HMRC recently published a report on the use of growth shares. The research was qualitative in its approach and discussed the advantages and disadvantages of growth share schemes for both the employer and employee. The report highlighted that growth share schemes were increasing in popularity, but also acknowledged that certain companies were more likely than others to use this structure. However, a key theme of the report suggested that schemes are bespoke and complex to implement, requiring specialist advice.
What are growth shares?
Growth shares are generally a class of share which allows the holder to benefit from any increase in the value of the company above a set hurdle (which effectively ring fences the initial market value of the company for existing investors). Employees benefit from the potential gains and favourable tax treatment while employers can use growth shares to attract and retain employees. The report also highlighted that growth shares are often a motivation factor for employees.
“Medium-term growth business strategies”
Growth share schemes are suitable for private companies looking for an exit plan in the short to medium term (3 to 10 years), especially those backed by private equity investors. The report noted that growth shares were of most value to companies in the hi-tech, communications and media sector. The report also indicated that growth shares were best suited to medium-term growth strategies, as opposed to being part of a long-term strategy.
Implementation
The research noted that growth shares are bespoke products with little standard features. As a result of this, employers found growth shares an attractive incentivisation approach but a complex concept to understand. The report highlighted that a company required tailored advice from a multi-disciplinary team. Due to the complex nature, only a small number of enquiries come to fruition. However, alternative approaches, such as Enterprise Management Inventive Schemes, were used instead.
Shepherd and Wedderburn have a dedicated Employee Share Incentives Team who work exclusively on share plans. The Employee Share Incentives Team has acted in the implementation of many growth share plans over the past five years. The Team also have considerable experience with the design and implementation of Enterprise Management Incentive schemes. The Employee Share Incentive Team work closely with Shepherd and Wedderburn’s expert teams in employment, pensions and tax.