09 April 2020 by Tom Hicks
Employee share plans can increase organisational performance and employee retention.
Companies who align the interests of their employees with those of other stakeholders commonly see benefits in the form of organisational performance, most notably through the increased ability to attract, motivate and retain employees.
This alignment of interests can take various forms, most commonly in the shape of employee share plans and direct employee shareholding. The nature of the plans and arrangements will differ from company to company but in many cases the facilitation of employee ownership will be simplified through the use of an offshore trust and will often include a nominee facility.
In simple terms a nominee facility allows for the legal title to shares to sit with a party other than the beneficial owner. A corporate sponsored employee nominee facility will be such that a professional service provider will hold the legal title to shares, usually in their employing company, on behalf of employees, the beneficial owners.
The form that a company’s share plans take will usually dictate the manner that a corporate sponsored nominee facility will be best utilised.
Under some share plans the employees will be shareholders from the time of grant (e.g. Management Incentive Plan), under others it may be following an award vesting process (e.g. Long Term Incentive Plan).
Plan rules for Management Incentive Plans or similar plans, particularly popular with private companies, typically with an eye on an exit event, will often require the use of a nominee to hold shares on behalf of the participants. This is predominantly for reasons of ease of return should the employee leave – essentially the trustee of an employee benefit trust, also acting as nominee for participants, creates a market where there might not otherwise be one, confidentiality (the nominee holds the legal title, details of which are commonly in the public domain – unsurprisingly, employers are rarely keen for employees to have visibility of their colleagues’ holdings) and administrative ease on a corporate event.
Through simplification of the process enabling employees to continue to hold the balance of shares after their awards have vested, the post-vest nominee facility encourages continued employee shareholding and, in turn, the alignment of employees’ interests to those of other shareholders and stakeholders.
In my experience, very few employees, perhaps with the exception of some executives and more senior employees, seem willing to go through the hassle of opening custody accounts in their own name when the opportunity to sell shares and take cash is usually so readily available on vesting.
It is typically the case that on the vesting of share awards, sufficient shares are sold to cover the employee’s withholding liabilities (e.g. income tax, national insurance/social security), with the balance of shares either transferred to the participant or sold and the proceeds transferred to the participant. This is great in principle but if you speak with any share plan manager they will quickly tell you about the challenges they have faced surrounding this, particularly where the ‘default’ treatment on the vesting of an award – where no participant election is received in respect of the vesting (i.e. a request from the employee to either sell or transfer the balance of shares following the sale to cover their withholding liabilities) – is a sale of sufficient shares to cover the liability and the issuance of a share certificate for the balance. Share certificates are an administrative burden for all concerned, including the employees.
Additionally, companies are increasingly including post-vest holding requirements and clawback provisions in respect of share awards and the UK Corporate Governance Code states that executives should build up a significant shareholding in their company’s shares. Nominee facilities are used to help companies manage these requirements by restricting transactions in relation to the shares whilst ensuring that the beneficial title to the shares is with the employees, along with the benefits, such as dividends and voting rights.
Furthermore the Investment Association’s Principles of Remuneration states that remuneration committees should also develop a policy on post-employment shareholding requirements, which would require an executive to retain a proportion of their shareholding for a time period after they have left the employment of the company. The terms of nominee facilities can be such that shares that are forfeited by the employee post-vest can easily be returned, typically to an employee benefit trust. It is not difficult to imagine the challenges facing companies attempting to arrange for a participant, consider a ‘bad leaver’, to return shares that are held in their own name.
Typically one of two parties will provide a nominee facility in relation to a company’s share plans, the trustee of an employee benefit trust or a share plan administrator. This will usually be determined by the profile of the company, the share plans adopted and the number of participants.
An employee benefit trust, a type of discretionary trust, is an incredibly flexible vehicle and has been the vehicle of choice for companies in the UK in the facilitation of employee incentive arrangements for upwards of 30 years.
Employee benefit trusts can be used for the sole purpose of acting as nominee for employees but generally speaking, the provision of a nominee facility is typically an additional service alongside their primary function.
Whilst many of the advantages of using a professional, specialist trustee for a company’s employee benefit trust will be common across most companies, similar to nominee arrangements, the purpose and use of employee benefit trusts will vary from company to company.
The overriding purpose of an employee benefit trust can be broadly split between private and listed companies.
In the case of private companies the trust can act as an internal market where otherwise there might not be liquidity. Typically, this is for the purpose of acquiring shares from leavers for later sale to new joiners or existing employees. This may take the form of a Management Incentive Plan, but this does not have to be the case. Where transacting with beneficiaries, transactions can be affected at a discount and in accordance with award documentation or the company’s Articles of Association which may dictate the price payable in respect of a leaver’s sale. Whenever shares are traded with employees at a price other than market value income tax and national insurance/social security will be a consideration in respect of the benefit of such.
The trustee can also transact with non-beneficiaries but any transactions with non-beneficiaries need to be at arm’s-length.
In addition to the creation of an internal market, the benefits of simplification of transactions between the trustee and the beneficiaries (only the beneficial title needs to change – not the legal title), confidentiality around employee shareholdings and reduced administrative burden, particularly on a company going through a corporate transaction, due to the trustee being the sole legal holder of the employee shares, acting under a power of attorney, are key drivers for the implementation for a nominee facility.
The key purpose of an employee benefit to listed companies is the ability to hedge company granted share awards. The trustee can acquire shares at any point when restrictions are not in place; these are then typically held for later use in the satisfaction of awards. With the most common vesting period being three years, the ability to acquire shares at the time of grant, or at any other stage prior to vesting can save companies hugely significant sums. Furthermore, the use of an offshore trustee – Jersey is considered by many to be the leading jurisdiction – can ensure that the trust holdings are sheltered from capital gains tax in addition to the benefit of the expertise of a professional provider.
It is not uncommon for a listed company to provide a post-vest nominee facility, sometimes referred to a vested share account (VSA); giving employees a simple and efficient means of maintaining their shareholdings once they have been released. As the beneficial owner of the shares, the employee will be entitled to the benefit of dividend and voting rights and often has access to broker commission rates that are superior to those available to individuals trading.
Where there are restrictions on trading, be it due to post-vest holding requirements or a requirement to build up an individual holding, these restrictions can be managed by the nominee provider. Where a post-vest nominee facility is in place the size of a company’s share award receiving population will largely determine who acts as nominee for the employees. Large companies who have engaged a third-party share plan administrator may find that the share plan administrator will be best placed to provide the nominee facility. Companies with a smaller population, where the company utilises the share plan administration expertise of the trustee provider alongside the provision of the trustee, will typically use the trustee as the nominee.
To further simplify matters, when using a Jersey based trustee the provider will typically avail of simplified due diligence measures provided by the local regulator, in most cases removing the need to collect client due diligence documentation in respect of employees where shares have originated from share plans.
Many companies already utilise an employee benefit trust to help facilitate their employee share plans. That said, it is often the case that companies do not maximise the return that the trust’s flexibility can provide, a nominee facility being one example.
Those companies that do not currently have an employee benefit trust may wish to consider one given the potential for significant return on investment, particularly through the use of a specialist professional offshore trustee. Consideration of a nominee facility alongside the employee benefit trust, as a means of further encouraging employee shareholding, should be part of that process.