The Nuttall Review (click here for details on the Nuttall review and its proposals) emphasised the benefits of long-term employee share ownership, whether through employee trusts or by employees directly, and asked the Government to look at ways of facilitating this.

The Government has now published an initial response. The only concrete proposal at this stage is a consultation on changes to company law (though no tax law changes are yet proposed) to allow private companies greater flexibility to buy shares from their employees. This might include the facility to hold the shares in treasury, which could circumvent the need for private companies to have an employee trust.  However, brief mention is also made of other future work.

Buy back of shares

Currently, when private companies buy back shares from employees or indeed any other shareholder - whether the shares are bought using a company’s capital, distributable reserves or the proceeds of a fresh issue of shares - there are complicated provisions which have to be observed. Aside from the need for a special (75%) shareholder resolution, payment in instalments is prohibited and various procedural steps must be taken, sometimes involving auditors. Also, the shares are automatically cancelled once purchased.

The Government’s proposal aims to introduce greater flexibility including permitting approval by ordinary (50%+) resolutions, the ability to pay in instalments and the company being able to hold the shares in treasury to transfer to other employees. The consultation will also look into flexible funding options because, for example, the current rules make it harder for loss-making private companies to buy back shares.

A frequent concern investors have about allowing employees to hold shares in these companies is that it is predictable that employees will leave, yet investors do not want employees to hold shares after their departure. This often leads to a need for employee trust arrangements of some sort, which can be expensive for private companies to operate, and can deter companies from having employee shareholdings at all.

The proposals could help here, removing the need for trustees or custodians to buy the shares once the company is able to do this itself more freely, although companies use trustees and custodians for many other good reasons. If the company could buy shares back this way many of the associated problematic funding and tax issues such as loans to directors or participators would also fall away. The buy-back proposal may even help companies deal with shares forfeited by employees who take advantage of recent proposals and opt out of some statutory employment rights and then later leave employment.

Accordingly, regardless of wider developments on employee ownership, the buy-back proposal would be a useful by-product of the Nuttall Review and could benefit companies in private equity ownership and family-owned companies alike.

Raising awareness of employee ownership

Responding to the recommendation that a lack of awareness of employee ownership in the private sector ‘underpinned all other barriers to employee ownership’, the Government has set out an action plan which, amongst other things, includes:

  • a Ministerial programme of raising awareness raising activity through regional visits, starting with a regional event with the John Lewis Partnership, and
  • working with HMRC to consider guidance currently available on tax issues relating to employee ownership.

Increasing the resources available to support employee ownership

The Government proposes:

  • working with employee and wider mutuals to establish the viability of setting up an independent institute to raise awareness of employee ownership, and
  • establishing a Minister–led Implementation Group, made up of representatives from the Government, the world of business, the professional services and the employee ownership sector to take forward the implementation programme.

Reducing the complexity of employee ownership

Acknowledging that employee ownership in the private sector should not need to be complex or burdensome to adopt, the Government has made a commitment to work with the ICAEW and the Law Society to develop simple ‘off the shelf’ templates for setting up employee owned companies, in addition to a consultation on de-regulation of company law to reduce the regulatory burden faced by employee owned companies (see above).

The consultation is due to close by the end of the year and the Government will announce next steps in light of the consultation responses.  Draft legislation on the buy-back changes has been published.

To access the consultation paper on share buy-backs, please click here and for the Government general response please click here.