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What to consider if you are thinking about making an Employee a Shareholder
On 1 August 2023 our Director, Amanda Crosbie and Principal Solicitor, Tony Peterson hosted a live LinkedIn Q&A answering What to consider if you are thinking about making an Employee a Shareholder.
What are the first steps?
- Consider what you personally want and what you want for the business, this will inform what offers you are willing to make and what control you want to maintain.
- Decide what you are willing to offer:
- Are you looking to grow the business? – Offer small Shareholders at a lower rate to retain staff.
- Are you looking to succeed out of the business? – Offer shares as an investment.
- Approach the employee to see if they’re interested.
- Consider special conditions in order to achieve goals.
- Engage with Accountant and Lawyer to prepare:
- Valuations,
- Share Sale Agreement,
- Employment Contract, and
- Shareholders Agreement.
Will I lose any control when I bring on a shareholder?
- This depends on what you are looking to achieve out of the sale, and is dictated within the Shareholders Agreement.
- If you are looking to succeed out of the business, you may opt to lose some control to allow someone else to step in.
- If you looking to grow the business and retain key staff, you may opt to maintain majority control by:
- Making the employee a Shareholder and not a Director.
- Maintaining your position as the managing Director.
- Addition terms within the Shareholders agreement regarding voting rights.
How do I exit an underperforming employee shareholder in the future?
- This is dealt with by having an effective Shareholders Agreement.
- Shareholders Agreement can detail:
- Trigger events giving you options as the majority Shareholder.
- Clearly detail how the buyback will occur.
- Probationary periods.
- KPIs.
- Performance evaluations.
- Without a Shareholders Agreement you cannot force a sale without going to Court.
What information should I provide to the new shareholder and when should I provide it?
- Whatever information you are comfortable to provide and that you think is appropriate for the employee to decide whether they would like to invest.
- The prospective Shareholder has a right to request any information they think is reasonable to make their assessment, though there is no legal obligation to give them any specific information.
- Typical information provided:
- Profit and loss statements.
- Other financial statements.
- Business forecasting plans.
- As the information you provide is not typically available to an employee, it is advised you have a confidentiality agreement in place prior, if not already in your employment contracts.
Will I need to change my business structure, and will capital gains tax be payable if I do?
- If you don’t have a company a change in structure will be required, this could be either:
- Partnership, or
- Company.
- Restructuring is the sale of a business to a different entity and therefore does have tax implications that requires advice from an Accountant.
- The most appropriate structure differs from case to case.
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The information in this article is not legal advice and is intended to provide commentary and general information only. It should not be relied upon or used as a definitive or complete statement of the relevant law. You should obtain formal legal advice specific to your particular circumstance. Liability limited by a scheme approved under Professional Standards Legislation.
