Government guidance indicates some of the complexities involved in setting up the new arrangements
Organisations can now engage employee shareholders. These employees give up some of their employment rights in return for receiving them at least £2,000 worth of shares. The government has now issued guidance on some of the issues involved.
Unfair dismissal
The main benefit of the new status for businesses is that they will not have to follow a full procedure or need a fair reason when dismissing employee shareholders. However, there is a catch. If dismissed, these individuals may try to argue they were not genuinely employee shareholders in the first place, in order to claim unfair dismissal. If they can demonstrate that the employer failed to comply with any of the complex requirements when setting up the arrangements, such an argument is likely to succeed. So it’s important employers avoid making errors in the process.
Share value
For example, the value of the shares on the day of issue must be no less than £2,000. Employers will need to obtain a shares valuation and the government suggest individuals might request their own valuation too. But, as valuing minority shareholdings is an imprecise science, it is entirely possible that at a later date a valuation could be produced which says the share value did not in fact meet this requirement. If this is accepted by an employment tribunal, then an unfair dismissal claim from the employee shareholder against the employer may well succeed.
The written information which the employer must provide the employee shareholder with is similarly complicated. If an employer gets it wrong and subsequently provides an explanation for this which a tribunal considers insufficient, the employee will have full employment rights.
Status
It is possible to have an employee shareholder who doesn’t actually have shares. Those engaged as an employee shareholder will retain that status even if they have given up, or been required to sell, their shares. Most employee shareholder agreements are likely to include complex and company-friendly rules, including an obligation to sell the shares in certain circumstances. This could result in employee shareholders without many employment rights but also without any current stake in the company.
Stake
There is a question mark over whether employee shareholders genuinely have a stake in the company in the first place. Carefully written employee shareholder documents are likely to give these employees little genuine say. While the individual’s shares should increase in value if the business succeeds, share sale provisions could be written so they result in employee shareholders never realising the level of reward they expected when the shares are sold. Indeed, employee shareholders may find themselves removed from the business and required to sell back their shares for limited value, just before the real value of the business is realised.
Advice
The cost of advice on these agreements could also be disproportionate. The law requires companies to pay for individuals to receive legal advice in advance of entering into an employee shareholder arrangement. Most law firms will insist on the individual receiving advice from more than one solicitor, as the expertise required will cross over traditional specialisms. As the rules may be complex, the cost of such advice is likely to be far higher than employers’ usual contribution to settlement agreement legal fees. Justifying the cost to the company will be a real problem if the individual ultimately turns down the offer.
On the face of it, employee shareholder status could be attractive where individuals are accepting the role in a company based on the business’ potential and not the immediate reward available. However, anyone offering these agreements is going to need to protect the business and, in particular, the ability to sell the company in the future.
Phil Allen is employment partner at Weightmans
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