If you are interested in establishing a share scheme, would like a review of your current arrangements or would like further advice on any of the issues raised in this guide please contact Fiona Thornton (fthornton@algoodbody.ie) or Sheena Doggett (sdoggett@algoodbody.ie) or by regular mail at A & L Goodbody, 1 Earlsfort Centre, Hatch Street, Dublin 2. Telephone ++ 353 1 661 33 11.
INTRODUCTION
This booklet is intended to provide a general guide to employee share schemes in Ireland.
The guide examines
- reasons why companies have share schemes
- types of share schemes available
- factors to be taken into consideration when setting up a scheme
- requirements of the Irish Stock Exchange for listed companies
- guidelines of the Irish Association of Investment Managers affecting companies listed on the Irish Stock Exchange with institutional investors
- action which may be appropriate for companies which already have schemes in existence
If you would like to establish a share scheme or if you require further information on the range of possibilities available, please contact Fiona Thornton or Sheena Doggett.
This booklet has been written as a general guide and detailed professional advice should be sought before taking any action.
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CONTENTS
Tax based schemes: - Revenue Approved Profit Sharing Schemes -SAYE Schemes -Share Subscription Arrangements -ESOTS -Share Retention Plans
Executive option and other schemes (schemes without tax incentives) -Executive Share Option Schemes -"Phantom" Share Option Schemes -Long Term Incentive Plans
Who pays for the shares? Will an approved or unapproved scheme suit the company's needs? Tax implications Will Stock Exchange rules apply? Will IAIM guidelines apply? Will there be any company law issues? How are the shares valued? Exit routes Trust law considerations Data protection laws Other regulatory issues
Eligibility Material Interests Maximum participation Similar terms Dealings with shares by a participant The role of the trustees Conditions applying to shares Deduction for employers contributions Tax implications in brief Profit sharing schemes used in conjunction with esots
Eligibility Savings contracts Savings periods Conditions as to the exercise of options Conditions applying to shares How the scheme is funded
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1. WHY HAVE A SHARE SCHEME?
For some companies, encouraging employee share ownership may be a goal in itself. Others may decide to set up share schemes to provide tax efficient benefits to employees under an approved scheme.
Other important reasons for introducing share schemes include:-
- aiding recruitment and retention of staff;
- encouraging employees to identify with the company and giving them a direct interest in how their employer is performing in the marketplace; and
- motivating employees to give better service and improve profit.
Recent Irish governments have shown strong commitment to employee share ownership and profit sharing generally. This commitment is reflected in the tax system which has a range of tax reliefs for employee share ownership.
Revenue approved schemes are framed to comply with detailed tax legislation and may well suit a company's requirements.
Sometimes companies are unable to achieve their objectives within the framework of a Revenue approved scheme and will, instead, chose to set up an unapproved arrangement. Although offering no special tax advantages this can still provide other very worthwhile benefits.
Establishing a successful share scheme and tailoring it to a particular company's needs is a challenge. Under a well designed scheme, there can be major benefits for both the company and its employees.
2. WHAT TYPES OF SCHEMES ARE AVAILABLE?
2.1. Tax Based Schemes
2.1.1. Revenue Approved Profit Sharing Schemes
These were introduced in 1982 and are regulated under the Tax Acts.
Under such schemes, a company pays money (not necessarily related to the amount of its profits) to a trust. The trustees use the money to acquire shares in the company (or its holding company), and the shares are then allocated to employees. Employees may also forego salary up to the lesser of the employer contribution and 7.5% of the employee's basic salary to acquire additional shares under the scheme. The shares are retained by the trustees, usually for three years, before they are distributed to the employees.
Broadly, such schemes must be open to all employees and they must participate on similar terms. Shares to the value of IR£10,000 per tax year (and exceptionally IR£30,000) may be allocated to employees free of tax. Payments to the trust by the company are tax deductible provided certain conditions are met.
Revenue approved profit sharing schemes are discussed in more detail further on.
2.1.2. Revenue Approved Savings Related Share Option Schemes (SAYE)
These were introduced in the Finance Act 1999. An option is granted to the employee who agrees to save a sum of between IR£10 and IR£250 per month over 3 or 5 years to fund option exercise. The option price may reflect a discount of up to 25% of the shares' market value as at date of grant. Interest on invested savings with a qualified savings institution under a certified savings scheme is tax free.
Broadly, like Revenue approved profit sharing schemes, SAYE plans must be open to all employees on similar terms. The costs of establishing an SAYE plan are tax deductible on meeting certain conditions.
Revenue approved SAYE plans are discussed in more detail further on.
2.1.3. Share Subscription Arrangements
An employee subscribing to a new issue of shares in his employing company is entitled to a tax deduction equal to the amount of the subscription. The maximum deduction for all such subscriptions made by him during his lifetime is IR£5,000. Shares must be issued in an Irish incorporated company which is tax resident only in Ireland and which trades or is a holding company whose business consists of the holding of shares in trading companies.
2.1.4. ESOTs (Revenue approved Employee Share Ownership Trusts)
These are regulated under the Tax Acts.
They are used to enable block(s) of shares in the establishing company to be allocated to employees over phased periods. ESOTs are relevant in state privatisations or management buyouts.
A trust is set up which benefits employees of the establishing company and its participating subsidiaries. The trust may borrow to purchase shares in the establishing company, receive cash and/or shares as a gift. Shares must be transferred out of the esot within 20 years. The esot may transfer them to a Revenue approved profit sharing scheme (in which case no capital gains tax accrues to the esot on the transfer).
At least half of the esot trustees must be selected by employees. A professional trustee unconnected with the company is also required. Dividend income (and capital gains on shares) used to acquire shares or to repay borrowings (capital or interest) incurred for share purchases are not taxable.
Shares acquired by an esot must comply with various conditions; in particular they must be ordinary shares.
As is usual in tax approved plans, shares must be transferred on similar terms.
The costs of establishing an esot and contributions made to it are tax deductible for the establishing company and its participating subsidiaries provided certain conditions are met.
2.1.5. Share Retention Plans
These are informal arrangements whereby an employer enables employees to acquire shares in it or its parent on condition they are not sold or transferred for a minimum period of one or more years.
The Revenue recognises that the restriction on sale reduces the value of the shares and consequently a deduction in the calculation of benefit-in-kind arises provided certain conditions are met.
2.2. Executive Option And Other Schemes (Schemes Without Tax Incentives)
Frequently, even though a scheme may not carry with it a tax incentive the employing company will nonetheless wish to establish an employee share scheme. The scheme may provide greater flexibility than, for example, a profit sharing scheme and may be more in line with corporate philosophy.
2.2.1. Executive Share Option Schemes
Between 1986 and 1992 it was possible to establish Revenue approved share option schemes which did carry tax advantages. Those tax advantages continue to apply to options granted under those schemes on or before 28th January, 1992.
Under such schemes a company grants an option to employees who thereby obtain rights to acquire company shares in the future at a price fixed at the date of the grant. It is usual for the price to be the market value of these shares. Newly issued shares are usually used to satisfy options. In some cases, however, it may be possible to make use of existing issued shares held by an employee trust. Frequently, these may be established as overseas schemes by an overseas parent.
- Scheme terms. In establishing an executive option scheme, a company is free (within IAIM guidelines, if applicable) to choose which of its executives may participate in the scheme and on what terms. No Revenue considerations apply since such schemes are not capable of approval.
- Option price Options are usually granted at an option price determined by reference to the market value of the company's shares at a date on or shortly before the option is granted.
- Exercise Conditions Exercise of options may be conditional on attainment of service or performance targets. Such may be additional individual targets in conjunction to those required by the IAIM guidelines, where these are relevant.
It is important to ensure that any performance target is a fully understood by the company and participant alike. The target must be clearly framed and communicated to the participant.
2.2.2. Other Schemes
Overseas Schemes
Legal and tax issues arise where an overseas share scheme is extended to Irish based employees. Professional advice should be taken to minimise the pitfalls, maximise the opportunities and comply with filing requirements which can apply to those arrangements.
Partly Paid And Other Schemes
Special arrangements can be set up tailored to the specific needs of a client.
"Phantom" Share Option Schemes
Essentially, these are a cash bonus arrangement linked to a company's shares. For example, employees are given options over "notional shares" in existing companies and later receive cash payments related to any increase in the value of shares in the existing company.
Arrangements of this sort can avoid the necessity to issue new shares to participants. The company pays out cash and does not dilute existing shareholdings. If it is intended that the arrangement should operate as a pure cash bonus scheme, a company should consider whether its share value is the most appropriate measure of performance for quantifying bonuses. Earnings per share, profits or some other performance target may reflect the company's success more reliably.
Also, careful consideration needs to be given to the problems of a company giving an open-ended financial commitment of this sort. Possibly, its share value could rise higher than its ability to pay the related bonus.
Long Term Incentive Plans (LTIPs)
These are arrangements intended to act as an incentive to senior executives over several years. Usually, they involve the payment of additional remuneration either in the form of awards of shares and/or cash. They may operate in lieu of or in conjunction with an executive option scheme. Where shares are awarded, these may be sourced from an employee benefits trust. LTIPs may be framed by a company to be an all employees share plan.
3. FACTORS TO BE CONSIDERED WHEN SETTING UP A SHARE SCHEME
3.1. Who pays for the shares?
The initial decision for a company is whether it will give shares to its employees or whether they will be required to pay for the shares. In the former case it is usual for a trust to be established.
3.2. Will an approved or unapproved scheme suit the company's needs?
The second choice is between the flexibility of an unapproved scheme and the tax advantages of an approved one.
If employees are to pay for their shares, the usual choice is to establish a share option scheme.
Such a scheme will normally provide for a minimum period of continuous employment (and in the case of an executive scheme the attainment of targets) before an option can be exercised. On exercise, the employee benefits from the increase between the option price and the then value of the shares.
3.3. Tax Implications
The tax implications of a particular scheme should be considered prior to its introduction to establish if the employer can avail of a tax deduction and whether or not the employee is liable to income tax and capital gains tax.
3.4. Will stock exchange rules apply?
Companies whose shares are dealt on the Irish Stock Exchange are required to comply with Stock Exchange Rules. These are discussed further on.
3.5. Will IAIM guidelines apply?
The guidelines of the Irish Association of Investment Managers("IAIM") are relevant if new shares may be issued under the scheme and the company's shares are dealt on the Irish Stock Exchange. Since most companies which are quoted on the Irish Stock Exchange usually have institutional investors, where relevant, the guidelines of the IAIM will be reflected in a scheme when it is designed. These guidelines are discussed on page 26.
3.6. Will there be any company law issues?
3.6.1. Constitutional issues
It is usual to ensure that the company has power to adopt the proposed plan and to see that it is, if necessary, pre-approved by shareholders. If a Revenue approved plan is to be set up its documents need to be approved in advance by the Revenue.
3.6.2. Financial Assistance
Any company establishing a share incentive scheme will need to be satisfied that it does not contravene company law concerning the provision of financial assistance for the acquisition of its own shares.
3.6.3. Insider dealing
If the share scheme being established relates to traded shares in an Irish company the law relating to insider dealing will apply to dealings under the share scheme. Advice must be taken to ensure that the scheme is not operated in a way which breaches these provisions and it is usual for the company to operate a dealing code for its directors and employees. Company law provisions relating to insider dealing operate in conjunction with the Irish Stock Exchange prohibitions in this area and IAIM code of best practice on share dealings.
3.6.4. Directors' declarations of interest
Company directors who are potential beneficiaries of a share scheme must declare their interests in the scheme, at the board meeting at which the scheme is proposed to be adopted.
3.6.5. Disclosure of interest in shares by officers of a company
Whenever the director or secretary of an Irish company acquires or disposes of an interest in shares in that company or its holding company, he must notify that event to the company within five days. Similar requirements apply to the grant and exercise of options. The company must then enter details of the notification received in a register of directors' interests in shares within three days. Breach of these provisions results in the non-enforceability of the director/secretary's interest in shares under Irish law as well as giving rise to penalties.
Where the company's shares are dealt in on the Irish Stock Exchange, the company must notify the Stock Exchange within one day, of details received by it from the director/secretary of the acquisition or disposal of the relevant interest in shares.
3.6.6. Freedom of company to issue shares to employees
When establishing a share scheme, it is important to ensure that the statutory provisions which require a company to issue new shares to its existing shareholders are disapplied. This is to ensure that new shares can be issued directly to the share scheme beneficiary.
3.6.7. Directors precluded from receiving purchase options
Directors of Irish quoted companies should only receive options to acquire shares to be newly issued on exercise, otherwise a breach of law is likely to arise.
3.6.8. Other regulatory issues
It is necessary to consider whether any parties by virtue of their involvement with a share scheme need to be authorised under investment intermediary legislation. If a share scheme is coupled with a savings plan (e.g. SAYE plans) consideration needs to be given to whether the savings carrier should comply with any applicable Irish regulatory provisions.
3.7. How are the shares valued?
Usually shares will be valued by reference to their market value at the relevant date. This value is also usually relevant for tax purposes. (For example, Revenue approved SAYE plans permit options to be granted at a discount of up to 25% of the shares market value). It may, however, be difficult in practice to determine the market value of shares in a company for tax purposes at a particular time, especially if its shares are not listed on a stock exchange. In those circumstances, careful consideration of how their value is to be ascertained is desirable.
3.8. Exit Routes: Is it always possible for a participant to realise value for his shares?
Where the scheme shares are not traded, it may not be possible to realise that value, although the assets which the employee has acquired may have grown considerably in value.
In some circumstances, this problem can be overcome by establishing an internal market in the shares, possibly in conjunction with an employee benefits trust. However, to establish such a market, usually a significant turnover in shares should be contemplated. This type of arrangement may be suitable to a group of companies with a very large workforce.
Alternatively, it may be possible for one or more of the other shareholders or even the company itself to buy the employee's shares.
3.9. Trust law considerations
Where the share scheme involves a trust, the trust must be designed to comply with the general requirements of trust law as well as the written terms of the plan itself.
3.10. Data protection laws
Data protection laws require that personal data (name, address and any other personal identification material) must be held in such a way as to respect the individuals' rights to privacy. (For example, these laws are intended to regulate the issue of junk mail). When setting up a share plan it is important to ensure that these laws are not breached.
4. REVENUE APPROVED PROFIT SHARING SCHEMES
The principal features of these schemes are:-
4.1. Eligibility
All employees and full-time directors in employment for a qualifying period (which cannot exceed three years) and who are taxed under Schedule E must be eligible to participate on similar terms.
The scheme must not allow shares to be appropriated to an employee or director more than eighteen months after he ceases employment with the company.
4.2. Material interests
If the company whose shares are to be allocated to employees is a close company, employees who have more than a 15% shareholding may not participate.
4.3. Maximum Participation
The maximum value of shares which the trustees can appropriate to an employee in each tax year is IR£10,000. (Exceptionally, this may be increased in one year to IR£30,000 where shares are sourced from an esot (and certain conditions apply).
Participation will also be limited by the level of contributions made to the scheme by the employing company. These contributions do not have to be geared to any particular percentage of the company's profits, although some companies choose to do this in order to incentivise employees more effectively.
Other companies operate "Salary Foregone" arrangements where an employee can set aside part of his basic salary (not exceeding the lower of 7.5% of basic salary or the employer's money used to buy scheme shares for him under an offer) to buy scheme shares. Where this arrangement occurs, it must be made in conjunction with a usual offer of shares.
4.4. Similar terms
Eligible employees must all be entitled to participate in the scheme on similar terms. These may vary by reference to the salary and service record of employees or similar factors. The purpose of this requirement in the legislation is to ensure that the approved profit sharing scheme genuinely benefits all levels of employees and is not for example, merely focused on senior executives. The Revenue pays particular attention to the system of share allocation between employees. The following are examples of some systems of allocation which have received Revenue approval in the past:
- Employees all receiving the same value of shares each;
- Company wide bonus arrangements applicable to all qualifying employees fund share acquisitions;
- The number of shares allocated to an employee is determined by a grid system so that employees with long service but on a lower tier salary level could receive the same number of shares as an employee with lesser service but on a higher salary level;
For example:
|
Salary IR£ |
Years of Service |
|||
|
|
0-2 |
2-4 |
4-6 |
6+ |
|
0 - 15,000 |
100 |
200 |
300 |
350 |
|
15,001 - 20,000 |
200 |
220 |
320 |
340 |
|
20,001 - 25,000 |
200 |
220 |
340 |
360 |
|
25,001 + |
200 |
220 |
380 |
400 |
(The above table illustrates share entitlements on a grid basis where salary level and years of service determine the entitlement of participants.)
- The number of days of sick leave taken during a year determines the number of shares to be allocated to an employee;
- Employees receive shares to the value of their cost of living increase foregone during the period from the scheme's inception to the latest share allocation offer date;
- Company wide gain sharing.
Employers should feel free to design their own system of allocation.
The Revenue will approve schemes which offer participation on a matching offer basis. Under such arrangements, an employee receives one free share in the company for every share he purchases himself out of his net salary.
4.5. Dealings with shares by a participant
A contractual agreement must be entered into by each participant. The employee must agree as follows:-
- he must permit his shares to remain in the hands of the trustees for a period of usually two years after they have been allocated to him ("the period of retention");
- he must not, during the period of retention assign, charge or otherwise dispose of his beneficial interest in the shares;
- he may direct the trustees to transfer his shares to him after the period of retention but before the third anniversary of appropriation ("the release date"). Prior to any such transfer, however, he must pay to the trustees a sum equal to income tax at the basic rate on (usually) the value of the shares at the time of appropriation;
- he may also direct the trustees to dispose of the shares, after the period of retention, but before the release date, provided that this is by way of sale for the best price that can reasonably be obtained at the time.
4.6. The role of the trustees
The trustees are appointed under a trust deed which governs the scheme and they must be Irish tax resident. They receive cash contributions from the employer with which they acquire and hold shares on behalf of the employees for a minimum required period. After this period has elapsed, they must pass the shares on to the employees.
At least one trustee who is unconnected with the company must be appointed. This is an additional safeguard required by the Revenue to ensure that the trustees act independently of the company.
Under trust law the trustees are, in any event, required to act in the best interests of their beneficiaries; the scheme participants, and cannot be constrained by the company's wishes.
Once the shares have been allocated to an employee and are held under the scheme for his benefit, they are then beneficially owned by the participant. The trustees hold the shares on behalf of the employees. While shares are in the control of the trustees, the employee may exercise voting rights on the shares by instructing the trustees to vote according to his wishes.
Trustees will also file annual tax returns and account to the Revenue for any tax owed by them. They also must give employees details of all share appropriations made to them.
The cost of running the scheme (including trustee remuneration, if relevant) is borne by the employer companies participating in the scheme and is tax deductible.
Goodbody Trustees Limited is A & L Goodbody's trust company and acts an independent trustee in a variety of share schemes. It has extensive experience of providing trustee and administrative services in this area.
Services provided by Goodbody Trustees include:-
- liaising with the individual employee designated by the company to deal with issues concerning the share scheme;
- dealing with brokers and custodians in connection with the acquisition of shares;
- agreeing the allocation value of the shares with the Revenue for tax purposes;
- calculating and recording the number of shares to be allocated to each participant;
- formally notifying each participant of the number and value of shares allocated.
- distributing dividends received amongst the participants;
- after the Period of Retention, arranging sales at the direction of participants;
- after the Release Date, arranging for sales to be sold or transferred directly into the names of the participants.
4.7. Conditions applying to shares
Companies wishing to set up an approved profit sharing scheme may find that their shares are unsuitable because of the limitations on the sort of shares that can be used for such schemes. The aim of these limitations is to prevent the manipulation of share values.
The relevant provisions are detailed and complicated but the main provisions are:
- Identity of company whose shares are scheme shares
The shares must form part of the ordinary share capital of a company
(a) setting up the scheme; or
(b) one which controls a company which sets up the scheme; or
(c) one which is or has control of a company which is a member of a certain type of consortium.
- Share restrictions
The scheme shares must be fully paid up and not redeemable and must not be subject to any restrictions that do not apply to all shares of the same class. Schemes approved on or after May 1997 may be subject to certain restrictions contained in the company's articles of association requiring the shares to be sold in the event of leaving service.
- Separate classes of shares
Difficulties may arise if the ordinary shares in a company are divided into separate classes. In that event, a majority of the class of shares which are scheme shares generally must be held other than by employees and directors or trustees holding on their behalf.
- Subsidiaries
In a group of companies, the shares used must generally be those of the parent company. Shares in a subsidiary can be used only if either the subsidiary or the parent is quoted on a recognised stock exchange.
4.8. Tax deduction for employers' contributions
Monies paid by a company to an approved profit sharing scheme are tax deductible in computing the company's profits, subject to certain conditions:
- the payment must either be used within 9 months of receipt to acquire shares for allocation to employees or be necessary to meet the trustees' reasonable scheme administration expenses;
- the deduction cannot exceed the company's trading income for the period;
- the tax deduction may be restricted to such amount as the Revenue regard as reasonable (having taken into account the number of the company's employees and directors who participate in the scheme and their salary levels, length of service with the company or similar factors).
4.9. Tax implications: a guideline
Shares are received free of income tax by an employee if they are held by the trust for three years.
Participants are taxed on dividends they receive on shares allocated to them in the usual way.
If shares are sold (or transferred into the participant's name) after two years of first allocation, income tax arises for the participant usually by reference to their value at allocation or, if lower, the sales proceeds (or value at time of transfer).
If a transfer into a participants' name is requested after two years (and before three) of first allocation the participant must pay the trustees an amount on account of standard rate income tax on the taxable amounts.
On a sale of shares after they have been transferred to the participant after three years their base cost for capital gains tax purposes is their value at initial allocation. Capital gains tax will apply in the usual way.
4.10. Profit sharing schemes used in conjunction with esots
Various additional opportunities apply where shares are passed from a Revenue approved esot to an approved profit sharing scheme. For example, effectively the 2 year and 3 year holding periods required under profit sharing schemes may be reduced by the equivalent amount of time that the shares have been held by the esot. Additionally the IR£10,000 annual cap on individual share allocations can in some cases be increased to IR£30,000 where shares are passed out from such an esot to an approved profit sharing scheme.
5. REVENUE APPROVED SAYE SCHEMES (SAYE Schemes)
5.1. SAYE schemes
The approved savings related share option scheme was introduced by the Finance Act, 1999.
5.2. Eligibility
An SAYE scheme must be open to all eligible employees of the company establishing the scheme and those of its participating subsidiaries on similar terms. Similar terms may vary by reference to salary or service or similar factors. It is possible to include a minimum service requirement for employees but this must not exceed three years.
5.3. Savings contracts
Participating employees must agree to save between IR£10 and IR£250 per month with an approved savings carrier. These savings will come from net income (i.e. after tax and PRSI). Any interest or bonus payable on the savings contract at maturity will be exempt from tax and not subject to DIRT.
5.4. Savings periods
These may be for three or five years with a facility to let the savings roll-over until seven years has elapsed from the start of the savings period.
5.5. Funding of option exercise
The sum of the contributions and investment return under a certified plan must be sufficient to secure the repayment of enough cash to take up in full options granted at the start of the related savings period. This means the monthly savings amount over the selected savings period will effectively peg the value of options granted at the outset. At maturity there is no obligation to exercise the option and use the savings proceeds to take up the option.
Subject to some exceptional circumstances, for example death or retirement, the general rule is that an option cannot be exercised until after the bonus date. Then options may only be exercised on the dates predetermined at the time of the grant.
An option is not assignable.
5.6. Conditions applying to shares
These conditions are substantially similar to those for profit sharing schemes dealt with at paragraph 4.7
5.7. How the scheme is funded
SAYE schemes are effectively funded by the employees themselves through their savings. Apart from set up costs, there is little cost to the employer. Furthermore any money expended by a company in establishing a Revenue approved savings related share option scheme can be written off against profits or gains of a trade carried on by the company provided certain conditions are met.
6. STOCK EXCHANGE RULES (AND BEST PRACTICE PROVISIONS FOR DIRECTORS' REMUNERATION)
Where the shares to be used for the purpose of the scheme are dealt in on the Irish Stock Exchange the scheme must comply with Stock Exchange Rules (which are regularly updated). These do not restrict the benefits that can be provided under the scheme. They merely stipulate the procedures to be followed in adopting or amending schemes which involve the issue of new shares and certain provisions that must be included in the scheme documentation. They also impose a code of share dealing which must be followed.
The Stock Exchange rules also set out a code of best practice relating to directors' remuneration. This should be considered when framing a share scheme.
The principal rules are as follows:-
- Schemes must be approved by shareholders prior to establishment if they involve shares to be newly issued. Certain key features must not be amended without the prior consent of the company in general meeting.
- Shareholders must be notified of the principal terms of a scheme in a circular.
- The Stock Exchange's model code on dealing in company shares must be adopted by the company, to apply to its directors and those of its executives with access to unpublished price sensitive information. Unpublished price sensitive information is information which, if it were widely known, would materially affect the price at which the company's shares are dealt on the Stock Exchange.
7. IAIM GUIDELINES
These are published by the Irish Association of Investment Managers and apply to a company whose shares are traded on the Irish Stock Exchange and which has institutional investors who require compliance with them. The guidelines are not legally binding. Irish institutional investors take the view that if a share plan is not guideline compliant they reserve their position as to whether they will vote in favour of it at the shareholders meeting at which it is to be approved. The guidelines also endorse the recommendations of the Combined Code on Corporate Governance (published by the London Stock Exchange).
Overall limits
The IAIM has two general requirements;
- that no more than 10% in aggregate of shares in a company may be utilised for share schemes of all kinds in any ten year period;
- The rate at which options may be granted or shares issued over all the company's share plans must comply with certain flow rate limits: broadly no more than 3% of the company's shares may be made available over any 3 years.
- Shares must be made available under SAYE planes are excluded from these limits save if issued at a discount to market value when some shares are deemed to be issued under these limits.
- Exercise of options (save those granted under SAYE plans) may only occur on attainment of performance (usually earnings) targets. Options with a three year performance target are known as basic options and those with a five year target are know as super options.
A further 5% of shares may be set aside for share arrangements which benefit all employees in a company (e.g. company-wide employee share plans where employees agree to changes in work practice, including salary restrictions in return for receiving shares).
Other detailed provisions apply and must be considered when framing a plan.
8. MERGERS AND ACQUISITIONS
The legal, tax and regulatory implications of a proposed merger or acquisition must be considered prior to the consummation of the transaction. For example, the rules of the plan may require that certain action must be taken (e.g. option exercise is accelerated and exercise must occur within a specified time) which it may be preferable to avoid (e.g. it may be more beneficial for substituted options to be granted). It is vital that plan rules are reviewed to ensure that the transaction proceeds in a way which meets the client's needs without infringing on the rights or expectations of plan participants or on applicable laws or regulations. The Takeover Panel Code and the Stock Exchange Rules may be relevant. Depending on the circumstances it may be appropriate to amend a plan, introduce a new one or make other arrangements with participants.
9. ACTION FOR EXISTING SCHEMES
Any company which already has employee share schemes should review them regularly.
It may be appropriate to introduce a replacement scheme where an existing one is due to expire or to avail of the new SAYE option regime. Companies may also wish to compare schemes against those introduced by competitors to ensure that the original HR and other objectives continue to be achieved in the best possible way.
Some companies may only operate one type of share scheme, e.g. a profit sharing scheme and not another e.g. a share option scheme (or long term incentive plan) and may wish to set up another scheme or may like to consider issuing new shares to enable employees to avail of the share subscription relief.
Option Schemes
- Amendments to a scheme may be appropriate from time to time, perhaps to alter performance targets or reflect updated IAIM guidelines.
- If a company operates an executive share option scheme covering basic options only, it may wish to extend this to super options.
- Additionally, the company may wish to set up a Revenue approved SAYE plan.
Revenue Approved Profit-Sharing Schemes
- Companies with approved profit-sharing schemes should check whether their schemes permit their employees to benefit from the increased limit of £10,000, p.a worth of shares per individual (from the previous £2,000).
- Companies operating such schemes may also wish to consider whether the scheme's allocation system should be changed. It should be noted that prior Revenue approval must be obtained before any changes can be made to an approved profit-sharing scheme.
Esots
In the context of a management buyout or other change of ownership it may be appropriate to set up an esot as a vehicle whereby employees acquire a stake in the company by bank borrowings or otherwise.
FURTHER INFORMATION
If you are interested in establishing a share scheme, would like a review of your current arrangements or would like further advice on any of the issues raised in this booklet please contact Fiona Thornton or Sheena Doggett.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.