Employee Shares Scheme through Redeemable Shares

An Employee Share Scheme is a program that allows employees of a Company to acquire ownership in the Company through the purchase or allocation of shares. AIFC Companies Regulations determine Employee Shares Scheme as “a scheme or arrangement for encouraging or facilitating the holding of Shares in the Company by or for the benefit of: (a) the genuine Employees or former Employees of the Company, a Subsidiary or Holding Company of the Company or a Subsidiary of the Company’s Holding Company; or (b) the spouses or minor children or minor step-children of the individuals referred to in paragraph (a)”.

So, shares under Employee Shares Scheme in the AIFC can be allocated to:

1) Employee of the Company;

2) former Employee of the Company;

3) the spouses of the Employee or the former Employee

4) minor children or minor step-children of the Employee or the former Employee.

One of the ways to realise Employee Shares Scheme in the Private Company registered in the AIFC is through Redeemable Shares. Redeemable shares are a specific type of share that can be bought back or redeemed by the Company at a future date. Section 60 of the AIFC Companies Regulations is indicated that redeemable shares can be issued or non-redeemable shares can be converted into redeemable shares: “a Company may, if authorised to do so by its Articles of Association, issue and allot, or convert existing non-redeemable shares (whether allotted or not) into, Shares that are to be redeemed, or are liable to be redeemed, either in accordance with their terms or at the option of the Company or the Shareholder”. As we can see in the text of the section, it is important to have provision that authorised the issue and allocation of the redeemable shares in the Articles of Association of the Company.

In the context of an Employee Share Scheme, redeemable shares can be used as a way to provide Employees with an opportunity to own shares in the company while also allowing the Company to maintain some flexibility in managing its capital structure.

The redeemable shares are typically subject to a vesting period, during which the Employee needs to fulfil certain conditions, such as remaining employed with the Company for a specified period of time or achieving specific performance targets. Until the shares vest, the Employee may not have full ownership rights. This makes redeemable shares a great alternative to option agreement when releasing Employee Shares Scheme.

The Company determines the length of the vesting period, which can vary based on its specific policies and objectives. Vesting periods commonly range from a few months to several years, but there is no fixed standard. The period may be defined in the Employee Share Scheme documentation or agreement.

The vesting period is often structured with a vesting schedule, which outlines the gradual release of ownership rights to the Employee over time. For example, a vesting schedule may specify that 25% of the shares become vested after the first year of employment, another 25% after the second year of the employment, etc. In some cases, a vesting period may include a “cliff” provision, which means that no shares vest until a certain period has elapsed. For instance, a scheme may have a one-year cliff, meaning that no shares vest until the Employee completes one year of service. After the cliff, the shares may vest according to a regular schedule. Vesting period and cliff vesting makes redeemable shares a great alternative to the option agreement when releasing Employee Shares Scheme. If an Employee leaves the company before the vesting period is complete, they typically forfeit the unvested shares. This encourages Employee retention and aligns the scheme with the Company’s long-term goals. Depending on the circumstances, an Employee Share Scheme may include provisions for accelerated vesting. This could occur, for example, in situations such as a change of control of the company.  Accelerated vesting allows employees to gain ownership of their shares more quickly than originally scheduled.

The Company specifies the conditions under which the shares can be redeemed. This may include a predetermined redemption date or a trigger event such as the Employee leaving the company, retiring, or reaching a specific milestone.

1) Predetermined Redemption Date: In some cases, the Employee Share Scheme may specify a fixed redemption date on which the redeemable shares can be redeemed by the Company. This date is predetermined and stated in the scheme documentation. It could be a specific calendar date, such as the end of a specified period (e.g., three years from the grant date), or tied to a particular event, such as the completion of a project or a Company milestone.

2) Employee Leaving the Company: An Employee Share Scheme may include a trigger event where the redeemable shares can be redeemed if the Employee leaves the Company. This could be due to resignation, termination, or any other reason for the Employee’s departure. The scheme will define the conditions and procedures for the redemption process in such cases.

3) Retirement: Retirement can also serve as a trigger event for redeeming the shares. When an Employee reaches the retirement age or decides to retire voluntarily, the scheme may allow for the redemption of the shares. The specific terms related to retirement and the redemption process would be outlined in the scheme documentation.

4) Reaching a Specific Milestone: In certain cases, an Employee Share Scheme may tie the redemption of shares to the achievement of specific milestones or targets. For example, if the Company reaches a certain revenue or profit target, or successfully launches a new product, it could trigger the redemption of the shares. The scheme would clearly define the milestones and the corresponding redemption process.

The redeemable shares are redeemed by the Company at a price determined either at the time of issuance or based on a formula specified in the scheme. The redemption price may be equal to the original purchase price, the market value at the time of redemption, or a predetermined formula based on financial performance.

1) Company’s net profit formula:

Formula: Redemption Price = (Company’s Net Profit * X%)

X% represents a predetermined percentage specified in the scheme. It could be a fixed percentage or a sliding scale based on different performance levels.

2) Book Value-Based Formula:

Formula: Redemption Price = Book Value per Share * (1 + X%)

In this formula, the redemption price is calculated based on the book value per share, which represents the net asset value of the Company divided by the total number of shares outstanding. X% represents a predetermined percentage specified in the scheme that allows for an additional premium or adjustment to the book value per share.

3) Earnings-Based Formula:

Formula: Redemption Price = Earnings per Share * (Y + X%)

In this formula, the redemption price is determined based on the earnings per share (EPS) of the Company. Y represents a predetermined multiplier specified in the scheme to determine the base value, and X% represents a predetermined percentage specified in the scheme to adjust the price based on certain performance factors or benchmarks.

4) Market-Related Formula:

Formula: Redemption Price = Market Price per Share * (1 – Z%)

In this formula, the redemption price is tied to the market price per share of the Company’s stock. Z% represents a predetermined percentage specified in the scheme that allows for a discount from the prevailing market price.

5) Revenue or Sales-Based Formula:

Formula: Redemption Price = Total Revenue or Sales * (P% / Total Shares Outstanding)

In this formula, the redemption price is based on the total revenue or sales of the Company. P% represents a predetermined percentage specified in the scheme that is allocated proportionally based on the Employee’s shareholding relative to the total shares outstanding.

When the redeemable shares are redeemed, the company typically pays the employee the agreed-upon redemption price. The payment can be made in cash or, in some cases, by issuing new shares or a combination of cash and shares.

Important that under AIFC legislation the Company may redeem Shares only if they are fully paid and from the following sources:

(a) for the nominal value of the Shares—from the Paid-up share capital, share premium and other reserves of the Company; and

(b) for any premium—from realised or unrealised profits, share premium or other reserves of the Company.

Also, A Company must not redeem any of its Shares unless all of the Directors sign a certificate stating that they have formed the opinion:

(a) that, immediately following the day payment for the redemption is proposed to be made, the Company will be able to discharge its Liabilities as they fall due; and

(b) that, having regard to:

(i) the prospects of the Company and to the intentions of the Directors with regard to the management of the Company’s business; and

(ii) the amount and character of the financial resources that will be available to the Company;

the Company will be able to continue to conduct its business, and discharge its Liabilities of they fall due, for 12 months immediately after the day payment for the redemption is proposed to be made.

If Shares are redeemed, the Shares must be treated as cancelled and the amount of the Company’s share capital must be reduced by the nominal value of the Shares redeemed, unless they are held by the Company as treasury Shares.

The way to realise the Employee Shares Scheme through redeemable shares under the AIFC legislation:

1) Amend the Articles of Association if there are no provision about redeemable shares;

2) Resolution of the Shareholders or Board of Directors (depends on the provisions of the Articles of Association) that approve the establishment of the Employee Share Scheme and authorise the issuance of redeemable shares and allotting it to a certain Employees;

3) Create an Employee Share Scheme Plan or Policy: This document outlines the overall framework and rules of the Employee Share Scheme. It covers aspects such as eligibility criteria, vesting provisions, redemption conditions, pricing formulas, and any other relevant terms and conditions. The plan or policy serves as a guiding document for implementing and administering the scheme;

4) Share Subscription or Grant Agreements: These agreements are executed between the Company and eligible Employees participating in the scheme. The agreements outline the terms and conditions of the share issuance, including the number of shares allocated, vesting period, redemption provisions, and any other relevant details. The agreements establish the contractual relationship between the Company and the Employees;

5) Employee Communication and Disclosure Materials: It is essential to provide Employees with clear and comprehensive communication materials about the scheme, including its purpose, benefits, risks, and any applicable tax considerations. These materials can take the form of a scheme booklet, FAQs, or presentations to ensure Employees have a complete understanding of their rights and obligations;

6) In 14 days after the Resolution notify the Register about issuing redeemable shares and allotting it to the certain Employees.

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