Incentivising Executives: Guide to Growth Share Schemes

February 7, 2023 Freddie Nicolle Brace

Share schemes continue to play an important role in incentivising executives and employees.

In this week’s newsletter, Dragon Argent continues our series looking at how to incentivise employees and executives with Growth and Non-Growth Share Schemes in the UK. Our corporate solicitors in London regularly provide advice to owner-managed businesses of all sizes in relation to Growth Share Schemes/Agreements.

Allotment of Growth Shares

Growth Shares are a type of share which only entitle holders to a share in future increases in the value of the company after they have been allotted the shares. This is different from ordinary shares which entitle their holders to a portion of the total value of the company (which reflects the period before and after they were allotted shares).

Advantages of Growth Shares Scheme

✔️ Do not need to be offered to all employees/staff

✔️ Can be allotted to anyone

✔️ No minimum holding period for tax treatment except for Business Asset Disposal Relief

✔️ No limits on how many can be allotted

✔️ Value is ring fenced so that the holders of growth shares only benefit from future increases in the value of the company aligning their goals with the company’s

✔️ Usually allotted for nominal value so no income tax and NICs are payable on allotment

✔️ Less financial risk for holders of the shares as they will not have paid market value for them

✔️ Tax efficient- any increases in the value of the shares are subject to the capital gains tax regime only

Disadvantages of Growth Shares Scheme

❌ Require the creation of a new class of share

❌ Annual filings are required

❌ Immediately dilutes existing shareholders

❌ Expensive to set up due to the complexity and amendments needed to the company’s constitutional documents

❌ Employer cannot pass on NICs

❌ Valuation of the growth shares is a key element and can be complex and costly

❌ Open to challenge by HMRC

❌ No corporation tax relief on the set up costs

❌ No corporation tax relief on profit made when the growth shares are eventually sold

Best used when:

the company does not qualify for a tax advantaged option scheme
the value that staff/employees are to receive as an incentive is larger than the limits that apply to tax advantaged schemes

Allotment of Shares (non-growth shares)

What is it?

Unlike granting an option, an allotment of shares gives the holder an immediate shareholding in the company.

Advantages of Non-Growth Shares

✔️ Usually the new shareholder will only be subject to Capital Gains Tax when they sell the shares and there is no income tax or NICs provided that the shares are not given as aa substitute for salary

✔️ Low cost

Disadvantages of Non-Growth Shares

❌ Immediately dilutes existing shareholders

❌ The holder is entitled to all rights attaching to the shares immediately so may be entitled to dividends and voting rights from the outset

❌ Market value must be paid for the shares or a tax charge will arise

❌ Once allotted they cannot be taken away e.g. for poor performance unless a Clawback Agreement is entered into or Leaver provisions are drafted into the company’s Articles of Association

Best used when:

There is some legal or compelling commercial reason why the company cannot grant options.

Setting up a growth share plan

If your company is planning to set up a growth share plan, get an experienced corporate solicitors to draft the share plan and associated documents including your company’s articles of association to set out the distinctive capital, income and voting rights of the growth shares.

For any questions you may have about growth share plans contact us by scheduling a discovery call with one of our solicitors and we will be happy to help you.

Point to consider:

Before setting up an option scheme of any kind, companies must understand and be comfortable with the concept of dilution. If more shares are issued in a company using options, the percentage ownership of existing shareholders will decrease as the overall total shares in the company increases.

Disclaimer: the guidance contained in this article is not a substitute for legal advice. Before implementing any option scheme, you should seek appropriate advice from a qualified legal professional.