Shares in motion

Guiding employees through exits

Corporate sales are a major event for employee share awards. Generally, a company sale (such as a trade sale or other ‘exit’) will be a ‘trigger event’ for employee share awards, allowing employees the opportunity to acquire shares to be sold to a buyer alongside other shareholders.

Whilst a company sale can be great news for employees, it necessarily brings some additional considerations for the target and buyer alike, for example:

• The target company may operate many different types of employee plans (share options, contribution plans, tax advantaged plans…) which may be impacted differently by the sale.
• Plans may be ‘tax-advantaged’ and all parties, especially employees, will be keen to ensure that tax efficient treatment is maintained.

It is important for management to ensure that employee awards are settled at completion to facilitate a smooth transition of ownership and allow the new owners to introduce their own incentive plans.        

Communication is key

Employees are an essential piece of the puzzle during the sale process. As a key asset of the target, management should communicate effectively and efficiently with employees to ensure a smooth sale process and maintain employee motivation throughout.

By providing clear and concise information about how the sale will impact employees’ awards, management can foster a better understanding of the process ensuring employees feel informed and reassured, ultimately leading to smoother transition.         

Management should communicate effectively and efficiently with employees to ensure a smooth sale process and maintain employee motivation throughout.

What do employees need to know?

It is important for employees to understand:

• The impact of the impending sale on their share awards;
• The proposals in respect of share awards and appropriate legal forms to be completed;
• The timetable for the sale process; and
• Perhaps most importantly for employees, what consideration will be paid (shares, cash, other?), when is it payable? and what the tax implications are for employees?

While legally required information must be communicated to employees, it is crucial to ensure that all communications are clear, understandable, and aligned with the company's overall communication strategy.

Particular considerations

Depending on the structure of the company sale and the parties involved, the following may need to be taken into consideration as part of the communications:

• PLCs: On a sale of a UK-listed company, Rule 15 of the Takeover Code regulates how (and when) the target company (and often the offeror company) should communicate with employees in relation to the share awards held by them. It is important to follow the guidance to avoid falling foul of the code requirements.
• Private companies: In contrast, a sale of a private limited company is generally less prescriptive than a listed company sale, and the timing and type of mandatory communications will be determined by the rules of the target company’s share plans (although they can still give rise to complexities and it will normally be appropriate to communicate more than is legally required).
• Tax treatment: The realisation of share awards will often be a taxable event for the employee. The tax treatment (and how taxes will be recovered where withholding applies) will need to be explained to employees and it may be advisable to include illustrations to aid understanding.
• Tax-advantaged plans: To maintain tax-advantaged treatment, it will be necessary to comply with any relevant HMRC requirements (or those of the relevant tax authority for overseas tax-advantaged plans). Employees will likely want comfort that their tax advantages will not be adversely impacted as a result of the sale.
• New incentive plans: In many cases, employee share awards could form a crucial part of an employee’s benefits package and employees may want to understand whether they will maintain similar levels of benefits after completion.

Technology-based solutions for global advice

The company must navigate local legal and tax requirements in each jurisdiction with participating employees.

When a target company operates globally, whether it has few employees or is a major global enterprise, communication can become a little more complex. The company must navigate local legal and tax requirements in each jurisdiction with participating employees. Translating communications may be legally required or appropriate, there may be securities law restrictions and filings and the tax impact on share awards can vary widely across jurisdictions.

In the fast-paced world of a corporate sale, companies need quick access to reliable global and legal information. A range of services deliver high-level global insights, among which the CMS ShareReporter Health Check service stands out. It offers swift, high-level global insights across 100+ jurisdictions, along with clear employee tax reports that support communications and help drive successful company sales.