Do you want to set up a growth share scheme for your business? Do you hold growth shares and you are unsure what your rights are? Suzy Giele from our team at EM Law is one of the UK’s leading experts on growth shares as well as other types of share incentive schemes.
Growth shares are a special class of shares usually offered to employees or directors to incentivise them. They enable the holders of these shares to benefit from the company’s growth in a tax efficient way.
There are different types of growth shares for example “hurdle shares” and “flowering shares” although they all follow a common thread: shareholders are able to invest in a business without having to pay to invest at the company’s current value. Instead these shareholders benefit from the value that arises in the business following their investment along with associated tax efficiencies.
Hurdle Shares are a type of growth share that enables holders to benefit from growth in a business once growth exceeds a certain level. For example, if a company is worth £1 million and growth shares are allocated that allow the holders of those shares to benefit from growth once the company’s value is £1.5 million then these would often be referred to as growth shares or hurdle shares.
Flowering shares enable the holders of these shares to participate in the growth of a company once a specific condition is met, for example, once the profits of the business hit a certain level.
Why use growth share schemes?
If the business does not qualify for offering EMI options and its ordinary shares are too expensive for employees to purchase then growth share schemes are an alternative way to incentivise participants.
They can be tax efficient (see below).
From the current shareholders’ perspective, if the growth shares are structured appropriately, their ownership in the business is not diluted and participation in a growth share scheme is selective – the company can choose who should benefit – not all employees must be offered growth shares.
Rights in growth shares are established at the board’s discretion i.e. they can be designed with or without voting and dividend rights. However, shareholder approval will normally be required to introduce the growth share structure initially.
Establishing a plan for your Growth Share Schemes
Before setting up the scheme the company will need to determine:
The company’s articles of association will then need to be amended to reflect the outcome of the above analysis.
The company will often also need to adopt an employee growth share plan. The plan will include details such as who can award the shares, the terms on which the shares will be acquired and other provisions.
The relevant employees will acquire their shares under a subscription deed.
Share valuation is a key aspect of the design and operation of growth share schemes and therefore it will be necessary to also involve a share valuation specialist.
As the value of the growth shares at the time of allocation will be low there will normally be little or no income tax or national insurance contributions liabilities depending on whether the shares are offered for full value or at a discount. The more beneficial rates of capital gains tax will normally apply to any increase in the value of the shares.
For any questions you may have concerning growth share schemes contact Suzy Giele.
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