An employee share scheme involving growth shares enables employees to acquire shares with a low starting value, their eventual value being linked to the company’s future growth. They can be issued to employees, directors (including NEDs), consultants and advisers.
For companies considering implementing growth shares, once the class of shares is created they may be issued to participants either through a sale of the shares themselves or by way of a grant of EMI options over the shares in the class (or a combination of the two). The tax and accounting implications of each method should be considered, both for the company issuing the growth shares as well as for the participants acquiring the shares or options over the shares.
Options may be granted over growth shares in place of a straightforward subscription and in some circumstances this may be an attractive alternative approach. Where the company is eligible to grant EMI options, this can make it much more likely that the capital gains tax rate on selling growth shares will be 10% under entrepreneurs’ relief.
We would recommend that advice is sought on valuation before growth shares are issued.
There are a number of potential issues that should be considered prior to implementing growth shares.
Unlike EMI and CSOP, a growth share scheme does not carry specific statutory tax advantages. Although the objective of growth shares is to secure capital gains tax treatment, this treatment cannot therefore be guaranteed.
This is relevant to companies which have investors claiming EIS relief. One of the fundamental conditions for investments from individuals pursuant to an Enterprise Investment Scheme (or EIS) is that the class of shares acquired by an EIS investor is the lowest class (typically, ordinary shares). With their limited capital rights, growth shares may rank below ordinary shares and their creation may result in a disqualifying event for EIS purposes. It is still possible to implement growth shares for a company that has received an EIS investment, but such shares should not have inferior rights compared with ordinary shares.
One Off Transaction.
As the threshold over which growth share holders will share in value will be based on the company’s value at the time holders first acquire them, the implementation of a growth share scheme should be considered to be a “one off” transaction. This is because if the company grows in value subsequently, any further issue of growth shares may cause immediate income tax issues because they will then have a value. Further, any new grant of options over growth shares may have an impact on the company’s profit and loss account. Therefore, if the value of the company has increased since the creation of growth shares, the company should either increase the price of the growth shares (relative to the growth in value of the company) or create a new class of growth shares (with a revised value threshold).