Neil Andrews - Partner, Coles Miller

Encouraging Employee Ownership2nd Nov 2012

by on 2nd Nov 2012

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Neil AndrewsWhilst there has been much in the press about George Osborne’s controversial “rights for shares” idea, the recent government proposal to implement some Graham Nuttall’s recommendations following his Review of Employee Ownership for the government earlier this year appears to have received relatively little attention. This is a bit of a shame as all efforts to make it easier for companies, particularly SMEs, to adopt employee ownership schemes should be welcomed and well broadcast.

One of Mr Nuttall’s observations is that the cost and complication of establishing mechanisms that enable outgoing employees to sell their shares is a major disincentive for private companies considering employee share ownership schemes. The Government says it wants to change this by simplifying the current employee share selling rules which are set out in The Companies Act 2006. It consultation paper, released on 30 October, seeks views on its main ideas (recommended by Mr Nuttall):-

First, it proposes to allow private companies to buy back the outgoing employee’s shares as treasury shares (as plcs can currently do) which can then be cancelled (if there are surplus shares) or sold for cash. Currently, the main mechanism is via Employee Benefits Trusts, but these can be expensive to set up and administer and are also fairly restrictive.

Secondly, it proposes that private companies will be able to buy back shares from employees in instalments rather than having to pay the market value of the shares in a single lump sum payment (as they currently have to) which can present serious cash flow challenges.

It is also proposed that companies wishing to buy back their own shares will only need a simple majority of shareholders to approve a resolution: currently a special resolution (which requires approval by 75% of shareholders) is required.

As the government’s stated aim is to encourage wider employee ownership within the business community, implementing these proposals would be a step in the right direction. Consultation closes on 16 November 2012.

In addition to the specific Consultation paper on share buy backs, the government has  given its formal response to the Nuttall Review which includes an action plan with the following key commitments:

  1. assssing the viability of an employee ownership institute to raise awareness of employee ownership
  2. working with John Lewis to examine funding barriers for employee-owned companies
  3. working with professionals to develop "off the shelf" template documents for setting up an employee owned company.
  4. setting up an Implementation group (to be chaired by the Minister for Employee Relations) and a Ministerial programme of awareness raising activity through regional visits, starting with a regional event with John Lewis.

All good "headline" ideas but real changes to employee ownership in the UK still seem a long way off. Further details on some next steps is expected in the Chancellor's Autumn Statement on 5 December 2012. Let's hope this doesn't all get kicked into the long grass.

Neil Andrews

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