There can be significant liability for the Company and its Directors if they do not comply with the requirements of the Financial Markets Conduct Act 1917 (FMCA). It could also provide to be an extremely exercise if the terms and conditions of the share offer are not well thought out and provide the Employer with the flexibility it needs while complying with its obligations to act in good faith towards its employees.
Reasons for implementing an Employee Share Scheme
- To attract and retain key employees
- To reward high performing employees
- To incentivise and maximise performance
- Succession planning
Types of Employee Share Schemes
Employee Share Purchase Schemes
This is where shares are either issued to the employee or transferred to the employee by an existing shareholder
Employee Share Option Schemes
This is where the employee is given the option to purchase shares on the happening on certain events – eg after they have been an employee for a certain period or if when they meet specified performance targets
Phantom Share Scheme
This is scheme which the employee with phantom shares. These are not real shares but do provide the employee with the right to a cash payment which is equal to dividends which would be paid if the employee held a certain number of actual shares in the Company.
What are the requirements of the FMCA which apply to Employee Share Schemes?
An offer of shares to an employee is deemed to be a Regulated Offer under the FMC. This means that a Product Disclosure Statement is required unless the offer comes within one of the exclusions in the FMCA. There are several exclusions in Schedule 1 to the FMCA which could apply to the offer of shares to an employee:
Employee Share Schemes
The offer must be part of the remuneration provided to the employee or otherwise made in connection with their employment or engagement. Raising funds must not be the primary purpose and the total number issued under the Scheme must no exceed 10% of shares issued in the Company in a 12 month period. The Employer must provide the employee with limited disclosure which includes the offer documentation containing a prominent warning statement, a description of the scheme and access to the Employer's annual report and financial statements.
Close Business Associates
The employee being offered shares must come within the definition of "Close Business Associates" which includes a director or senior manager of the Company, a spouse, civil union pr de factor party of a person who is a close business associate and a child, parent, brother or sister of a person who is a Close Business Associate. No additional disclosure is required under the FMCA as part of an offer which comes under this exclusion.
Relatives of a Director of the Company
This includes the spouse, civil union, de facto partner child, parent, grand parent, brother, niece, nephew, uncle, Aunt or first cousins of a director of the partner. No additional disclosure is required under the FMCA as part of the offer.
Small Offers
This is an offer which is made to 20 or less investor and the amount raised from the offer does not exceed $2,000,000. It must also be a "personal offer" which means the Employer only offers shares to those likely to interest due to previous contact, professional or other connection or statements/ actions made which indicate interest. The offer must not be notified and notification must be made to the Financial Markets Authority (or reliance on the exclusion together with details of the offer) and a prominent warning statement provided in the offer documentation.
Offers for no consideration
This is where shares are effectively "gifted" to an employee. But there must not be any non-financial consideration – eg agreement to non-competition provisions. No additional disclosure is required under the FMCA as part of an offer which comes under this exclusion.
Issues to consider when considering/designing an Employee Share Scheme
It is vital that your Employee Share Scheme is designed to meet the needs to your business – both now and in the future. It should also be flexible enough to provide the Employer with options in the future. Some of those issues are:
- What consideration is payable by the employee for the shares? Cash, non-cash (e.g. entry into a new employment agreement which contains new provisions such as non-competition clauses.
- What price is payable by the employee for the shares – will a discount be applied? Expert tax advice is essential here.
- How is the employee paying for the shares? Will the Employer provide vendor finance? How is this to be paid back – from dividends? Will interest be applied?
- Will the shares being offered have voting rights or just a right to dividends? If the shares have voting rights – what decisions can the employee be involved in?
- Does the employee have to meet any targets and/or attain certain performance criteria to be able to purchase the shares?
- What happens to the shares if the employee leaves? Typically, the agreement will contain "good leaver" and "Bad Leaver" provisions.
- Whether or not the employee can sell the shares while they are an employee and if so, to whom? Should there be a no transfer period?
- Will the employee be required to agree to a new or different restraint of trade as part of the offer?
- Will the Employer have a call option in certain situation?
- Will there be drag along or tag along rights?
What documentation is required for an Employee Share Scheme?
It would be standard for the following documents to be prepared and entered into as party of the Employee Share Scheme:
- An offer letter which sets out the main terms of the offer
- A Subscription Agreement (if the offer is for the issue of shares) or an Agreement for the Sale and Purchase of Shares (if the offer is for the purchase of shares held by an existing shareholder).
- Loan Agreement, if vendor finance is being provided for the purchase/ issue of shares.
- A Shareholders Deed/ Scheme Rules which the employee must sign up to
- New amended Employment Contract or Contractors agreement
- Tax advice
Tax advice
The implementation of an Employee Share Scheme can carry with it serious tax implications for both the Employer and the Employee. Any Employer contemplating implementing an Employee Share Scheme must seek tax advice from their accountant.
Parting Thoughts
As you can see from this article, the issue of shares to an employee can be a complex exercise which requires careful consideration and advice from experts to ensure that the Employer implements a scheme which is tailored to their situation. There are also serious implications if the Employee Share Scheme is not implemented correctly – eg fines under the FMCA and the potential for claims by an employee.
We can assist you to design an Employee Share Scheme which is tailored to meet the needs of your Company. If you would like to discuss this further, please contact Lizandra on 021 774 333 or liz@astutelegal.co.nz for a no cost no obligation consultation.
IMPORTANT DISCLAIMER
THIS ARTICLE IS INTENDED TO PROVIDE GENERAL INFORMATION ONLY. IT SHOULD NOT BE RELIED ON AS PROVIDING ANY FORM OF LEGAL ADVICE. YOU SHOULD OBTAIN YOUR OWN LEGAL ADVICE BEFORE ACTING ON ANY OF THE INFORMATION CONTAINED IN THIS ARTICLE.