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Visit Our Archive for previous newsletters covering Hospitality, Recruitment, Intellectual Property, Food & Drink, Commercial Property, Employment, Hotels, Restaurants, Start Ups and many other topics |
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Visit Our Archive for previous newsletters covering Hospitality, Recruitment, Intellectual Property, Food & Drink, Commercial Property, Employment, Hotels, Restaurants, Start Ups and many other topics
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Dear Subscriber,
In this month's newsletter, we focus on employee incentives and have an article purely on employee share option schemes.
In tough economic times, it is also important to understand how contracts may be terminated and what a termination clause should encompass. Our second article gives an overview of this.
The use of employee share schemes has become increasingly popular in recent years both for start ups and established businesses. This is due to a number of factors. Employee share schemes effectively give employees a stake in the company which helps to enhance motivation and improve performance. They can also encourage loyalty if the exercise conditions for the option take time for the employee to fulfil or are staggered, so an added benefit is the retention of valued staff. At the hiring end, an employee share scheme can be used as an incentive or reward and therefore facilitates recruitment.
Our featured client, Tom Simnett of Initforthe Ltd understands the advantages of employee incentives and recently instructed us to advise and prepare a share option scheme. His company is a web production house offering design, consultancy and hosting. His team have worked with brands such as BT, L'Oreal, Nissan UK, and the NSPCC. Whatever internet needs your business has, Tom will be able to assist.
For further information or advice on setting up an employee share option scheme please do get in touch with us: 0207 440 2540 and enquiries@fortunelaw.com.
Further information
Fortune Law provides businesses with "a one stop shop" service dealing with commercial property, commercial litigation, employment, international, corporate and commercial law. We can also provide a dedicated service for international clients.
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Shainul Kassam
Fortune Law Solicitors |
Featured Client: Initforthe Ltd www.initforthe.com  | | Tom Simnett, initforthe |
"Shainul and Charles have been great. I came into the process of share options a little clueless. I've been thoroughly impressed with their knowledge, their advice, and their ability to move quickly and I couldn't recommend them highly enough."
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Contracts: To Terminate Or Not To Terminate?
 In light of the current economic climate, many companies will be scrutinising existing relationships to ensure they are truly adding value. Many long-term contracts may not be as profitable as they once were or there may be better deals available. You may be considering renegotiating, or even exiting, unprofitable contracts or those which no longer meet the needs of your business. It is therefore important, perhaps more so now than ever before, that you understand how to terminate such contracts.
Contract termination occurs when one or both parties decide to end their contractual obligations. The easiest way to terminate a contract is to have both parties mutually agree that the contract is no longer necessary. If only one party wants to end the contract, and there is no express clause dealing with the subject in the contract, termination may prove to be more difficult.
The law
Where the contract is silent on termination, or there is only a verbal agreement between the parties, there will generally be an implied right for either party to terminate the agreement by 'reasonable notice'. What is reasonable, however, depends on the nature of the contract. There is also the option to terminate the contract without notice, but this is far more risky. Generally, this is only available when one party has materially or significantly breached the terms of the contract.
This means that the breach must be so serious that it deprives the non-defaulting party of substantially the whole benefit of the contract.
In practice, however, it is often difficult to establish what constitutes a material breach. Determining this will require a review of the nature of the breach and the terms of the contract as a whole. Making the wrong decision can have significant implications; most notably the non-defaulting party may be in breach of contract and liable for damages.
The termination clause
Termination clauses are therefore crucial, and an effective clause should consider the following:
- Listing the events that will trigger a party's right to terminate the agreement immediately for a serious breach and on notice for less serious breaches. Examples of serious breach events include non-payment and a failure to perform services under the contract. Examples of less serious or on notice breach events include repeated breaches of minor terms in the contract and the change of control of one party.
- Offering parties the flexibility to terminate the contract at will by giving the other party reasonable notice in writing. This will enable the contract to end in a controlled and orderly manner.
- Outlining the consequences of termination. Particular consideration should be given to the following: that the parties will have no future obligations to each other; that all rights and liabilities already arisen under the contract will continue to exist; and that certain clauses such as limitation of liability and confidentiality will survive termination.
- Ensuring that payment is received for outstanding invoices, final invoices and any work in progress. Similarly, it is advisable to ensure any advance payments for goods or services will be refunded.
- Requiring the parties to return, delete or destroy the other party's documents, software, equipment and anything else that may belong to the other party. Practical points to consider here are access rights to recover items that have not been returned and confirmation of destruction and deletion of materials.
These are just some of the main points to include in a termination clause. Remember the key to an effective termination clause is to make it as clear and comprehensive as possible. This helps to avoid potential future conflict and any questions being raised as to the enforceability of the clause.
Whether you are putting together a set of terms and conditions for clients, suppliers, for website use or a contract for a specific transaction or business relationship, Fortune Law has the necessary expertise to advise and assist you with all aspects of Contract Law. Please get in touch by telephone on 020 7440 2540 or by e-mail at enquiries@fortunelaw.com.
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Employee Share Option Schemes - Things To Consider
Employee share option schemes are commonly adopted by many companies.
Under such schemes, employees are given the right to buy a certain amount of shares usually at a future date, known as the 'vesting period', at a price or on terms agreed at the time the option is granted.
Share options can offer many commercial benefits to both the employer and employee.
A key benefit for the employer is that it can incentivise an employee without the cash flow implications of increasing salaries or offering monetary bonuses related to performance. The main advantage for the employee is that they are given an option, and not an obligation, to purchase shares in the company. Consequently, the employee takes on no financial risk. If the market price of the shares falls below that of the option price, then the employee is more likely not to exercise the option. Should the shares increase in value above the option price then the employee may choose to buy the shares and can stand to make a profit if the company is subsequently sold.
Tax implications
Provided certain statutory guidelines are complied with, approved schemes have tax and National Insurance Contribution advantages. Company Share Option Plans (CSOPs) and Enterprise Management Incentives (EMIs) are examples of statutory share option schemes which are HMRC approved. Unapproved schemes on the other hand carry no specific tax advantages but may still provide opportunities for favourable tax planning and greater freedom and flexibility. The issue of taxation can become quite complicated so it is best to consult a specialist adviser. At Fortune Law we only stick to what we know best - the law - but we regularly work with accountants and tax advisers, and can point you in the right direction should you need more in depth advice.
Considerations when setting up a share option scheme
We regularly advise clients on the setting up of share option schemes. There are a number of important questions to answer when doing so. These include:
- Whether all employees or only key personnel will benefit and on what terms? For instance, options may be granted based on an employee achieving a minimum sales target, the number of years of their service or their historic performance.
- When will an option become exercisable? For example, options may be exercisable at the end of a set period of time or in tranches. It is also important to consider what limited length of time employees have to exercise the option.
- Will employees have to pay for the shares or will the company issue free shares?
- Will the shares used in the scheme be of a different class from the other shares in the company? For instance will they have voting rights and will a dividend be paid?
- What happens to the shares when an employee leaves or in the instance that the company is sold? Where a company is being acquired the general position tends to be that employee shareholders will be expected to sell their shares to the buyer.
For further information or advice on setting up an employee share option scheme please do get in touch with us: 0207 440 2540 and enquiries@fortunelaw.com.
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