Employee shareholders and share buybacks

Employee shareholders

With a view to further reducing UK unemployment levels, the Government is looking to make recruitment more attractive to small-medium sized businesses through the introduction of ‘employee shareholder’ status (Clause 27, Growth and Infrastructure Bill 2012–13).

What will it involve?

• A minimum of £2,000 of shares must be offered to the employee in order to establish an employee shareholder arrangement
• The employee will benefit from a capital gains exemption on the first £50,000 made on the sale of such shares
• The employer will benefit as the employee will be required to waive their rights in relation to absence due to training, flexible working arrangements, unfair dismissal (subject to some European protections) and more crucially, redundancy. The employee must also provide the employer with 16 weeks’ notice or a concrete date for return from maternity or adoption leave.

Current status

With the House of Lords having the opportunity to reconsider Clause 27 of the Growth and Infrastructure Bill, there is still a possibility that the Bill may be subject to change.

Share buy-backs

Presently, employees who also own shares in their employing company (e.g. through enterprise management incentives (‘EMI’)) are often required to relinquish such shares upon an exit. However, in order to relinquish the shares there usually has to be a ‘transferee’ available to accept them. If a transferee does not present themselves, then the company will be forced to establish an employee benefit trust or seek to comply with the company law requirements for a share buyback.

A recent report by Graeme Nuttall on the subject of share buybacks concluded that the company law requirements were overly burdensome and could discourage employee ownership structures, which the Government feels is a key component to helping to reduce national unemployment levels (see above).

Current status

The Government suggested the following changes to the share buyback procedure in their response to Graeme Nuttall’s report:

• Allow off-market share buybacks to be authorised by ordinary resolution.
• Extend the ability to authorise in advance multiple share buyback agreements to private companies, but limited to buybacks connected with and employee’s share scheme (e.g. EMIs, SIPs, SAYE and CSOPs). The current notice periods for displaying resolutions to be retained.
• Payment by instalments by private companies for shares bought back, but only if the buyback is pursuant to or for the purpose of an employee share scheme. No maximum time limits are to be imposed.
• Allow private companies to finance a buyback out of capital if it is pursuant to or for the purpose of an employee share scheme, subject to providing a solvency statement and a special resolution.
• Allow private companies to buy back shares using small amounts of cash (not exceeding the lower of £15,000 or 5% of share capital in any financial year) that does not have to be identified as distributable reserves, where there is provision in the company's articles to do so. Where there is no provision in the articles, special resolution will be required.
• Private companies and unlisted public companies will have the option to hold shares in treasury on a similar basis to permitted public companies.

The Government intends that the secondary legislation required to amend the current provisions of the Companies Act 2006 will be in force at some point this year.

If you have any queries in respect of the above, please contact any member of the corporate team who will be happy to discuss.