How to Navigate Employee Share Option Scheme in Nigeria
The Employee Share Option is a tool mostly deployed by startups to encourage, motivate, and spur on employees for greater productivity in the business. In this article, we examine the place of Employee Share Option under our current legal regime.
What Is an Employee Share Option?
This is a corporate arrangement between a business and an employee, by which the business gives the employee the option to own shares in the business as a means of remuneration for services rendered or motivation in form of incentives.
It is mostly deployed on the condition that an employee remains a staff of the business for an agreed period of time. Under this arrangement, an employee is permitted to purchase the shares at no charge, a nominal value or at a price below its fair market value.
Why Employee Share Option Plan is Important for Start Ups
Employee share option is crucial because it enables start-ups to retain their best employees at minimal costs and favorable terms, having regard to the fact that the salary of a start up may not be as competitive as the salary of already established businesses in that industry.
It also helps to buy employee loyalty by making the employee take ownership of the business. Through issuance of the shares, the employee would develop a sense of ownership of the business.
How is an Employee Share Option Scheme Created?
At the inception, the business would create and reserve certain number of shares for the employees. The scheme usually forms part of the founder’s agreement or employment contract and would carry details such as number of shares offered, price, date of grant and the waiting period before it becomes exercisable.
It is the usual practice for employers to insert a clause that employees will forfeit the right to the shares if they resign during the waiting period otherwise referred to as “Cliff” or “waiting period”.
The scheme is created subject to the internal approval process as contained in the Articles of Association of the business. This approval process must be subject to final approval by the board of directors of the business.
Is the Scheme Backed by Law?
Although not expressly provided for under the Companies and Allied Matters Act, 2020 (“CAMA”), it appears there are salient provision of CAMA that purport to support the scheme. for instance, section 186(d) of CAMA permits a business to purchase shares from employees who may have acquired such shares by means of a share option scheme.
In like manner, section 189(b) of CAMA permits a business to sell or transfer treasury shares to employee participating in a share option scheme. One inference could be drawn from both sections of CAMA, which is that the scheme is recognized by law.
However, businesses must be conscious of the provision of section 146 of CAMA which expressly prohibits the issuance of shares at a discount. Making use of the scheme in line with the provision of the law is very key to its success.
What Taxes are Payable on the Scheme?
The Personal Income Tax (amendment) Act, 2011 provides that all salaries, wages, allowances, and other gains of an employee from employment and compensation are subject to Personal Income Tax. However, there is no express provision on the employee share option scheme.
The Lagos State Internal Revenue Service (LIRS), by a 2017 notice has now made in mandatory for tax to be paid on any share or stock option scheme. This tax is ascertained on two premises, which are:
- The difference between the cost price and the fair market value (if any) of the shares or stocks
- Dividends earned on the shares or stock during the vesting period.
What is a Vesting Period?
A vesting period is a timeframe during which an employee gradually earns the right to the shares allocated to them under an Employee Share Option Scheme.
Typically, the vesting period spans several years, often with a “cliff” or initial waiting period, commonly set at twelve (12) months. During this cliff period, the employee does not gain any rights to the shares. If the employee leaves the company before the end of the cliff period, they usually forfeit the right to the shares.
After the cliff period, the shares gradually vest over the remaining duration of the vesting period, enabling the employee to gain ownership rights to the shares over time.
Can the Shares be Transferred or Sold?
This is usually determined by the Share Option Agreement. If permitted under the Agreement and the Articles of Association of the business, then same is legally binding on the parties and vice versa.
Conclusion
The employee share option scheme offers numerous advantages to both the business and the employee. However, business must be mindful of the provision of CAMA when implementing the scheme. Understanding the peculiarities of the scheme and the applicable regulatory framework is key to its success.
Berkeley Legal is a leading business law firm in Nigeria. We provide comprehensive and sophisticated range of specialized and personalized legal services that are designed to meet the various needs of highly diversified local and international businesses.
If you would like to know more about the Employee Share Option Scheme, please contact info@berkeleylp.com
The information provided in this article is for general informational purposes only and does not constitute legal advice.
