Shares And Shareholders: Employees Shares Ownership Scheme

Empowering your workforce is key to achieving long-term success. This article discusses Employee Share Ownership Schemes (ESOS), exploring how they can transform your business by aligning employee interests with yours, boosting productivity, and retaining top talent.  Discover the different types of ESOS, the legal framework for establishing them, and the steps involved in implementation.  Learn how to unlock the potential of your greatest asset; your employees! 

Employee Share Ownership Schemes (ESOS) are regulated by the Companies Act, the Capital Markets Act, and the Income Tax Act which provide the legal framework for their establishment and operation. Typically, ESOS are administered by the company’s board of directors or appointed committee that is tasked with determining the employee eligibility criteria, granting share awards (either for free or at a discounted rate) and overseeing the vesting and implementation of the same. 

 Companies that offer such incentives in Kenya include Equity Bank, Safaricom PLC and EABL. 

Types of Employee Share Ownership Schemes 

  1. Employee Share Ownership Plans (ESOPs) - involve granting employees shares or options to purchase shares in the company at a predetermined price. Employees typically receive these shares as part of their compensation package or as incentives. Employees may be required to meet certain performance targets or remain with the company for a specified period (vesting period) to exercise their options. These allow employees to purchase company shares at a discounted price through payroll deductions or direct contributions. There are various types of ESOPs, such as profit-sharing schemes, savings related share option schemes, share option schemes, phantom share schemes; 
  2. Restricted Stock Units (RSUs) - RSUs grant employees the right to receive company shares or cash equivalents at a future date, subject to certain conditions, such as continued employment or performance targets. These may vest over time or upon the achievement of specific milestones; 
  3. Performance Share Plans (PSPs) - reward employees with company shares based on the achievement of predefined performance criteria, such as financial targets, operational metrics, or individual goals. PSPs align employee incentives with company performance;  
  4. Employee Share Ownership Trusts (ESOTs): these trusts are established by companies to hold shares on behalf of employees. They may acquire shares through direct purchase or contributions from the company and distribute them to employees according to predetermined criteria; 
  5. Share Appreciation Rights (SARs): entitle employees to receive cash or shares equivalent to the appreciation in the company's stock price over a specified period. SARs provide employees with a financial incentive tied to the company's performance without requiring them to purchase shares directly. 

Establishing an ESOP in Kenya 

Establishing an Employee Stock Ownership Plan (ESOP) in Kenya involves several key steps to ensure compliance with relevant laws and regulations which include: 

  1. Legal Framework and Regulatory Compliance - understanding the legal framework governing ESOPs in Kenya is essential. These include, the Companies Act 2015, the Income Tax Act, Finance Act to list a few;  
  2. Company Structure - one must determine the appropriate structure for the ESOP within the existing company framework. This may involve amending the company's articles of association or adopting a separate trust structure to hold the shares on behalf of employees;  
  3. Plan Design - developing a comprehensive ESOP plan outlining the purpose, eligibility criteria, contribution mechanism, vesting schedule, and allocation of shares or stock options to employees is important; 
  4. Valuation of Company Shares - conducting a valuation of the company's shares to determine the fair market value to issue shares or stock options to employees;  
  5. Legal Documentation - preparing the necessary legal documentation, including the ESOP trust deed, employee communications, board resolutions, and any other relevant agreements and ensuring that the documentation complies with Kenyan law and accurately reflects the terms of the ESOP;  
  6. Employee Communication and Education - communication of the details of the ESOP to employees and provide education on the benefits, rights, and obligations associated with participation. Transparency and clarity are crucial to fostering employee understanding and engagement; 
  7. Regulatory Filings - making any required regulatory filings with relevant authorities, such as the Capital Markets Authority (CMA) or the Retirement Benefits Authority (RBA), depending on the nature of the ESOP and the company's industry; 
  8. Implementation and Administration - implementing the ESOP according to the established plan design and administering it effectively which entails managing share allocations, tracking vesting schedules, facilitating employee transactions, and complying with reporting requirements; 
  9. Tax Considerations - understanding the tax implications for both the company and participating employees associated with the issuance and exercise of shares or stock options under the ESOP. Read more in this here and 
  10. ​​Ongoing Compliance and Review - regular review and update of the ESOP to align with changes in the business environment, regulatory requirements, and employee needs. Stay informed about developments in relevant laws and regulations to maintain compliance. Companies that offer this incentive are required to disclose such information in their financial statements and annual reports.​  

How we can help 

The team at CM SME Club is well equipped with knowledge, skill and experience needed for such shareholders and companies to stay informed about their rights and responsibilities in company affairs. We guide businesses on shares and shareholding including advising on the documentation required to protect the interests of the Company. Contact law@cmsmeclub.com for assistance.   

 

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