employee share option plans/schemes seminar on … · 4. power to contract on behalf of the scheme....

EMPLOYEE SHARE OPTION PLANS/SCHEMES

Seminar on Management of shares, Dividends and ESOPS

Presented by CS: Winnie JumbaOctober 2018

October 2018Institute of Certified Secretaries

The Governance Profession 2

Established under the Certified Public Secretaries of Kenya Act 1988 (Cap 534).

The core mandate of the Institute is to promote the practice of good governance in all sectors.

More than 3,000 Members competent in matters of governance, corporate secretarial practice, compliance, management and administration.

About ICS

October 2018

Institute of Certified SecretariesThe Governance Profession 3

An ESOP is a formal plan made available to eligible employees of a company which allows

them to participate in the long term value growth of the business through the purchase of

an ownership interest.

October 2018 Institute of Certified Secretaries The Governance Profession

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• An ESOP is required by law to invest primarily in the securities of the Sponsoring Employer.

• An ESOP is unique among qualified employee benefit plans in its ability to be registered and borrow money as an independent entity.

• ESOPs typically have restricted voting rights but have a right to dividend and income distribution.

Special features of an ESOP


The Governance Profession5

Legal Framework

The Companies Act, 2015 Capital Markets Authority and Regulations

Trustees Act Other Laws

• Provisions in relation to sponsor of such schemes.

• Scope includes holding of shares or debentures of a Company, its subsidiaries, its holding Company or a subsidiary of the Company's holding)

• Benefit extends to employees, former employees and their spouses / dependents.

• Provisions for Schemes in relation to reconstruction and amalgamation of companies.

• Provisions on acquisition / transfer shares held by minorities in schemes during such transactions

• The Capital Markets (Collective Investment Schemes) Regulations 2001 (“the CMA Regulations”)

• Grant the CMA the authority to register, approve and regulate such investment schemes;

• To conduct inspection of the activities, books and records of such schemes or engage an Auditor for that purpose;

• The Regulations defines provisions that are to be in-grained into the Company’s Deed and Rules to guide operations; and

• To regulate and oversee the issue and subsequent trading, both in primary and secondary markets of capital market instruments.

• The Trustees (Perpetual Succession) Act, Cap.164.

• The stamped Trust Deed is then registered at the Registry of Documents in accordance with the provisions of the Registry of Documents Act (“RDA”).

• Additionalregistrations can be made with the KRA and the CMA at the discretion of the Trustees.

• Application of Employment Act to rights and obligations of employees

• Application of tax law to fringe benefits and distribution of income

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How an ESOP Scheme works

• Vesting of shares directly in favor of the participating

employees

• Indirect ownership involves

the establishment of a unit trust that vests units

Direct or indirect ownership

• Immediate acquisition entails the immediate

vesting of shares or units to eligible employees.

• Gradual acquisition refers to where the units vest

gradually through a defined process.

Immediate or gradual (vesting)

• Open Structure – All employees of the Company

are eligible to participate in the ESOP

• Limited Structure –Employees eligible to

participate in the ESOP are determined based on set

criteria (for example, permanent employees,

targets achieved or length of

service)

Eligibility(Limited Structure or Open Structure)

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Operational mechanisms

Option Schemes

• Held by the ESOP Trust and employees are

granted the option to purchase the shares at a

pre-determined price

• Upon exercise of the

option (purchase), the share can vest

immediately or after a pre-determined interval.

Unit Scheme

• the shares are held by the ESOP Trust and the

employees are given the chance to purchase units

representing shares in the ESOP Trust.

• No direct holding of shares in the Company and any

redemption of units will be under the rules of the

Scheme and not under

any procedure set out in law.

• The price can be pre-determined or based on a

continuing valuation criteria

• Redemption based on a valuation criteria so as to

transfer the capital gain to the employee

Share Save Scheme

• Employees save on a predetermined basis

towards shares reserved for them.



Governance Framework

Trust Deed

• Appointment and removal of Trustees

• Trustee powers and responsibilities

• Remuneration of trustees

• Eligibility Criteria

• Issue of shares

• Offers/Invitations to Employees

• Restrictions

• Dividend policy

• Financial Assistance

• Scheme expenses

• Adjustment on reorganizations, Amendments to the Deed

• Audits, Reports and record keeping

• Disputes

• Notices, Termination of Trust, etc

Rules

• Control over Dealings with Units and Shares

• Invitations

• Applications and Grant of Options

• Exercising of Options

• reconstruction or Winding Up

• Take Over, Variation of Share Capital

• Administration and Amendment of the Scheme Rules, Notices

• Vesting period

• Lapsing of options allotted to an employee

• Voluntary and Involuntary terminations

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Governance of the ESOP Scheme

1. Fiduciary Duty;

2. Continuity of the ESOP;

3. Control over Scheme Office Bearers;

4. Reward Policy and Eligibility;

5. Strategic Plan;

6. Costs of ESOP;

7. Financing Plan; and

8. Closed periods (if any)

1. Power, control and authority over the assets of the Trust Fund.

2. Power to vary the terms of the Trust Deed and Rules in consultation with the Company’s Board of Directors.

3. Management and administration of the Scheme, including appointment of the Scheme auditors.

4. Power to contract on behalf of the Scheme.

5. Power to borrow from the Company or any other person on behalf of the Scheme.

6. Power to deal in the Shares allotted to the ESOP e.g. dividend distribution, allotment of new shares/units, rights issue /Bonus etc.

7. Power to exercise the participatory rights of the ESOP in the Company e.g. approval of corporate actions in the main Company.

8. Exercise discretionary powers over the business of the Trust.

9. Discretionary role e.g. making certain decisions at the point of Winding up of the Trust

BoardThe

Trustee

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Key Terms … cont.

The Scheme: means the XYZ ESOP.

Shares: means ordinary shares of the Company as listed on the Company’s Register of Members.

Unvested share or Option: is a share, allocated by the Scheme to an Eligible Employee, that gives the Employee the right, but not the obligation, to save up and purchase a share in the Company at a pre-determined price after the vesting period.

Allocation Date: Specified days after the date of the Allocation Notice issued to Eligible employees.

Vesting period: means the period between when the unvested share or option is offered and when the same can be exercised. Prescribed time period after the Allocation Date.

Lock-up Period: the period of time from the allocation date when an earlier vesting date will be granted to employees who have fully paid up for their unvested shares.

Exercise: Actions undertaken by a unvested-shareholders to take up their rights to become a shareholder of the Company as provided by the Scheme.

Eligible Employee: A full time employee as determined by the Board from time to time.

Price / Market Value of a Share: Value of an ordinary share as based on the approved valuation parameter e.g last published quarterly financial statements as finally determined by the Board from time to time.



Funding the ESOP

The ESOP Trust receives shares from the Company by way of a fresh allotment, purchasing from existing shareholders in open market or via sale of shares by the majority shareholder to the ESOP Trust.

The ESOP Trust usually obtains its funds through a loan either from a financial institution or from the sponsor as grant or a combination of both. A company can extend loan to the Trust for purchasing the shares.

Employee contributions

Bonuses/Commissions

Dividends earned by un-allotted shares

Treasury shares (Listed entity only)



Distribution

• Dividend distribution

• Administrative expenses

• Investment of funds

• Investment and interest income



Compliance

The ESOP Trust is subject to audit.

Tax obligations.

Any change in the Trustees must be reported to the Registrar of Documents.

If registered with the CMA, annual reports should be submitted.

If registered with the KRA, annual reports should be submitted.



Compliance

Additional Parties and

Activities(listed

Companies)

Capital Markets

Authority

Nairobi

Securities

Exchange

Kenya Revenue

Authority

• Listed Companies must apply for the

approval of the CMA to set up an ESOP.

• The application must be accompanied by

the Shareholders and Directors resolution

approving the set up and authorizing

issue of shares to the Trustee, list of

current trustees, copy of the Trust Deed

and Scheme Rules and Regulations and

Auditor’s Certificate confirming that the

reserves are sufficient for capitalization.

• Listing of securities that have been

approved for listing by the Authority

• Payment of tax for capital gains to the

KRA



Key CMA Requirements

• Capital Markets (Collective Investment Schemes )Regulations, 2001

Mandatory for Listed companies

• Specifically for Employee Share Option Plans

• Specific Requirements for Trust Deed and Rules

• Minimum Three Trustees

• Must be a unit trust; each unit representing a share in company

• Units not transferrable, but pledgeable and redeemable

• Re-purchase price to reflect market price

• On termination Employee surrenders unit certificate

• Annual Audit - report to unit holders and CMA – within 60 days of end of audit

• Winding up – according to its rules; 3 months notice to unit holders and Authority

• Disclosure of ESOP options and total value of ESOP shares in Annual Report of company



Role of Administrators

Custodial Services • Maintaining the Scheme's physical and electronic files

Administration • Maintaining the Scheme's Register

(routine) • Managing exits from the unvested shares register

• Day to day correspondence with unvested shareholders

Administration • Supporting Representations to the Trustees and Management

(non-routine)

• Conducting Trainings and Sensitization Workshops to Employees,

Management and Trustees

• Preparing Annual Calendar of Scheme Activities

• Support in the review of the Trust Deed and Rules

• Advisory Services

ESOP Compliance • Performing Compliance Reviews of the Scheme’s Activities

Corporate Actions• Dividend Processing and circulation of Warrants

• Bonus Issues

• Rights Issues

• Convening the Annual Unitholders Meeting

• Supporting the Annual Invitations

• Supporting the Exercise of Shares upon vesting



Role of Administrators

Book Keeping and

Accounting

• Keep books of account relating to the affairs of the Schemes

• Review documents for correctness of allocations and classification;

• Maintaining the general ledger and trial balance

• Maintain subsidiary journals/ledgers

• Prepare monthly reconciliations and supporting schedules

• Prepare monthly reports, accounts and supporting schedules

• Prepare annual accounts in accordance with the International

Financial Reporting Standards (IFRS).

• Audit support and responding to all queries arising from audit;

• Assist in the preparation of the annual budget for approval by the Trustees;

• Remittance of unclaimed dividends to Unclaimed Financial Assets Authority

i.e.

Preparing updated report of surrendered unclaimed dividends

Handling all queries with regard to unclaimed dividends

• Offer Advisory Services regarding taxation aspects that may affect the

Scheme.



Typical Benefits of an ESOP

To Employees To Company

Share ownership opportunity Incentivizes Employees

Administration expenses borne by the Company

Presents Sponsor as an employer of choice

Flexible payment plans Facilitates share ownership and staff retention

Allocation of dividends to reduce amounts outstanding

Additional Reward Mechanism

Pre-determined share valuation criteria Aligns Company and Employee Objectives

October 2018 19Institute of Certified Secretaries

The Governance Profession

Questions


The Governance Profession20

Lunch

October 2018 21

Thank You

Institute of Certified Secretaries The Governance Profession