Employee Share Schemes.

Employee share schemes have not been as widely used in Malta as they have in some of our European neighbours. However, in general, companies use employee share schemes to attract, retain and reward talent by offering their employees a share in the success they help to create in the company. They provide a form of cash free reward and/or remuneration for employers as well as align the interests of employees with those of the company's shareholders to enhance performance and the company's success.

1. Purpose

The company must first look at what it wishes to achieve from the implementation of the scheme. Does the company want to attract top talent or does the board of directors want to focus the company's employees on a specific event (such as an exit or an improved financial year)? The type of scheme to be adopted will emerge once its objectives are identified.

2. Type of Scheme

There are several different types of schemes available. The most common types of schemes are:

-share loans: company provides loans (which may or may not be interest free) to the employee to purchase shares at market value[1];

-performance linked shares: company grants the employee shares once specific targets have been met;

-options: company grants the employee the option to purchase shares at a future date and at a pre-determined value; and

-phantom shares: company provides a cash payment to the employee which mirrors the company's share price and/or dividend.

Each type of scheme will vary in terms of complexity, cost, and tax implications and it is therefore important that the company is clear in what it wants and the best method to achieve it. A company will need to look into its own particular circumstances (its future plans, expected growth etc.) as well those of the market in which it operates (availability and competitiveness of talent pool).

3. Conditions

Once the type of scheme is identified, the company will need to flesh out the mechanics of the scheme. This will include identifying the total number of shares to be set aside for the scheme, which employee/s will be entitled to participate, the amount of shares the employee/s will be granted to and at what price (if any) as well as on what basis, and whether or not, the employee will be entitled to retain their shares following resignation or termination.

4. Establishment

Once the type of scheme and its conditions have been determined, the company will need to obtain tax, legal and accounting advice in order to establish the scheme. Guidance must be drawn up in order to provide employees with clear guidelines as to the operation of the Scheme, otherwise the company may not get the desired result out of implementation. Moreover, in anticipation of establishment, an amendment to the memorandum and articles of association, board and/or shareholder approval may be necessary.

5. Availability of Shares and/or Dilution

Unless the company holds shares in treasury, the shares granted to the employee/s must either (i) be created; or (ii) transferred from an existing shareholder. If created, it is important that companies are aware of a possible dilution of the existing shareholding as well as a possible value shift (and take measures to avoid this). If shares are to be transferred, a willing transferor/s must be identified, and a share transfer effected.

6. Administration

As the scheme will need to be administered throughout its lifetime, depending on its size, the company will need to either establish a committee or engage a third party (such as a trustee) to manage the scheme. Companies typically opt for the latter both from a transparency perspective as well as the want to minimize employee/company interaction when it comes to the scheme. Should the granting of shares be linked with performance targets, regular updates will be needed in order to allow employees to link work carried out with rewards.

7. Costs

The setting up of the scheme will involve short term and long terms costs. The former will consist of legal, accounting and tax advice in preparation of drawing up the scheme as well as those costs for implementation. The latter will consist of record keeping and administration of the scheme for its lifetime.

Employee share schemes can be used to attract, retain and reward talent. Due to their nature, complexity and potential longevity it is important that the scheme is well thought out and tailored for the ambitions of the company. With the growth of the Maltese market and an increased and more competitive talent pool, the use of such schemes in Malta may be set to grow.

[1] Article 110 of the Companies Act (Cap. 386) excludes these types of loans for acquisition of shares from the scope of financial assistance provided that certain conditions are met.