As a business owner, you may have considered selling shares in your company to an employee or group of employees, commonly referred to as an ‘employee buy-in’. Employee buy-ins are something we assist clients with regularly. As an emerging trend among small businesses in New Zealand, we briefly explore the benefits and considerations required for a successful employee buy-in in this article.

There could be many reasons why you wish to sell shares in your company to an employee. You may, for example, want to encourage workplace performance and or staff retention or to facilitate the future succession plans of your company.

It is essential, however, that you identify the reasons why you wish to sell shares in your company to an employee right from the outset, as this will determine how and in what way the shares are ultimately acquired.

Possible structures could include:

  1. A loan or bonus share scheme in terms of which shares are acquired by an employee and paid for by way of a loan or cash bonus;
  2. An employee share scheme which meets specific criteria under the applicable tax laws may also be an option if you wish to offer shares to the majority of your employees; or
  3. You could even provide share ‘options’ to your employees to acquire shares at a pre-determined price after a specific period or event.

The structure of the employee buy-in does not only depend on your rationale for offering the shares but other vital considerations as well. Depending on your situation, you may, for example, need to comply with the Financial Markets Conduct Act 2013 (FMCA) and the Companies Act 1993 (Companies Act).

It may be that one of the exemptions under the FMCA could apply to your situation, which could save you time, money and effort in offering the shares to your employees. By the same token, knowing precisely what your obligations are under the Companies Act could also save you time, money and effort.

One of the most common obligations we see under the Companies Act relates to the ‘financial assistance’ provisions when the company itself finances the transaction in terms of which the employees acquire the shares.

In most cases, you will also need to consider the financial and tax implications of the employee-buy-in, such as the impact it may have on the company’s financial statements and reporting obligations under the International Financial Reporting Standards, the possibility of a tax on employee gains, and FBT and PAYE considerations.

Although at first glance an employee buy-in may appear to be a straight forward matter, it is in fact, relatively complicated. As we have illustrated above, this is a complex area of law that requires a variety of matters to be considered.

For more information

If you are exploring the possibility of an employee buy-in, we recommend that you seek advice to understand precisely what your obligations are and how best to structure your buy-in. For advice tailored to your business call Matthew Whimp on 04 495 8909 – email matthew.whimp@morrisonkent.com or call Alain Van Der Westhuizen on 04 495 9979 – email alain.vdw@morrisonkent.com.

Employee Buy-in | Morrison Kent Lawyers