Shares for employees

You should always take advice before you give class shares in your company to employees - to make sure you achieve your objectives, to make sure you don't inadvertently lose control of (or deadlock) your company, and to make sure the tax position for both company and shareholders is as favourable as it can be.

Once you have issued shares to employees you can't change the rights that attach to them without their consent. So you can't change your mind if you subsequently realise you have given them too many, or the wrong, share rights. That's why advice is crucial.

Objectives of giving shares to employees

Shares can act as an incentive to employees - they can motivate them to work harder, give them a common interest with the owners, reduce staff turnover, provide an alternative to paying higher wages and, of course, provide additional working capital for the business. Giving shares to some employees may be part of a process that will eventually lead to their taking over ownership.

There may be tax incentives to encourage employees to take shares, if the shares are offered to them under an HM Revenue and Customs (HMRC) approved share scheme. In that case, your solicitor must draft the rights attaching to the 'scheme' shares very carefully - if you get this wrong, the tax reliefs may not apply.

This is because 'scheme' shares must usually be ordinary shares - not carrying any preferential rights to dividend, and with the same voting rights as ordinary shares. But you will often want to differentiate between scheme and other ordinary shares when it comes to rights to transfer - for example, you may want employees who leave to have to give up their shares.

HMRC will allow these differences to an extent but, unless drafted by a specialist, there can be an inadvertent income tax charge.

Articles of Association -v- shareholders' agreement

Shareholder rights can be set out either in a company's articles, or in a shareholders' agreement, or in a combination of the two. Technically, they can also be set out in a shareholders' resolution too, but this is rare. There are pros and cons to each - you will need advice on which is best for you. Very broadly, a shareholders' agreement is appropriate if the arrangements you want to set up are for individuals involved with the company (or some of them) now. Articles are appropriate if you want the arrangements to apply to future shareholders too.

Naming the shares

Finally, please note that a class of shares can be given any name you wish. For example, there is no set of fixed rights that must apply if you call your shares 'preference' shares - the rights attached to preference shares may be quite different in two different companies. Usually, though, it is sensible for the name to reflect the rights attached to the shares.

For example, the share rights for a class of non-voting, redeemable shares may also say that, if a preferential dividend is not paid in one period it is to be carried forward and paid in a subsequent period. In those circumstances, the dividend is said to be 'cumulative'. If the share rights say that the preferential shares are also entitled to an ordinary dividend, as well as the preferential dividend, they are said to be 'participating'. Good practice would be to call such shares Cumulative, Participating, Redeemable, Non-Voting Preference shares.

Always take legal advice on the rights appropriate to your particular circumstances when considering shares for employees.