Rewarding Management with Shares - Management Buy-In

It is a challenging time for businesses to find and retain employees. Some are offering key employees shares in their business in recognition of the key employee’s efforts towards its success, and as an incentive to be part of its future – this process is commonly referred to as a “Management Buy-In” or "Employee Share Scheme".

For the purposes of this article, we are referring to businesses which operate via a Company structure, although Management Buy-Ins are not restricted to Companies. There are a number of ways that a Management Buy-In can be achieved, some common examples being:

1. By sale and purchase of existing shares to the key employee;
2. By issuing new shares and selling them to the key employee; or
3. By granting share options which a key employee can later exercise.

An important part of any Management Buy-In is the way in which the shares are paid for by the key employee – while an upfront payment is common, the payment doesn’t have to be structured that way – as a couple of examples Vendor finance could be offered, or the shares could be paid off over times by dividend payments.

Each of the examples above for achieving a Management Buy-In has different advantages and factors for the Company and selling shareholder/s to consider, and so Management Buy-Ins are exercises that should involve the Company’s lawyer and accountant. For example, issuing shares as opposed to selling existing shares means that different requirements of the Companies Act 1993 apply, and the options will be treated differently under any Company constitution or shareholders’ agreement.

Issuing of shares is also commonly used for Company capital raises, and when a capital raise is completed at the same time as a Management Buy-In, both will have their own particular dynamics to be worked through.

When an employee share scheme is put in place that grants a share option this comes with accounting considerations of its own, and it pays to have robust, complete advice at the time of putting the employment agreements in place, as well as at the time that an employee exercises the option to buy shares. The Company should put in place clear conditions around what needs to be achieved by the employee for the option to be able to be exercised, to streamline the process from start to finish.

There are other Company matters that tie into Management Buy-Ins, and where necessary can be worked through at the same time, such as shareholder agreements, constitutions, and buy/sell agreements to name a few. These are all matters which regulate the Company and its shareholders on an ongoing basis and can, along with Management Buy-Ins, contribute to its success and sustainability over time.

As set out above, there are different ways to reward and seek to retain key employees via a Management Buy-In, and it is an exercise we are seeing some of the businesses we deal with undertake. The suitability of each method will depend on the Company’s specific situation, and we recommend you seek legal, accounting and financial advice to assist you with making the best decision for your Company and its future.

DTI Lawyers has a team of commercial lawyers who have the necessary expertise, and are ready to assist you with a Management Buy-In, or any other business matters. Our specialist lawyers can be contacted by phone on 07 282 0174 or by email [email protected]