A Practical Guide to Implementing a Share Plan – Plan Design and Shareholder Liaison

Matthew Findley

2

Introduction

Equity-based incentives are firmly entrenched within UK companies

They present particular issues in an SME context

Key design considerations

– Further your corporate objectives

– Take account of your specific circumstances

– Delivery of strategic goals

Shareholder liaison

Implementation nuts and bolts

– What documentation do you need?

– What do you need to ensure to minimise future administration?

Conclusions

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Design Considerations – Overview

Who do you want to incentivise?

Structure of plan

Currency of plan

Quantum

Vesting criteria

Treatment of leavers

Impact of change of control

Tax

Accounting

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Design Considerations

Who do you want to incentivise?

– Founders

– Senior management

– Other employees

Structure of plan

– “Conventional” awards

• Share options/performance shares

• Exercise windows if utilising share options

– “Restricted” shares

• Flowering shares

• Growth shares

• Jointly-owned shares

• Nil-paid shares

– HM Revenue & Customs approved plans

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Design Considerations cont.

Currency of plan

– Shares

• Source – existing shares or new issue?

• Number – linked to issue of individual quantum (see below)

• Valuation – relevant both at the outset and on vesting

• Possible need for a nominee

• Transfer, voting and dividend rights

• Liquidity How will value be realised? Creating a market

- Use of an employee benefit trust

- Issues for close companies

- Allowing shareholders to transact with each other

– Cash

• Phantom awards

• Long-term bonus awards

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Design Considerations cont.

Quantum

– May be influenced by market practice

– More likely to be driven by the objective of the plan

• Annual awards? Salary multiples

• Exit-focussed? Proportion of sale proceeds/value on IPO

Vesting criteria

– Three years from grant?

– Exit?

– Exit with long-stop date?

– Performance conditions

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Design Considerations cont.

Treatment of leavers

– “Good leavers”

– “Bad leavers”

– Treatment of any shares received by “good leavers”

• Buy back? Identity of purchaser? Potential cost to company

• Retain until exit (if unquoted)?

Impact of change of control

– What if plan is not exit-focussed?

– Unquoted SMEs – usual approach

– Quoted SMEs – usual approach

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Design Considerations cont.

Tax

– Do not lose sight of tax treatment in designing/implementing your plan

– Use a tax-efficient wrapper if at all possible

– Interaction with commercial objectives

Accounting

– Model any accounting cost as part of the design/implementation process

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Shareholder Liaison

Investor scrutiny of executive pay (including equity-based incentives) has never been greater

Relevance to SMEs

Unquoted SMEs

– Case-by-case assessment

– Formal shareholder approval unlikely to be needed

– Approach heavily influenced by shareholder structure/profile

Quoted SMEs

– Best practice to consult

– Best practice –vs–pragmatism

– Shareholder approval requirements

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Implementation Nuts and Bolts – Documentation Required

“Conventional” share plans – share options/performance shares

– Plan rules

– Performance conditions

– Board minutes adopting plan

– Remuneration committee minutes approving awards

– Formal grant papers

• “Global” deed of grant

• Individual deeds of grant

• EMI

– Communications

– EBT?

– Post-grant

• EMI1

• Annual return(s)

– Ongoing administration

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Implementation Nuts and Bolts – Documentation Required cont.

“Restricted” shares

– Flowering shares/growth shares/jointly-owned shares/nil-paid shares

• Articles of association

• Shareholders’ agreement

• Plan rules

• Subscription/share purchase agreement

• EBT

• Explanatory communications

• Associated board minutes

• Post-transaction valuation check

• Tax elections (“section 431 elections”)

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Conclusions

There are multiple ways in which equity incentives can be delivered in an SME context

Key design considerations

– Structure of plan

– Currency of plan

– Vesting criteria

– Tax

Position in respect of shareholder liaison will be heavily influenced by quoted/unquoted status and shareholder structure/profile

Design conclusions need to be carefully implemented

– Impact on management time if not

– Plan rules/Articles of Association likely to be the critical documents

– Ensure ancillary papers fit-for-purpose for future use (if relevant)

– Ensure deadlines in respect of reporting requirements/tax elections are adhered to

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