Thackray Williams

Sounds obvious but, when cash is tight and traditional bonus-type arrangements are not achievable, companies need to consider other forms of incentivising and retaining their key people. Remuneration by way of shares (particularly share options) is an established method of achieving this and we are seeing many clients giving this priority in the current market.

Aligning the interests of executives with those of shareholders works well. We know that. With the growth of tax-efficient share option arrangements (such as the popular “EMI” schemes) employees have been able to see real capital growth (taxed at capital gains, rather than income, tax rates) and the employer has been able to see enhanced company performance. There is a clear link between the two. It is win-win.        

However, for the larger, rapidly growing companies, the detailed EMI scheme requirements can sometimes pose problems. Companies with existing EMI schemes may literally “outgrow” them (perhaps gross assets now exceed the threshold test) with the result that no further EMI options can be granted. Similarly, there may be successful companies operating in trades that are excluded under the EMI rules, such as property development or asset leasing, or who want to offer an employee a shareholding larger than EMI terms permit. We are therefore seeing more and more clients turning to an alternative – “nil-paid share schemes”.

Nil-paid schemes, if structured correctly, can achieve the same overall goals as an EMI scheme. Instead of issuing employees with share options, the company issues shares, but with no monies payable on day 1 – hence they are “nil-paid,” albeit that the recipient will have to pay the subscription price at some point, just as he would on exercising an option.  The terms of issue may be very similar to an EMI option eg with the company requiring the employee to pay that price only in given circumstances, such as a sale of the company, or a listing, so there is a good cashflow advantage for the employee. The intention, of course, is that the employee will only pay the monies if he is likely to immediately sell-on at a gain. Broadly, the tax treatment is favourable, with gains escaping income tax, because the employee holds shares from the outset. This is particularly attractive if the new entrepreneur’s relief is available. Detailed tax advice will, of course, be required in all cases. 

Nil-paid schemes are simple to introduce. The company’s articles are likely to need amendment to provide for no voting rights, no dividend etc whilst the shares remain nil-paid. The shares will probably also be forfeited if the employee leaves the company. These are not significant issues and, in many respects, a nil-paid scheme can be much easier and less costly to implement than an EMI. Again, it can be win-win.  

Robert Goddard is head of Corporate at Thackray Williams LLP, Solicitors.
Robert.goddard@thackraywilliams.com