Establishing an ESOP structure usually involves two phases: preparation and implementation. 

The preparation phase normally involves the following activities:

  • Directors’ Resolution Approving the ESOP and Initial Communication with Employees

This involves giving the employees background information to explain what the company has done, why, and how it will impact the company, the employees and the selling owner.

  • Shareholders’ Resolution

The shareholders then approve and allocate shares for the ESOP and if necessary, increase authorized capital to accommodate the additional shares issued.

  • Tax and Regulatory Approvals

This involves advising on tax considerations including review of the CMA, RBA and Income Tax guidelines and requirements. It also includes a review of recent amendments to the Company’s Act and its impact on the ESOP combination options.

  • Structuring of the ESOP

The ESOP is then structured to include the proposed size, funding methods and type of trust.

  • Preparation of Essential Documents

These include the Deed and Rules as provided in the regulations, as well as the Draft Offer Information Memorandum, and Legal, Financial, Commercial and Property due diligence reports.

  • Appointment of a Trustee.

It is prudent to appoint an external independent trust corporation to provide trustee services since they have the experience and capacity to provide sound governance and guidance as opposed to internal trustee who may display conflict of interest.

The duties of the trustee are to:

  1. Retain and maintain custody of ESOP share certificates
  2. Maintain register of unit holders and records of trust fund charges and commissions
  3. Facilitate acquisition or purchase shares of the company from time to time as may be required by the rules of the ESOP.
  • Filing of Allotment Return

This is the process of formally notifying the Registry of Companies of the new shareholders and their shareholding.

The implementation phase normally entails the following activities:

  • Employee Integration to the ESOP

A Circular with details on how to buy units in the ESOP, disclosure of options granted and procedure for granting the scheme is provided to employees. Meetings are then conducted with employees on procedure (with question-and-answer sessions) to enhance their understanding. Application forms and Information Memoranda are distributed to eligible employees.

After the initial offer opens and closes and Application Forms are processed, successful applicants are allocated the shares. This is followed by an official results announcement.

  • Communication with the Trustee and Management on Periodic Vesting of Shares

Share vesting is the process by which an employee is rewarded with shares and receives the full rights to them over a set period of time, usually one that’s established in the shareholders resolution.

  • Subsequent Activities

These include annual transfers of vested shares to employees and disclosure of additional shares. An annual audit of the scheme and disclosure of the same to unit holders is recommended.

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