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Chester legal expert urges caution over ‘John Lewis’ model

4th April, 2012

Nick Clegg’s assertion that more companies should operate in the style of the John Lewis Partnership has prompted a warning from a Chester-based lawyer that any firms considering it must seek detailed legal advice.

Speaking to business leaders recently, the Deputy Prime Minister stressed that allowing employees to have a stake in their firms will usher in a new era of ‘responsible capitalism.’
He called for a radical increase in employee share ownership with the introduction of the right of workers to request a share in their company.

Mark Briegal, a partnership law specialist at Aaron & Partners on Foregate Street, agrees with Nick Clegg that employee ownership can lower absenteeism, reduce staff turnover and boost company growth.

And while it can be a good way of retaining good staff without increasing the wage bill, he urges caution and stresses the importance of any companies considering such schemes to seek appropriate legal advice in order to explore all the options.
Mark, a partner in Aaron & Partners’ Corporate Commercial team, said that more private businesses are looking to set up share option schemes for their staff and some of the schemes can prove very tax efficient.

“It has been possible for smaller, private companies to set up such schemes under the Enterprise Management Incentive (EMI) scheme as a way of incentivising staff,” he said.
“The way this works is that owners or managers can grant shares in the business to employees provided the company employs fewer than 250 people and has assets of under £30 million.

“The price at which the share options can be granted is calculated after a valuation of the business is undertaken by an independent third party. The option can be exercised by the employee in the event of a change of ownership of the company.
“This may occur when the company is sold or secures a public listing on the stock market. Either way, up to that point the employee will not have to part with any money in order to buy the shares.
“A simultaneous transaction takes place when the employee buys the shares at the option price and sells them at the higher price, banking the difference in the process, though profits made would be subject to capital gains tax.”

Mark stressed that this only works for the employee if there is a prospect of an exit such as a takeover. This is because having an option to buy a minority interest in a company that is going to remain private provides no incentive and can end up a disincentive if the employee has foregone a pay rise in favour of a share option scheme.”

Mark added that there are many other ways companies can incentivise staff without going down the share option scheme route. “As mentioned, share option schemes won’t be suitable for everyone but there are other initiatives such as offering bonuses, extra holiday entitlements or private health care schemes,” he said.
“However, I would urge companies to seek proper legal advice before considering these as well, because there are pros and cons. For example, do you include all employees or just senior employees? What about part-time staff or staff who take maternity or paternity leave and how do you pro-rata any benefits?

“It is also really important to communicate this effectively to staff so they fully understand it. We believe that some of the best run firms are doing this already and it is working very well for them, particularly during tough economic times.”

For advice on any aspect of Partnership Law, please email Mark Briegal or call him on 01244 405563.

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