There are circumstances where a company may wish to look at alternatives to tax-advantaged CSOP (Company Share Option Plans) and EMI (Enterprise Management Incentive) options. Such circumstances include where:
- a company does not satisfy the conditions necessary to qualify to grant tax-advantaged CSOP or EMI options, or
- the intended recipient of the award is not eligible to receive it (for example, they do not work sufficient hours for the company), or
- the value of the awards (which the company wishes to make to certain employees) exceeds the limits on the value of shares over which CSOP and EMI options may be granted.
There are two arrangements which companies commonly use in this situation:
- ‘Growth shares’, and
- Joint share ownership plans (JSOPs).
These two arrangements have common intentions and features, but the structure for implementing each is different. The difference in structure means that growth shares and JSOPs tend to be used by different types of company:
- Because a growth share structure involves creating a new class (or classes) of share, it cannot be used by UK-listed companies. UK-listed companies therefore would use a JSOP.
- JSOP arrangements can be used by both listed and private companies. Some private companies prefer JSOPs rather than growth shares, for example where there is reluctance to create more share classes.
Common features of growth shares and JSOPs
Both growth shares and JSOPs are intended to deliver value to employees as capital gain (20% rate) rather than employment income (for more senior employees a 40% or 45% rate). To achieve this:
- employees acquire shares or an interest in shares up-front when the award is made (in contrast to an option where shares are acquired only on exercise).
- the shares or the interest in shares which the employees receive gives the employees the opportunity to participate in the growth in value of the company only over a specified ‘threshold value’, which is generally set at a level such that employees participate only in value created after the award has been made.
By limiting the share participation rights of the employees to participation only in future value:
- the employees do not acquire ‘windfall’ value in the form of an entitlement to any of the existing value of the company.
- the value of the growth share or the JSOP interest is reduced by excluding the accrued value of the company, making it possible for the employees to acquire growth shares or a JSOP interest at a low (and possibly nominal) cost.
In contrast to CSOP and EMI options, where the shares subject to the options must be shares in an independent company, the shares used in growth share arrangements and JSOPs may be shares in subsidiary companies, or companies which would not be eligible to grant CSOP or EMI options because they have a majority corporate investor.
- It is possible to put in place growth share and JSOP arrangements using shares in a particular subsidiary company, so that the value delivered relates directly, and only, to the performance of that subsidiary and, if relevant, its subgroup. This can allow very targeted incentive arrangements to be put in place.
- Where ‘leavers’ are required to sell shares, there is an obvious buyer for a leaver’s shares in the form of the next company up the chain.
Growth shares and JSOPs are often structured so that the point at which value is delivered to the employees is a defined future event.
- That is typically a sale of the company, where the growth shares or JSOP interest participate in the sale proceeds over the threshold value.
- It can, though, be possible to structure the arrangements so that value is delivered on other events, such as the achievement of performance conditions.
Structure of growth shares
Growth shares are shares of a specific class in the capital of the company, with economic rights set out in the articles which limit economic participation to growth in value over the specified ‘threshold value’. For example, the class of growth shares could carry an entitlement to a specified percentage of the value of the company over the threshold value.
- It is necessary to create a new class of growth shares. This involves amending the company’s articles to create the class of growth share with the particular threshold value desired.
- Growth shares may be non-voting, so they need not impact control of the company.
- Growth shares may be excluded from participating in dividends.
- Each time a new award of growth shares is made, it may be necessary to create a new class of growth share with a higher threshold value, in order to strip out any increase in the value of the company since the previous award of growth shares.
Structure of JSOPs
Under JSOP award, an employee acquires an interest in shares jointly with another holder, typically the trustee of an employee benefit trust.
- Each JSOP share is owned jointly by the employee and the trustee. JSOP arrangements are commonly structured so that the trustee holds legal title to the JSOP shares, while the beneficial ownership of the JSOP shares is split between the trustee and the employee.
- The main commercial terms of the JSOP are commonly set out in a set of plan rules, with the particular terms of each award being set out in a ‘JSOP Agreement’ between the employee and the trustee. It is, though, possible to put in place JSOP arrangements without a set of plan rules, include all the terms of the awards into JSOP Agreements.
- Under the JSOP Agreement, the economic rights of the shares are split between the two co-owners, so that the employee is entitled only to the growth in value of the shares over the ‘threshold value’. The trustee is entitled to the value of the shares up to the threshold value.
- There is no need to create a new class of shares. Shares of an existing share class may be used. This means that (unlike with growth share structures) each time a new award of JSOP interests is made, there is no need to create a new class of share to strip out any increase in the value of the company since the previous award of JSOP interests. Instead, such increased value can be stripped out simply by specifying a new, increased, threshold value in the new JSOP Agreement.
- The voting rights of the shares may be retained by the trustee.
- The entitlement to receive dividends may be retained by the trustee, although sometimes dividends are divided between the two co-owners on the basis of their relative economic entitlements when the dividend is paid.
Tax treatment
- Provided growth shares or the JSOP interests are acquired for not less than ‘unrestricted market value’ (i.e. their value ignoring the effect of any ‘restrictions’ such as a risk of forfeiture by leavers), no income tax should be payable on the acquisition of the growth shares. A robust, and preferably independent, valuation of the growth shares or JSOP interests should be obtained each time an award is made.
- Thereafter any increase in the value of the growth shares should fall within the capital gains regime.
- The employees should make a precautionary election under section 431(1) of the Income Tax (Earnings and Pensions) Act 2003 when they acquire their growth shares or JSOP interests.
How Abbiss Cadres can help with your share plans
Abbiss Cadres can provide advice and guidance in relation to all aspects of the share plans including:
- Practical support
- Help with self-certification of tax-advantaged plans
- Expert advice on tax treatments and administration of all share plans; and
- Assessment and advice on data protection compliance in relation to share plan reporting
