Share plans on an initial public offering (IPO)

New share plans are normally put in place as part of the IPO process but before the company's shares are formally admitted to the market. This enables the company to make grants or undertake an employee offer at or soon after the IPO and to avoid the general requirement for shareholder approval for a plan which applies following an IPO onto the main market of the London Stock Exchange. This requires forward planning, with appropriate disclosures incorporated into the listing prospectus.

In addition to new plans, due diligence will be carried out to determine the implications of the IPO on any existing share plans the company operates and on any outstanding options and awards. It is unusual for new awards to be granted under existing share plans following the IPO as these are unlikely to comply with institutional investors' guidelines or drafted in a way that is compatible with the requirements of the AIM Rules or Listing Rules, as appropriate.

Designing an IPO share plan

A share plan can involve giving free shares to employees, granting share options or conditional share awards and/or allowing employees to buy shares, which in some cases are matched with free shares.

When designing new plans, it will be important for a company to take into account the various regulatory and corporate governance requirements that apply to listed companies, including:

• the Listing Rules or AIM Rules;
• the UK Corporate Governance Code or other nominated governance code for AIM IPOs;
• the UK Market Abuse Regulation; and
• guidance on remuneration issued by institutional investors and their representative bodies. 

Discretionary or executive plans

There are a number of different ways to structure share-based incentives for selected participants. These include:

Performance share plans

Also known a long-term incentive plan (LTIPs), a performance share plan is usually structured as a nil (or nominal) cost option or a contingent share award.

As there are no special legal conditions or individual limits on the size of share awards, these can be very useful and flexible tools for delivering incentives - particularly where companies do not meet the legal conditions for tax-advantaged plans or have a business need to make share awards above the individual limits for those plans.

However, it should be noted that institutional investors usually require that the quantum of awards are not over generous and that they are granted subject to challenging performance conditions that must be met in order for the award to vest, particularly when awards are granted to executive directors or senior management. Institutional investors' guidelines also limit the percentage of the company's share capital that can be used for employee share plans.

The value of the shares on acquisition will be subject to income tax and National Insurance contributions (NICs).

Restricted share plans

Awards under a restricted share plan are usually similar in structure to those made under a performance share plan. However, they are usually made either without performance conditions attached or subject only to a performance underpin.

To reflect the increased certainty that an award made under a restricted share plan will vest, institutional investors expect the quantum awarded to participants to be significantly less than the quantum that might be awarded under a performance share plan. As a rule of thumb, they would expect to see a reduction of around 50%.

Institutional investors' guidelines also limit the percentage of the company's share capital that can be used for employee share plans.

As with a performance share plan, the value of the shares on acquisition will be subject to income tax and NICs.

Company share option plans

A company share option plan (CSOP) is a tax-advantaged discretionary plan that allows companies to grant options over shares with a maximum market value at the date of grant of up to £30,000 per participant. The option price must be at least equal to the market value of a share on the date of grant.

Institutional investors usually require that options are granted subject to challenging performance conditions that must be met in order for the options to become exercisable, particularly when options are granted to executive directors or senior management. Institutional investors' guidelines also limit the percentage of the company's share capital that can be used for employee share plans.

Generally, if an option is held for at least 3 years any gain on exercise is not subject to income tax or NICs. Instead, any gain on the subsequent sale of the shares is subject to capital gains tax (CGT). As individuals receive an annual CGT exemption, this can mean that some or all of the value of the share option gain may be tax free.

Non tax-advantaged share option plans

Share plans that do not benefit from any special tax regime are also common.

As there are no specific legal conditions or individual limits on the size of share awards, these can be very useful and flexible tools for delivering incentives - particularly where companies do not meet the legal conditions for tax-advantaged plans, or have a business need to make share awards above the individual limits for those plans.

However, it should be noted that institutional investors usually require that the quantum of awards are not over generous and that they are granted subject to challenging performance conditions that must be met in order for the award to vest, particularly when awards are granted to executive directors or senior management. Institutional investors' guidelines also limit the percentage of the company's share capital that can be used for employee share plans.

Any gain on exercise of an option will be subject to income tax and NICs.

Enterprise Management Incentive plan

The Enterprise Management Incentive (EMI) plan is only available to companies with no more than £30 million in gross assets and fewer than 250 full-time employees, and is therefore only likely to be suitable for smaller companies listing on AIM.

This is a tax-advantaged discretionary plan that allows companies to grant options over shares with a maximum market value at the date of grant of £250,000 per participant.

Institutional investors usually require that options are granted subject to challenging performance conditions that must be met in order for the options to become exercisable, particularly when options are granted to executive directors or senior management. Institutional investors' guidelines also limit the percentage of the company's share capital that can be used for employee share plans.

As with the CSOP, where an option is granted at market value, there is usually no income tax and NICs at exercise with any gain on the subsequent sale of the shares subject to CGT (which, if certain additional conditions are met, is taxed at the reduced rate of 10% under the Business Asset Disposal Relief tax regime).

Joint ownership plan

Although not widely used by listed companies, it is also possible to put in place a joint ownership plan.

Under a joint ownership arrangement (JOA), the employee acquires an interest in shares upfront, jointly with another shareholder (usually the trustee of an employment benefit trust). The interests are drawn up so that the employee only benefits to the extent that the shares increase in value above their acquisition value (plus, usually, a carrying charge).

The purpose of a JOA is for the employee to acquire a CGT asset upfront, so that any growth in value of the shares is charged as a capital gain rather than as employment income.

The value of the employee's interest at the outset is critical, and valuation is an important part of adopting and running a JOA.

All-employee plans

There are two main choices available for all-employee share plans, both of which are tax-advantaged. These plans give benefits to employees (through income tax and NIC savings), and can also save employer costs (through NIC savings). The two plans are:

Share incentive plans

Under a share incentive plan (SIP), employees have an interest in shares from the outset and, if shares are kept for at least five years, special exemptions from income tax and NICs. Shares issued under a SIP are held in a SIP trust.

Under a SIP, employees may be:

• awarded free shares, to a maximum annual value of £3,600;
• invited to purchase partnership shares from their pre-tax income, to a maximum annual value of £1,800;
• awarded free shares to match their partnership shares (up to 2 matching shares for each partnership share); and/or
• able to reinvest dividends paid on SIP shares in further shares.

Sharesave/save as you earn (SAYE)

Save as you earn (SAYE) is an option plan.  Employees are granted a share option if they save between £5 and £500 a month for a three or five year savings period.

Options are granted over the number of shares that could be purchased at the end of the savings period at the market value (or the market value discounted by up to 20%) at the beginning of the savings period, using the amount due to be saved.

At the end of the savings period, the employee is able to decide whether to purchase the shares or use the savings for other purposes.

The tax treatment is similar to that of a CSOP.