A company’s employee share ownership plan (ESOP) is a structure that allows and supports employee ownership. ESOPs are a popular way for employees to become more involved in the ownership and decision-making of their company.

There are situations when an ESOP is not the best option for a company. Many of our clients, on the other hand, have recognized compelling reasons to engage in ESOP transactions and have enjoyed the benefits of doing so. We’ve put together this guide to walk you through the most important factors to consider before creating an ESOP.

  • Capacity of the Company to implement the ESOP

A company can only create an ESOP if its memorandum and articles of association provide it the authority to do so. Some permit for the establishment of an ESOP, although a broader capacity to remunerate employees should be sufficient in most cases. If the objects section of the memorandum of association needs to be amended to allow the formation of an ESOP, a special resolution must be passed in accordance with the Companies Act 2015.

  • The ESOP structure and framework

A corporate and tax due diligence is required to identify any regulatory difficulties that may arise when a firm establishes an ESOP. This will entail a review of the many applicable legislation, as well as the examination and structuring of necessary documents. The transaction advisers can then recommend a proper structure and framework for establishing the ESOP.

  • Availability of Authorized Share Capital

A company that implements an ESOP must have sufficient authorized but unissued share capital to allot shares under the program. If the authorized share capital is insufficient, shareholders can increase it by passing an ordinary resolution under Section 405 of the Companies Act 2015.

  • Consideration for Financing

Under the Companies Act 2015, a firm may give financial assistance for the acquisition or subscription of its shares in connection with the formation of an ESOP. Workers or previous workers, relatives of any such employees or former employees are eligible for financial help.

  • The Trust Deed and Rules

The trust deed and rules normally specify the eligibility of employees, the procedure for participation in the scheme, the rules for exit, allotment, meetings, and other rights and obligations of the parties. The trust deed and rules must include a clause addressing the vesting circumstances for the benefits. It must be explicit and communicated to all participants. This will ensure that employees are treated fairly and that they do not feel short changed when they depart.

Employee ownership interests could encourage employees by aligning their interests with those of shareholders, improving employee morale and productivity.

Standard Investment Bank (SIB) has extensive ESOP structuring experience. We’ve helped a number of organizations put up the best ESOP arrangements possible, all of which are compliant with market practice and legal requirements. If you’d like to set up an ESOP for your employees, please contact us at advisory@sib.co.ke.

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