If you are a start-up company which does not have the cash to pay larger salaries to your employees or a growth-stage company struggling with retaining talents, Employee Share Option Scheme (ESOS) may be used to motivate, retain and remunerate your employees in the longer term.
An ESOS is a scheme operated by an employer where the employer grants options to its eligible employees to acquire shares in the company.
This allows the employees to have the opportunity to participate in the financial success and profitability of the company through ownership of shares in the company.
The terms and conditions of an ESOS are governed by what is known as the ESOS by-laws (“By-Laws”).
A set of criteria on eligibility and criteria for allocation (if any) is to be determined by the board of directors of the company. The criteria may include, but not limited to;
Typically, the By-Laws will restrict the eligible employees from selling, assigning, transferring or otherwise disposing of the option. The option can only be held and exercised by the eligible employees to whom the option is granted.
The right to dividends and votes is attached to the shares, rather than the ESOS options. The eligible employees are not entitled to any dividends, rights, allotments, distributions or other entitlements on the unexercised option. Further, the option must not carry any right to vote at any general meeting of the company. The foregoing rights will only available to the eligible employees when the option is exercised.
The By-Laws may provide that the shares to be allotted and issued to the eligible employees pursuant to the exercise of the option under the ESOS are subject to a retention period or restriction on transfer. This is to prevent the eligible employees from disposing of the shares to another third party without the consent of the company.
The By-Laws will typically provide for what happens when the eligible employee leaves the company. The general position is that the option will lapse upon the employee leaving the employment. Nevertheless, exceptions may be made to the employee leaving the company by reason of retirement, ill-health, injury, physical or mental disability, retrenchment and other circumstances acceptable to the ESOS committee.
The option will often lapse upon the occurrence of the following events:
The By-Laws may provide that the ESOS may be terminated upon the approval of the board of directors of the company and the board of directors may do so notwithstanding that there may be eligible employees who have yet to exercise their options.
Further, the company must, within fourteen (14) days from the granting of the option to take up unissued shares in the company to the eligible employees, enter in the register the particulars including the details of the eligible employees entitled to the option, the date on which the option was granted, the number and the description of shares in respect of which the option was granted, the consideration for the exercise of the option (if any) and the period or time or the occurrence of any event of which the option may be exercised. Any contravention of this section will be an offense penalized under CA 2016.
The offering of share options to potential employees will aid the company in terms of recruitment and the provisions of ESOS that the option will lapse upon the employee leaving the employment can help the company in terms of retention of employees.
By granting your employees the option to subscribe for shares in the company, you are telling your employees that you are willing to share the financial success and profits of the company with the employees.