A bird in the hand worth two in the bush? A look at the Chancellor’s employee share ownership proposals

Many of you will have seen George Osborne’s announcement yesterday in relation to the introduction of a new “employee-owner” contract.  Under the proposals, which are due to come into force in April 2013, employees may be given between £2,000 and £50,000 worth of shares in their employer company – free from capital gains tax – in return for waiving key employment rights.

The scheme is primarily designed for fast-growing, small and medium-sized companies, although it will be open to limited companies of all sizes.  Interestingly, it would appear that companies will be able to compel new starts to sign up to such contracts from April next year, whereas existing employees will have to opt in to such an arrangement. 

Whilst details of the proposals remain sketchy at present, Simon Allison (Partner, Employment team) and Kirk Dailly (Associate, Corporate & Commercial team) take a brief look at some of the potential issues:

Employment Law

The affected rights would be the right to claim unfair dismissal, redundancy, time off for training and flexible working.  Additionally, women on maternity leave would require to give their employers 16 weeks’ notice of a return to work, as opposed to the current 8 weeks’ notice.  At the moment, the proposal does not seek to affect a worker’s protection against discrimination in the work place. 

In my view, this is a niche concept which will only be attractive to a limited spectrum of employers.  It seems likely that smaller, more newly formed employers might seek to benefit from the protection of unfair dismissal and redundancy type claims.  By comparison, this proposal is likely to be more attractive to employees.  The Equality Act protects employees from discrimination.  Any treatment which is because of age, sex, race, religion or belief, sexual orientation, gender-reassignment or disability can be unlawful.  Given that most tribunal claims now contain at least a flavour of discrimination, even if employees do agree to discharge these “employee-owner” rights, they will still be entitled to pursue a claim against their employer for any alleged discrimination. 

Company Law

From an employer’s perspective, there will be expense involved in setting-up such a scheme – it is certainly not going to be a matter of issuing shares and that’s that.  Owners are going to have to think carefully about how many shares they are prepared to give away and what rights are to attach to those shares, tailoring their constitutional documents accordingly. 

In my opinion, there will also be a number of company law considerations for employees to weigh up.  Those participating are likely to become minority shareholders, who will typically lack the power to influence a company’s management and decision-making.  A company’s directors will still have responsibility for the day-to-day running of the company, while the relevant employees may lack the necessary voting rights to block key shareholder resolutions.

Separately, I believe that the preservation of an employee’s stake in the business is another potential issue that your average employee may not be alive to.  If a company issues further shares in the future, an employee is likely to have to invest further sums of money into the company just to maintain his or her proportionate shareholding.  Otherwise, he or she will face being diluted.

I have seen it mentioned that this scheme may be attractive to young technology companies, and there are of course a number of those in the Dundee area.  However, it is important to remember that many of these companies require significant investment in their early years in order to develop and exploit their products and services.  This investment will sometimes come from business angels and institutional investors, who will typically demand preferential rights in relation to matters such as dividend payments and decision-making.  As such, it is not difficult to imagine how an employee who has given up his or her employment rights in return for shares in a start-up technology business could find that the landscape has changed considerably following an investment round.

Summary

As ever, the devil will be in the detail and we will keep a close eye on developments here.  In the meantime, our view is that we are unlikely to see widespread adoption of the scheme.  It throws up a number of potential issues for both employers and employees, and those participating will certainly be advised to take expert legal advice at an early stage.

Simon Allison
Partner
Business – Employment Law

Kirk Dailly
Associate
Business – Corporate & Commercial Law

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