“Share schemes are not just part of the documentation,” says Julian Macedo, Managing Director of The Deal Team. “And their inclusion is not a box-ticking exercise to make sure you've met the minimum requirements of the scheme. ESPs are part of the incentive package for the biggest brand carriers of your entire organisation – and they are both your employees and your shareholders. So you need to think carefully about how to avoid doing things in a rushed, uncaring or badly communicated manner. If you do, it will impact the perception of your relationship and your treatment of employees, now and in the future.”
Matthew Findley, Partner for Employee Benefits and Executive Compensation at Norton Rose Fulbright, agrees. “In any significant corporate transaction, the ESP is a highly important workstream in its own right and deserves proper time and attention. In particular, the two things I would focus on are strong project management from the outset and the importance of good, clear and timely communications.”
The Cultural Shift
Ideally, the planning doesn’t even start with the onset of the corporate transaction, it begins with the way the ESP is structured in the first place. “When you create an ESP, you don’t just have to think about why you’re doing it, but what’s going to happen to it down the road,” says Julian. “The potential cultural shift of, for instance, a future IPO is rarely thought about when people are initially creating a share plan. And the possible impact of a corporate transaction on schemes is not always reflected in the documentation.”
Moving forward to the corporate transaction being initiated, Julian argues that the impact on the share scheme is often regarded as a side issue, but should be prominently placed on the ‘to do’ list.
“Plan administrators are often conscious that major corporate transactions take up a huge amount of senior management time and may feel nervous about interrupting the process,” says Julian. “But there are circumstances where the composition of the schemes themselves can materially impact the entire transaction structuring or valuation. So it’s important that they get involved earlier rather than later to understand what’s needed.”
“People switching on to the process too late is a big issue,” agrees Matthew. “And there’s often a failure to appreciate the volume of work that can be associated with a share scheme in the context of any form of corporate transaction, but particularly with an IPO.”
When the facts change
Julian points out that the way in which schemes will function within a new context can take time to examine and resolve, so it’s worthwhile investing the time to plan appropriately. Companies that grow rapidly and may be expanding cross-border, or undertaking more complex capital structure rearrangements, could run into issues that were not initially considered in the plan documentation. These can range from a purely technical change such as a share swap inadvertently triggering local tax issues for employees, the methodology for calculating the relevant exchange rate or valuation, to how to adjust fairly for dilutive events such as special dividends and share splits.
Don’t splurge, drip-feed
As previously mentioned, Matthew places an emphasis on communication. “Don’t underestimate the importance of getting this right because, depending upon the nature of your transaction, there's always going to be some form of documentation issued to the employees,” he says. “And there will be different levels of formality in terms of the nature of that communication depending upon what the transaction is. Think carefully about the nature and timing of what you're sending so it’s a ‘drip-feed’ of information rather than a ‘splurge’ at the end.
Employees in listed company transaction scenarios also need to be made aware of their potential ‘insider’ status. “There’s an additional layer of governance which they’ll need to be aware of and maybe limitations in their ability to realise value,” says Julian.
Alignment across the business is another key consideration. Matthew has often encountered situations where there are differences of opinion or understanding between parts of an organisation about how elements of the transaction are meant to play out. Such scenarios do not produce happy outcomes.
A real eye-opener
Looking at IPOs in particular, one major cultural shift to prepare for is the arrival of significant scrutiny over executive remuneration. “After listing, you’ll be required to achieve shareholder approval for your senior management remuneration policy,” says Matthew. “And then each year, there’s an extensive disclosure regime under which you have to disclose not only what your policy is, but how you have implemented it. And increasingly, you may have to justify the decisions that you have taken, or not taken, as a company”.
“For instance, there might have been an external event that affected the company from a reputational perspective, and that may have had an impact on the share price. As a result, investors may expect the remuneration committee to apply downwards discretion in relation to the annual bonus and vesting levels. If you've never been in a public company before, and are not used to that level of scrutiny, it can be quite an eye-opener.”
This is also a good time to review your all-employee share plan strategy to ensure you’re making the most from the share schemes that HMRC offers. These plans can provide valuable tax and National Insurance Contribution (NIC) benefits along with a corporation tax deduction for costs. The two all-employee HMRC tax-advantaged plans to consider are Sharesave (SAYE), running since 1980, and Share Incentive Plans (SIPs), well-known since their adoption in 2000. There is some additional information about these plans in the notes below.
Insider status
But Matthew also urges companies to be just as diligent when it comes to managing smaller transactions, such as divesting parts of the business that are no longer regarded as core. “Think about each transaction on a case-by-case basis,” he says. “Think about what’s going to happen to the people involved and what you would like to achieve for them, as well as how you want to change the company. And be proactive about how these other smaller transactions are going to be managed, rather than working on a reactive basis.”
The 2020 field for corporate transactions is assembling. The winners will be the ones who use their heads – and walk fast, rather than run.
About all employee share plans:
Sharesave plans are highly popular due to their low-risk nature. Employees contribute between £5 and £500 a month directly from their net salary over a fixed three- or five-year savings period, and can then choose whether or not to buy their company’s shares at a pre-determined price (the option price). Sharesave combines the potential for great returns along with the security that participants won’t lose money even if the share price falls over the savings term. The latest Government statistics show that 490 companies use Sharesave as a way to reward employees and align interest to investors.
SIPs are share-based plans and are also very popular. Whilst the plan does carry some risk to participants if they are buying shares, there are valuable tax savings as well as NIC savings for both participants and employers. There are three elements to SIPs: Free Shares (up to £3,600 per year per employee); Partnership Shares (employees can invest up to £1,800 from their gross salary per year); and Matching Shares (linked to Partnership Shares, up to £3,600 of additional shares per year per employee). Dividends received on Plan shares can also be reinvested within the SIP, known as Dividend Shares. Plan shares are held in a trust on behalf of employees with full tax advantages usually gained once shares have been held for five years. The latest Government statistics show that 810 companies have set up Share Incentive Plans.