Share-based incentive plans for employees and corporate officers (stock option plans, free shares and warrants): choosing the right tool

Prospective For nearly half of a century, successive measures and reforms have been adopted to introduce mechanisms into French law, aiming at granting employees an easier access to the share capital of the stock corporation they are employed by; corporate officers are also entitled to these incentive plans under more stringent conditions, though.

There are two kinds of incentive schemes. On the one hand, several employee profit-sharing measures have been adopted such as Article L. 3311-1 and seq. of the French Labour Code, related to employee profit-sharing and incentive schemes (“intéressement et participation des salariés”) as well as employee savings schemes (“épargne salariale”). On the other hand, certain measures target the company’s shareholding in particular. Their sole goal is to favour share subscription or acquisition by employees or corporate officers, through subscription or purchase stock option plans (“options de souscription ou d’achat d’actions”), free shares (“attribution gratuite d’actions”), stock warrants (“bons de souscription”) or warrants for subscription to business creator shares (“bons de souscription de parts de créateurs d’entreprises”), such mechanisms being attached with specific tax or social advantages. Besides those schemes, legal practitioners have developed other “incentive tools” such as the issuance of preferred shares (“actions de préférence”) allocating specific rights to their beneficial owners or, the issuance of complex securities that grant access to the share capital through warrants to subscribe to and/or acquire redeemable shares.

Most companies may be bewildered by so many opportunities and may wonder which “incentive tool” would tailor to their particular situation, among the main existing ones (stock options, free shares, warrants). The very purpose of this column is to point out the four guiding questions likely to identify the most relevant incentive tool according to a specific case.

1. Who is the prospective beneficiary? The first question to raise is related to the identification of the people that would potentially benefit from the given advantage: would they be employees of the issuing company? Or/and corporate officers of said issuing company? Is there any plan of extension of the advantage, conferred by this incentive tool, to other key staff within the group (subsidiaries, sisters or parent company)?

This question is regulated by the French law and the people entitled to receive such an advantage, through the main existing legal schemes (stock options, free shares or warrants for subscription to business creator shares), may be summarized as follows:

2. What is the stock liquidity guarantee eventually? what is the factual situation of the issuing company and more precisely, what is the composition and the ownership of its share capital: is the shareholding structure open or rather closed? do the majority shareholders enjoy a longstanding shareholding ownership? is there any investment fund within the shareholding structure? Is an overall transfer contemplated at short / medium term?

Answering these preliminary questions is key to determine the terms of the stock liquidity guarantee that would be granted to the prospective beneficiary, namely employees or corporate officers; indeed, the structuring of the incentive tool will be closely linked to the beneficiary’s expected liquidity: could it be secured by the market (quotation or third party investor) or by contractual obligations undertaken by the shareholders, or by some of them only (e.g. call options, drag along or tag along provisions). Not addressing this issue in advance may result in the beneficiary risking to end up in a very minority position with no significant power (except in the case of a fragmented shareholding structure) and worse, with no real prospect of liquidity… which genuinely weakens the advantage initially offered. But this liquidity can only be contemplated if provided at fair market value: the mechanisms tending to allow the beneficiary to sell his securities at a value different from the fair market value should be avoided to avoid any recharacterization of part of the capital gain as employment income.

3. Is the beneficiary a risk-averse? Is the prospective beneficiary ready to make an investment in order to subscribe or acquire the offered stock options, shares or warrants, using his own funds or resorting to debt? in other words, is the right, which would be granted by the company (employer/issuer) to its employee or its corporate officer, depending on whether the beneficiary is ready to take an investment risk, namely the risk of loss incurred (damnum emergens or “perte subie”) in addition to the risk of lost profit (lucrum cessans or “gain manqué”), if the shares do not create value as expected during the holding period?

Obviously, such risk taken by the beneficiary reveals motivation and determination in conducting the project as he accepts, in such cases, to act as an investor in addition to being an employee or a corporate officer; consequently, such risk taking enables to reduce the tax and social risk of requalification into salary of the advantage conferred to the beneficiary.

The prospective beneficiary’s refusal or impossibility to take risk is the major reason for the success, over the past few years, of the free shares which –as opposed to stock options, warrants or even to preferred shares- do not require any risk taking or disbursement by the beneficiary; the benefit provided through free shares thus consists in a form of compensation which principle is recognized (even though it can be conditioned, cf. infra §4) but which quantum remains unknown on the date of its implementation. Despite this uncertainty, free shares granted within the legal framework present the undeniable advantage to benefit from a clear and secure tax and social regime less prone to criticism, inter alia from the tax authorities. On the contrary, the beneficiary’s ability and willingness to take such an investor risk opens up the way to other possibilities and enables to resort to incentive tools such as stock options or warrants and in particular (if the conditions are met) to warrants for subscription to business creator shares, which tax and social regime is more favorable than that of free shares. Therefore, for free shares attributed since 7th August 2015, while the employer/issuer must pay a 20% employer’s contribution on the value of the shares at the date of acquisition, the subscription to business creator shares are very favorable for the employer/issuer, as the latter has no specific contribution to pay.

4. Is the benefit conditional to any way? Is the award of the advantage to be granted, by the company (employer / issuer) to its employee or corporate officer, tied –in addition to legal conditions (e.g. the improvement condition set by par Article L.225-197-6 of the Commercial Code or the AFEP-MEDEF corporate governance code)- to the compliance with a particular deadline and/or to the fulfilment of conditions related for instance to attendance, to individual or collective performance (such as reaching a certain level of turnover or profit within a defined calendar), or to the holding of the shares during a certain period?

Obviously, laying down such conditions is in line with the legal framework designed to grant “key men” the opportunity to benefit from incentive and motivational tools. Moreover, the introduction of such conditions affects the tax regime of the advantage conferred to the employee or the corporate officer: for instance, the beneficiary will be able to benefit from a 50% tax deduction for duration as soon as the free shares will have been retained for at least two years, and from even a 65% tax deduction in case of an eight-year retention at least (the counting down of such delay starts from the acquisition of the free shares).

In short and in order to highlight the key distinctive criteria, the brief comparison of the three main incentive tools –compared to the payment of a bonus- can be summarized as follows:

1 Or 30 % assuming that all the employees will benefit from the free shares and, the by-laws of a non-listed company which fulfils the small and medium-sized enterprises requirements (total workforce fewer than 250 employees, turnover lower than €50 million, balance-sheet total lower than €43 million) can set the limit to 15%.
2 Mention in the minutes of the granting governing body
3 Mention in the minutes of the granting governing body and in the management report if the issuer is a listed company and on the Economic and social data base made available to staff representatives.


French companies thus benefit from a wide range of incentive tools aiming at motivating and winning the loyalty of their key staff. The first hardship is to determine, for each specific case, the appropriate tool(s) based, in particular, on the identified constraints and the objective being pursued by both the employer / issuer and the prospective beneficiary, which might hardly be reconciled.

Our recommendation would be, at the launch of such project, to come up with the guiding questions beforehand, as mentioned above: such an approach enables to get rid of the unfeasible solutions, depending on the circumstances of the case in point, and to focus on the available options; indeed, having ranked the pursued goals beforehand, it will be easier to shape the appropriate incentive tool. As Sénèque used to say “There can be no fair wind in uncharted waters”.