Employee share schemes – part 3

Published by Chris Taylor on October 22, 2010

Where an employer wants to implement an employee share scheme, the employer should carefully consider how to structure the terms of the scheme. 

Will shares be transferred to employees outright?  Will shares be transferred to an employee share trust (controlled by the employer) which restricts the circumstance in which shares are transferred to participating employees? 

There are many ways to structure such schemes and each employer will have their own preferences.  In any event, where shares are to be transferred to an employee under an employee share scheme, the employer should require the employee to enter into a shareholders’ agreement. 

Some of the useful provisions (from an employer’s point of view) that can be included in a shareholders’ agreement include the following:

  • Control.  The employer (i.e. the company owner) can ensure that they have ultimate control of the business (subject to mandatory provisions of the Companies Act).  For example, the employer can ensure that only they have the right to appoint directors to the board and have the power to implement all business decisions that they make.
  • “Drag along” rights.  These rights allow the employer to require the employee shareholders to sell their shares should the employer wish to sell the company to a third party.
  • “Tag along” rights.  These rights allow an employer to prevent employee shareholders from selling their shares to a third party unless the third party also offers to purchase the employer’s shares on terms that are no less favorable than that offered to the employee.
  • Pre-emptive rights.  These rights will restrict the situations in which employee shareholders can transfer/sell their shares to third parties by requiring the employee shareholders to first offer their shares to the employer (on terms no less favorable than that offered to the third party).
  • Confidentiality obligations.  These obligations will prohibit employee shareholders from disclosing or using confidential information outside of the business. 
  • Non completion/restraint of trade.  These types of provisions will prohibit employee shareholders from being involved in a competing business, both during their tenure as employee shareholders and for a period thereafter (for example, one year). 

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