice. Failure to do so may bring unexpected tax liabilities.

How Lawson West Solicitors can help

If you’re considering implementing a company share scheme we would recommend you seek expert legal advice to protect your business’ present and future interests.

At Lawson West Solicitors, our experienced team of specialists in Corporate law can guide you through every step of the process. We understand that share schemes are not “one size fits all” and can create bespoke share schemes, Shareholders Agreements and Articles of Association suited to your business needs.

If you are thinking of incentivising employees with shares, or would like advice on share schemes, please contact us on telephone 0116 212 1000 or 01858 445 480, alternatively complete the free Contact Us form and we will get in touch as soon as possible.

View all