Government measures boost direct employee ownership
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Jo Swinson announces changes to over-burdensome share buy back rules aimed at boosting direct employee ownership and cutting red tape
Changes to over-burdensome share buy back rules aimed at boosting direct employee ownership and cutting red tape, were announced today by Employment Relations and Consumer Minister Jo Swinson.
Under the new rules, companies with employee ownership that issue shares directly to their employees will find it easier to buy back these shares when an employee leaves. The company will then be able reissue these shares more easily when new employees join.
These deregulatory changes will reduce the administrative burden of share buy backs allowing companies to avoid the situation where companies promoting employee ownership can become predominately owned by former employees or others outside the company.
Ms Swinson also announced that Thursday 4 July 2013 will be the first national Employee Ownership Day. The day aims to raise awareness of the Employee Ownership sector at both national and local level across the UK and to illustrate the achievements and progress made since last year’s Employee Ownership Summit.
Employment Relations and Consumer Minister Jo Swinson said:
Hundreds of businesses will benefit from the introduction of reforms that make direct employee ownership easier and simpler for both employers and employees.
Evidence shows that employee owned companies can be more profitable, create more jobs and were more resilient during the economic downturn. We are committed to making direct employee ownership more attractive, cutting red tape for companies, and promoting new and more responsible ways of running a business.
I hope these changes, alongside the announcement of an Employee Ownership Day on 4 July, will raise awareness of the benefits of employee owned companies and lead to an increase in the number of direct employee owned firms across the UK.
Employee Ownership Association (EOA) Chief Executive Iain Hasdell said:
I welcome the enactment of this Statutory Instrument and the government’s commitment to looking at further refinements to it in the future.
The Instrument will improve the workings of internal share markets and it will reduce costs. The enactment sends an important signal to the business community and professional advisers that government is serious about promoting employee ownership.
Author of the Nuttall Review and partner at Field Fisher Waterhouse LLP Graeme Nuttall said:
These significant changes in company law will bring employee ownership to the attention of a wider audience. The changes will provide many companies with a less expensive and simpler way to run an internal share market for employees’ share schemes. As a Nuttall Review recommendation they will always be linked to the broader goal of making employee ownership a widespread feature of the UK economy.
The changes announced today to the Companies Act 2006 implement one of the recommendations of the 2012 Nuttall Review of employee ownership. This follows on from a government consultation into impediments to direct employee ownership. The Nuttall review found that company law provisions on the buy backs of company’s own shares were overly burdensome and recommended the removal of barriers and disincentives to direct employee ownership.
Through these regulations:
- shareholders in any company would be allowed to approve off-market (i.e. not through a regulated investment exchange) share buy backs by an ordinary resolution. Currently share buy backs require a three quarters approval. Under these regulations the approval threshold will be lowered to a simple majority.
- share buy backs connected with an employee share scheme will be eligible for approval in advance. Companies will now be able to approve all future buy backs over a specific period of time through shareholder resolution rather than on a case by case basis.
- a greater range of options for financing buy backs will be available: payments by instalments, a simplified regime for buy backs out of capital; and using small amounts of cash.
- more companies will be able to hold shares bought back ‘in treasury’ so that they may be issued to new employees or share scheme joiners. This company share ‘storage facility’ will reduce the administrative burden and costs associated with creating new shares every time a new employee joins.
Overall, the changes, which impose no additional costs on business, will increase the flexibility available to companies in how they fund share buy backs, and allow companies, for the first time, to select the most suitable arrangements for their particular needs.
Notes to editors:
- Employee ownership refers to the employees of a company having a significant and meaningful stake in their company. To be meaningful the employees’ stake should go beyond mere financial participation and underpin organisational structures that ensure employee engagement. Employee ownership can take one of three forms:
- direct employee ownership - employees become individual owners of shares in their company;
- indirect employee ownership - shares are held collectively on behalf of employees, normally through a benefit trust;
- combined direct and indirect ownership - a combination of individual and collective share ownership.
- UK based employee owned companies had a turnover of over £30 billion (2 per cent of GDP) and employed over 130,000 people in 2011. Evidence shows that employee owned businesses enjoy greater staff retention, innovation and motivation than non-employee owned businesses, which in turn deliver wider economic benefits including increased productivity, profitability and more resilience to economic shocks.
- The range of options for financing buy backs under the new regulations include:
- the option for private limited companies to pay in instalments for the shares they buy back in connection with an employee share scheme. This would only take place if the seller agrees.
- the ability for private limited companies to finance share buy backs for employee share scheme outs of capital using solvency statement and a special resolution.
- greater flexibility in how private companies fund buy backs. The ability for shareholders to authorise directors of private limited companies to pay for the shares out of cash for small share purchases (up to £15,000 or the cash equivalent of 5 per cent of the company’s total share capital, which ever is lower each year) without having to identify this as distributable reserves.
- The government’s response and consultation on deregulating share buy-backs is available at: http://www.bis.gov.uk/policies/business-law/employee-ownership
- Sharing Success: The Nuttall Review of Employee Ownership can be found at: http://www.bis.gov.uk/policies/business-law/employee-ownership
- The independent Nuttall Review of July 2012 set out the economic and social benefits of employee ownership, including improved business performance, increased economic resilience, and greater employee engagement and commitment. The Review also made a series of recommendations to government on how to increase the uptake of employee ownership in the private sector and what barriers needed to be removed to enable this.
- The government’s economic policy objective is to achieve ‘strong, sustainable and balanced growth that is more evenly shared across the country and between industries’. It set four ambitions in the ‘Plan for Growth’ (PDF 1.7MB), published at Budget 2011:
- to create the most competitive tax system in the G20
- to make the UK the best place in Europe to start, finance and grow a business
- to encourage investment and exports as a route to a more balanced economy
- to create a more educated workforce that is the most flexible in Europe.
Work is underway across government to achieve these ambitions, including progress on more than 250 measures as part of the Growth Review. Developing an Industrial Strategy gives new impetus to this work by providing businesses, investors and the public with more clarity about the long-term direction in which the government wants the economy to travel.