Introduction

An Employee Share option Plan (ESOP) is a formal plan made available to eligible employees of a company which allows them to participate in the long term value growth of the business through the purchase of an ownership interest. What this essentially means is that an Employee is provided with shares in the company which they work.

ESOPs typically have restricted voting rights but have a right to dividend and income distribution.

An ESOP Trust receives shares from the Company by way of a fresh allotment, purchasing from existing shareholders in open market or via sale of shares by the majority shareholder to the ESOP Trust.

ESOP Agreements

ESOP agreements generally take the form of Trust Deeds which contains:

• Appointment and removal of Trustees
• Trustee powers and responsibilities
• Remuneration of trustees
• Eligibility Criteria
• Issue of shares
• Offers/Invitations to Employees
• Restrictions
• Dividend policy
• Financial Assistance
• Scheme expenses
• Adjustment on reorganizations, Amendments to the Deed
• Audits, Reports and record keeping
• Disputes
• Notices, Termination of Trust, etc.

The Trust Deeds normally has Rules that regulate its governance. The Rules contain:

• Control over Dealings with Units and Shares
• Invitations
• Applications and Grant of Options
• Exercising of Options
• Reconstruction or Winding Up
• Take Over, Variation of Share Capital
• Administration and Amendment of the Scheme Rules, Notices
• Vesting period
• Lapsing of options allotted to an employee
• Voluntary and Involuntary terminations

Functionality of ESOPs Plans

1. Direct or indirect ownership:
   1. Direct Ownership- Vesting of shares directly in favor of the participating employees.
   2. Indirect Ownership- Involves the establishment of a unit trust that vests units.

2. Immediate or gradual Vesting of shares:
   1. Immediate – Immediate acquisition entails the immediate vesting of shares or units to eligible employees.
   2. Gradual acquisition – refers to where the units vest gradually through a defined process.

3. Eligibility:
   1. Open Structure – All employees of the Company are eligible to participate in the ESOP
   2. Limited Structure – Employees eligible to participate in the ESOP are determined based on set criteria (for example, permanent employees, targets achieved or length of service)

Compliance Obligations of ESOPs

The ESOP Trust is subject to

• Audit
• Tax obligations
• Any change in the Trustees must be reported to the Registrar of Documents.
• If registered with the CMA, annual reports should be submitted.

Benefits of an ESOP