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INCORPORATING SHARE INCENTIVE SCHEMES IN YOUR COMPANY

What is a Share Incentive Scheme? 

A Share Incentive Scheme is a system used by companies to grant their employees an option to obtain certain classes of shares in the Company, as an incentive to the employees.

The options by the employees may either be exercisable after a specific period of time or the option can be linked to the employees’ performance. The granted option can also be offered to the employees at a marked-related value or at a discounted value and may be coupled with certain conditions.

For example, the employees may be required to remain in the employ of the company for three years before the shares would vest in their names. Where the granted option is offered to the employees at a marked-related value or at a discounted value, the employees will not pay for the shares at the time that they are offered the option and will only do so when they exercise the option (at a later predetermined date).

A Share Incentive Trust is typically used as a vehicle to give effect to Share Incentive Schemes.

Types of Share Incentives Schemes

There are three types of Share Incentive Schemes generally used:

  1. The Share Option Scheme
  • The main characteristic of a Share Option Scheme is that companies can grant employees an option to acquire shares in the company. The shares can be offered to the employee at a discounted value or at a market-related value. The shares will, however, only vest in the employee at a later (predetermined) date.
  • Any type of company can implement a Share Option Scheme. The type of Share Option Scheme will be dependent on a number of things including, but not limited to, the following:
    • the desire of the company to add additional shareholders to their shareholding pool;
    • to increase the BEE points of the company (re: the ownership element); and
    • to create an incentive for employees to remain in the employ of the company.
  • There is no limit on the amount of shares that a private company may decide to offer the employees. Certain conditions can also be coupled with the option to acquire the shares.
  • The employees will also have voting rights as in terms of section 37(2) of the Companies Act of 2008 (“Companies Act”) which provides that all shares, irrespective of the class, has associated with it one general voting right, except as provided otherwise in terms of the Companies Act or the Memorandum of Incorporation of the company (in accordance with section 36 of the Companies Act). Depending on the class of shares, the employees may have more than one voting right per share.
  1. Share Acquisition or Purchase Plan Schemes
  • The main characteristic of a Share Acquisition Scheme is that the company can offer the purchase of the shares in that company. The purchase price can be at discounted value or at a market-related value and may also be subject to certain conditions.
  • The shares will generally vest in the employee at the time of purchase. The vesting of the shares may change depending on the conditions attached to the shares.
  • Any type of company can implement a share option plan (this will be dependent on whether the company in question wants to add additional shareholders to their shareholding pool).
  • There is no limit on the amount of shares that a private company may decide to offer the employees.
  • As with the Share Option Scheme, the company can decide on how many votes each share will hold.
  1. Phantom or Cash-Settled Share Schemes
  • The main characteristic of the Phantom Share Scheme is that the employees are afforded an opportunity to obtain a cash benefit derived out of a share. The employees themselves do not however become shareholders of the company as the shares will never vest in the employees. The cash benefit usually becomes payable to the employee at a fixed and determinable time.
  • There is no maximum amount attached to the benefit and this will be free for the company to determine.
  • Because the shares do not invest in the employee, he/she does not become a shareholder and therefore does not acquire a proprietary interest in the company.

Share Incentive Schemes are attractive options to incentivise employees and to enable them to participate in the growth of the company thus enabling increased growth in the way that the company performs.

Prepared by:

Noori Edros | Associate | Dispute Resolution: Litigation & Arbitration

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)