The Use of Nominee Facilities

Share plans have been a useful tool for companies in their attraction, motivation and retention of staff for decades. In turn, the alignment of the interests of their employees with those of other stakeholders typically creates an increase in organisational performance.

The nature of the plans and arrangements will differ between companies, but in many cases the facilitation of employee ownership will be simplified through the use of a nominee facility often alongside an offshore trust.

A nominee facility allows for the legal title of shares to sit with a party other than the beneficial owner. A corporate-sponsored employee nominee facility will be such that a professional service provider will hold the legal title to shares, usually in their employing company, on behalf of employees, the beneficial owners.

Encouraging employee share ownership through the use of a nominee facility

Whilst there are no hard and fast rules, and there will certainly be potential cross-over, it is easiest to consider the form of and purpose of corporate-sponsored nominee facilities as those typically used for listed companies and those for private companies.

Listed companies

Nominee facilities for listed companies are commonly adopted to encourage employee shareholding post-vest, but are also seen as a useful mechanism to manage executive and post-employment holding requirements.

It is typically the case that on the vesting of share awards, sufficient shares are sold to cover the employee’s withholding liabilities (e.g. Income Tax, National Insurance/Social Security), with the balance of shares either transferred to the participant or sold with the sale proceeds transferred to the participant. This is great in principle but if you speak with any share plan manager they will quickly tell you about the challenges they have historically faced surrounding this, particularly where the ‘default’ — where no participant election is received in respect of the award vesting (e.g. sell all or sell sufficient) — is a sale of sufficient shares to cover the liability and the issuance of a share certificate for the balance.

The days of the issuance of share certificates as the default for the transfer of the balance of shares to participants on award vest are seemingly long gone. This is largely as a consequence of, or
perhaps the reason for, the increase in popularity of corporate-sponsored nominee facilities. It is difficult to argue against providing a simple mechanism for employees continuing to hold shares post-vest will increase longer-term employee shareholding.

Additionally, companies are increasingly including post-vest holding requirements and clawback provisions in respect of share awards and the UK Corporate Governance Code states that executives should build up a significant shareholding in their company’s shares. Nominee facilities are used to help companies manage these requirements by restricting transactions in relation to the shares, whilst ensuring that the beneficial title to the shares is with the employees, along with the benefits, such as dividends and voting rights.

Furthermore, the Investment Association’s Principles of Remuneration states that Remuneration Committees should also develop a policy on post-employment shareholding requirements, which would require an executive to retain a proportion of their shareholding for a time period after they have left the employment of the company. The terms of nominee facilities can be such that shares that are forfeited by the employee post-vest can easily be returned, typically to an Employee Benefit Trust. It is not difficult to imagine the challenges facing companies attempting to arrange for a participant, considered a ‘bad leaver’, to return shares that are held in their own name.

Private companies

By their very nature, in most cases, private companies will not have a market place for their shares and an Employee Benefit Trust (‘EBT’) will often be used to create that internal market to enable acquisitions and disposals of shares by employees.

The internal market can be significantly simplified through the trustee of the EBT acting as nominee for the employee shareholders. This is predominantly for the following reasons:

// Transacting party

The trustee can act as the buyer or seller of shares from/to employees and can hold an unallocated balance for later sale to employees.

// Confidentiality

As the nominee holds the legal title, and detailed as such in the shareholder register, details of individual employee shareholders are not in the public domain and accessible to interested parties (such as colleagues).

// Administrative ease of transactional activity

Purchases and sales are effected without the need for a change in legal owner; just the beneficial title. This removes the need for stock transfer forms and changes to the shareholder register on each transaction.

// Administrative ease on a corporate event

Where a company has a significant number of employee shareholders, the use of a nominee facility ensures that these shareholders can be managed as one party on a corporate event. Essentially the nominee can enter into agreements and other documentation on behalf of the employee shareholders as a whole.

Furthermore, some share plans are adopted such that companies make the use of a nominee facility compulsory on participation. A common example of this is Management Incentive Plans.

It is also worth noting that the trustee can transact with non-beneficiaries, but any transactions with non-beneficiaries need to be at arm’s length.

How it works

Typically one of two parties will provide a nominee facility in relation to a company’s share plans, the trustee of an EBT or a share plan administrator. This will usually be determined by the profile of the company, the share plans adopted and the number of participants.

Platform providers, such as Cytec Solutions will usually have nominee functionality within their platforms to allow for employee visibility and the provision of instructions relating to their nominee holdings. In most cases the nominee holdings can be accessible alongside participants’ share awards.

An Employee Benefit Trust, a type of discretionary trust, is an incredibly flexible vehicle and has been the vehicle of choice for companies in the UK in the facilitation of employee incentive arrangements for upwards of 30 years.

Employee Benefit Trusts can be used for the sole purpose of acting as nominee for employees but generally speaking, the provision of a nominee facility is typically an additional service alongside their primary function, most commonly the facilitation of award satisfaction and hedging.

To further simplify matters, when using a Jersey-based trustee, the provider will typically avail of simplified due diligence measures provided by the local regulator, in most cases removing the need to collect client due diligence documentation in respect of employees where shares have originated from share plans.

Conclusion

Many companies already utilise an Employee Benefit Trust to help facilitate their employee share plans. That said, it is often the case that companies do not maximise the return that the trust’s flexibility can provide, a nominee facility being one example.