Clive Zietman has featured in the Times commenting on Labour’s plan to force companies to share shares with employees if the party takes power in an election. His article, ‘Paved with good intentions’, can be read here. Below, Clive expands on these points in more detail.

The legal implications of an inclusive ownership fund

For some time now, the Shadow Chancellor, John McDonnell, has been outlining how, under a Labour Government, a law would be passed that would require all companies with more than 250 employees to give away 10% of their share capital to their employees. Ignoring the economic, political and moral implications of such a law, what are some of the legal implications of this proposal? The prospects of an imminent general election have focused minds on this topic once again.

In the absence of any detail, one can foresee very quickly some of the striking challenges that would face those drafting such legislation. There can be little doubt that any company wishing to avoid having its shares expropriated would exploit any legal avenue it could in order to protect itself. Where would the battleground be?

More interesting however, would be the practical implications for such a law and the need for draconian anti-avoidance legislation to make the process work.

Potential Human Rights Challenges

For starters, if this proposed law were introduced before the UK leaves the EU or before the expiry of any transition period, one can certainly imagine a company bringing a Human Rights challenge to the legislation. Article 1 of Protocol No. 1 to the European Convention on Human Rights is currently enshrined in English law and protects (amongst other things) any company’s “peaceful possession” of its shares. Forced expropriation of shares without compensation could well be seen as falling foul of this provision.

Foreign companies operating in the UK

Take for instance the question of foreign companies operating in this country. Mr McDonnell would presumably see them as fair game and would not wish to contemplate such entities escaping his net whilst the legislation bites on those incorporated here.

If the foreign company were incorporated in, say New York, it is hard to imagine how the UK could extend its extraterritorial reach that far, although what about Jersey or the Isle of Man? And even if foreign companies were exempted, what if the company in question were the wholly-owned subsidiary of a foreign corporation?

Fearful of having the shares in its subsidiary confiscated, the parent company might well decide to restructure its affairs so as to subsume the subsidiary into the parent and simply make it a department. Again, it is hard to see how this sort of action could be stopped if the controlling mind and body of the corporate were abroad.

What is beyond doubt is that any foreign company exemption would be exploited to the maximum, with companies that were able to do so, transferring their qualifying credentials to offshore jurisdictions so as to avoid the share grab.

Split companies

That issue begs the question of how one would fetter the rights of any company to organise its affairs in any way it wishes so as to avoid the impact of the legislation. What if a company with 400 employees were to split into two distinct companies each with 200 employees? How would that be treated?

There might be all sorts of reasons for such arrangements that would have nothing to do with the new legislation but presumably this sort of restructuring would have to be stopped as permitting it would make it too easy to sidestep the new law.

Companies approaching 250 employees

And what about companies on the cusp of the magic 250 employee mark? A company with 249 employees would presumably stop hiring. Indeed, it might be said that the directors of such a company would be failing in their well-established duties if they were to allow the company’s headcount to go over the line given the obvious implications for the existing shareholders.

Of course there will also be cases of companies with more than 250 employees that decide to reduce their headcount before or after the legislation became law. Carefully drafted language will be required to restrict any wriggle room.

It is obvious that there would need to be a governmental body policing every company in the country so as to monitor how many employees each one has at any given time and then, presumably, prosecuting those who fail to comply. Given the scale of the task one cannot imagine self-regulation and self-reporting being considered appropriate.

Which employees would count?

And then of course there would be the question of which employees would count. Would an employee who has worked for the company for 20 years have the same rights as one who was a part-timer taken on a day after the legislation came into effect?

What about employees who leave the company? It is hard to see why an ex-employee should benefit from having free shares on his or her departure but perhaps this sort of wide-spread share ownership is precisely what Mr McDonnell wishes to see.

Which entities would be impacted by the legislation?

Another issue would be the type of entity caught by the legislation. It would be perverse to force companies to hand over equity but not, for example, limited liability partnerships, which would otherwise become safe havens for growing enterprises. In the absence of shares as such, how would a compulsory handover be imposed?

Grounds for disputes

Given the vagueness of this proposal, the only certainty is that there will be swathes of uncertainty. However well any legislation were to be drafted, there would be huge grey areas and massive scope for conflict. Commercial litigators will be sharpening their axes at the prospect.