Employee Shareholder Status: Proceed With Caution

Companies may now offer employees the opportunity to become “employee shareholders”.  The new law enables employers to offer workers between £2,000 and £50,000 worth of shares in return for the employee relinquishing certain employment rights such as the right to claim unfair dismissal and statutory redundancy pay and the ability to make flexible working requests.

The first £2,000 worth of shares will incur no income tax or national insurance liability and there are capital gains tax exemptions available on eventual disposal of the shares by the employee. The employee is obliged to take independent legal advice before accepting the offer and will retain other employment rights such as discrimination and whistleblowing protection.

Companies should carefully consider the legal ramifications of making such an offer, especially if the company has never operated employee share schemes.  At this early stage, there are also a number of legal uncertainties with the new law and directors must ensure they obtain comprehensive legal advice before proceeding. Directors should, in particular:

  • ensure correct documentation is put in place including an agreement, board minutes and resolutions
  • consider the effect on the company’s articles and any shareholder agreements
  • look at all alternative options of granting shares or options to ensure this is the most suitable for both parties
  • obtain a valuation of the shares and decide how the issue will be treated in the company accounts, particularly as the shares must be issued fully paid.  BIS guidance currently suggests that companies will generally need to issue shares by way of capitalisation of distributable profits
  • consider what will happen if the employee leaves.  Will the company be financially able to repurchase the shares?