Employee Shareholder
Agreements – The
Potential Gains
Introduction
Since September 2013, Employee
Shareholder Agreements have enabled
companies to introduce a new type of
employment status into their workforce.
Basic principle
By entering into an Employee Shareholder
Agreement, an individual will acquire
employee shares (worth at least £2,000 at
the time of acquisition) in the company
employing them or in its parent
undertaking. In return for the employee
shares, the individual entering into the
Employee Shareholder Agreement will forgo
and vary limited, specific employment
rights.
Why employers are using Employee
Shareholder Agreements
Employee Shareholder Agreements have
become increasingly popular with start up
businesses and private equity companies
who expect to make substantial capital
gains in a short to medium period of time.
In particular, many new investment
companies are identifying Employee
Shareholder Agreements as a way to attract
BRIEFING
and incentivise employees to produce good
results. This is because good results are
likely to increase the value of the company
and, in turn, the value of the employee
shares will increase.
The Employee Shareholder scheme is
available to any type of company with share
capital regardless of its size or the nature of
its business. This includes companies which
might fail to meet the qualifying criteria for
Enterprise Management Incentive schemes.
It is also worth noting that the employer
company can select the individuals it wishes
to offer employee shares to, for example, it
may only wish to offer employee shares to
its senior employees or to employees in a
particular team.
The benefits for employees
The main advantage for individuals entering
into an Employee Shareholder Agreement is
the fact that any subsequent gain arising
upon the disposal of the employee shares
could be totally exempt from capital gains
tax. Therefore, Employee Shareholder
Agreements are likely to be particularly
attractive to senior or high achieving
This briefing note is not intended to be an exhaustive statement of the law and should not be relied
on as legal advice to be applied to any particular set of circumstances. Instead, it is intended to act
as a brief introductory view of some of the legal considerations relevant to the subject in question.
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employees as the potential rewards and
capital gains are likely to be more important
to these individuals than the loss of certain
employment rights.
still share in the equity and success of the
employer company.
However, in order to take full advantage of
the capital gains tax exemption, the
employee shares must be worth between
£2,000 and £50,000 at the date of
acquisition. Further, the Employee
Shareholder must not at any time during
the 12 months prior to acquisition of the
Employee Shares:
The statutory employment rights that are
forfeited as a consequence of entering into
an Employee Shareholder Agreement
include:

Hold a material interest (i.e 25% or
more) in the employer company or
any parent undertaking; or

Have a right to acquire a material
interest in the employer company or
any parent undertaking; or

Be connected to anyone with a
material interest in the employer
company or any parent undertaking.
Tax saving example
Subject to the rules above and provided all
of the formal statutory requirements are
satisfied, with capital gains tax rates at circa
28%, the potential tax saving to Employee
Shareholders can be significant. For
example:
1. If an Employee Shareholder is issued
with shares valued at £30,000 at the
time he or she enters into the
Employee Shareholder Agreement
and all of the formal, statutory
requirements have been met; and
2. Those shares increase in value so at
the time of their disposal they are
worth £1,000,000;
3. The Employee Shareholder would
make a capital gains tax saving of
£280,000.
Employee Shareholder Agreements may
also be a good incentive for junior
employees as despite their status, they can
Employment rights

Unfair dismissal (with exceptions, for
instance, if the dismissal is
discriminatory or linked to
whistleblowing);

The right to a redundancy payment;

The right to request to undertake
study or training;

The right to request flexible working
arrangements (unless such request is
made within 14 days of the Employee
Shareholder returning to work after a
period of parental leave).
Employee Shareholders must also provide
extended notice if they intend to return to
work early following a period of maternity,
paternity and adoption leave.
Additional employment rights
It is important to note that companies
cannot compel their existing employees to
enter into an Employee Shareholder
Agreement. Existing employees have
additional statutory rights which protect
them from detriment or dismissal on the
ground that they have refused to enter into
an Employee Shareholder Agreement.
Formalities
Section 205(A) of the Employment Rights
Act 1996 sets out the formalities for
Employee Shareholder Agreements and
these must be satisfied in order for
individuals to become Employee
Shareholders. The formal requirements can
be summarised as follows:
This briefing note is not intended to be an exhaustive statement of the law and should not be relied
on as legal advice to be applied to any particular set of circumstances. Instead, it is intended to act
as a brief introductory view of some of the legal considerations relevant to the subject in question.
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
The employer must be a company
with a share capital; and

The individual and the employer
company must both agree that the
individual will become an Employee
Shareholder; and

The employer company must provide
the individual with a written
statement containing the particulars
of the status of Employee
Shareholders and the rights attaching
to the employee shares to be issued
or allotted; and

The employer company must issue or
allot to the individual fully paid up
shares which are worth at least
£2,000 (in the company or parent
undertaking); and

The individual must not provide any
consideration for the shares (other
than entering into the Employee
Shareholder Agreement); and


The individual must obtain advice
from a relevant independent adviser
on the terms and effect of the
proposed Employee Shareholder
Agreement (the employer company
must also cover the reasonable costs
incurred by the individual in obtaining
such advice); and
statutory requirements and the implications
of entering into an Employee Shareholder
Agreement.
If either party to fails to observe any of the
statutory formalities, the Employee
Shareholder Agreement will be invalid and
the potential tax benefits will be lost.
How Winckworth Sherwood can help
Our employment, tax and corporate lawyers
have the knowledge and experience to
provide a complete and tailored Employee
Shareholder Agreement service for
employers looking to implement them or for
potential employee shareholders who
require independent legal advice. We also
ensure that our services are delivered in the
most time and cost effective manner
possible.
Key Contacts
David Von Hagen | Partner, Employment
T: 020 7593 5018
E: [email protected]
The individual must observe a seven
day cooling off period before entering
into the Employee Shareholder
Agreement. The seven day cooling off
period commences the day after the
independent legal advice has been
provided.
Legal advice
It is of paramount importance that the
formal statutory requirements for Employee
Shareholder Agreements are satisfied.
Therefore, prior to the completion of the
Employee Shareholder Agreement, both the
employer company and the potential
employee shareholder should independently
receive comprehensive legal advice on the
Danielle Crawford | Solicitor, Employment
T: 020 7593 0262
E: [email protected]
This briefing note is not intended to be an exhaustive statement of the law and should not be relied
on as legal advice to be applied to any particular set of circumstances. Instead, it is intended to act
as a brief introductory view of some of the legal considerations relevant to the subject in question.
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