Since 2013, employees have been able to receive free shares with tax advantages in return for the surrender of certain statutory employment rights under what are known as employee shareholder arrangements. Indeed this has now become fairly common in private equity-backed companies, albeit with some political uncertainty about how long these arrangements and their tax advantages will continue. (Click here to see the previous Law-Now article on this subject.)
For shares to be employee shareholder shares, they must be received in the right kind of way. Historically, only new shares or treasury shares have been thought capable of satisfying the legislative requirements. However, HMRC has recently indicated that it now accepts that existing shares can be transferred to the employee by an existing shareholder (including an employee trust). It is not, as previously thought, necessary for the company to issue new shares or to use shares that it holds in treasury. Click here to see HMRC’s Bulletin.
Using existing shares avoids worrying about how the shares are paid up (or what value they are paid up at), which has been a problem with new issue shares, and it particularly makes it much easier for quoted companies (which have extra problems issuing shares for free) to participate in employee shareholder arrangements.
However, despite HMRC’s view there are still some risks with using existing shares. The legislation itself expressly says the shares must be “issued or allotted” which, in company law terms, would normally only refer to new shares being issued by the company (although it could also cover a transfer of treasury shares, as such a transfer is treated as an allotment for certain company law purposes). While most participants in these arrangements are just concerned about the tax treatment, there is a risk that with existing shares the employee could subsequently argue that his waiver of his statutory employment rights was ineffective because he received the wrong type of shares. This could be costly for the company if the employee’s contract is terminated at a time when the shares are worthless and so the employee has no incentive to argue for favourable tax treatment of his shares.
Accordingly, in most circumstances it would still seem preferable to continue to use new, rather than existing, shares in the implementation of employee shareholder arrangements.