The rules have recently changed for employee share schemes and are now easier to put in place and carry out. Employee share schemes can help:
- Attract and retain talented and productive staff
- Align the incentives of employees with investors
- Address succession issues by transitioning ownership to the next generation in a managed way
- Lower the overall cash cost to the company of rewarding and incentivising employees
Despite these clear benefits, employee share schemes have not been widely used in the past – particularly among privately owned companies. So why is that?
The issues in the past
Prior to April this year, the primary reason was the cost and hassle of complying with the Securities Act 1978.
Under the Act, an employee share scheme required the preparation of a prospectus and audited accounts to be registered with the Companies Office. This added significantly to the cost of setting up a scheme, and meant that the company’s financial statements were available to the public, including their competitors. While exemptions were available, these were quite restrictive. For instance, a company could only issue ordinary shares or rights to ordinary shares, and could only offer 5% of the company’s shares each year, and no more than 15% in total.
Opportunities in the present
A new exclusion (called the ‘Employee share purchase scheme exclusion’) under the Financial Markets Conduct Act 2013 now means qualifying schemes do not need to provide detailed disclosure documents and have more flexibility in terms of their structure. The other key improvement is that companies may also offer other kinds of equity securities (such as shares with different voting or dividend rights), not just ordinary shares.
Companies need only provide employees with:
- A document describing the scheme and setting out the terms of the offer
- A prescribed warning statement
- A copy of the company’s most recent financial statements and annual report
Relying on the exclusion will not by itself trigger the need to register the company’s financial statements with the Companies Office.
The limits on the number of shares or options that can be issued under an employee share scheme have also been relaxed. Now, a company can issue shares or options that comprise up to 10% of the company’s voting shares in any 12 month period, with no further cap on the total number of shares or options that can be issued under the scheme. Note that companies that have a small number of employees may instead choose to rely on another new exclusion called a ‘small offers exclusion’. This covers personal offers of up to 20 people each year, within an annual cap of NZ$2 million and has even lower disclosure compliance obligations.
Don’t be left behind!
The recent legislative changes mean that it is now easier and more cost effective for businesses to establish employee share schemes. As a result, such schemes are becoming more prevalent, and in some industry sectors they are an expected employee benefit. So don’t be left behind – find out if an employee share scheme is right for your business.
Guest blog thanks to Rodney Craig