Employee participation

We often see that our clients feel the need to let their employees participate in the company. Employee participation is a good way to encourage employees to become more involved. It increases their sense of responsibility and makes them feel that their work is valued. After all, through participation they have a direct influence on the company’s value movements and are rewarded for it.

There are various ways in which you can let your employees participate. Depending on the number of employees who qualify for participation and their roles in the organization, you must consider whether you wish to grant them a direct say in or the right to attend the general meeting of shareholders, or whether you wish to limit their participation to sharing in the proceeds.

Many entrepreneurs choose not to give their participating employees a say or powers in the company. In this blog, we will discuss two variants that are suitable for this purpose: issuing depositary receipts for shares via a trust office foundation (‘STAK’) and granting of Stock Appreciation Rights (‘SAR’).

Issuing certificates via a STAK

By issuing depositary receipts for shares via a STAK, entrepreneurs can share profits with employees, while the participating employees are not granted voting rights in the meeting of shareholders. The STAK becomes a shareholder and the Board of the STAK will be able to exercise the voting rights in the general meeting. Moreover, the STAK is a party to the shareholders’ agreement concluded among the shareholders.

Depositary receipts are claims in the name of the employee concerned. Holders of such depositary receipts share in the profits of the company through dividend distributions or through the distribution of the sales proceeds in the case of an exit. In that respect, depositary receipts are therefore similar to ‘normal’ shares in a company.

It is advisable for the parties to lay down the arrangements made for the issue of depositary receipts in a depositary receipt holders’ agreement. In this agreement, arrangements can be made for special situations that may occur during the ownership of depositary receipts. These could include returning the depositary receipts on termination of the employment, or taking over depositary receipts in the event of incapacity for work or the death of the participating employee. A depositary receipt holders’ agreement may also stipulate that the depositary receipts are not freely transferable.

Stock Appreciation Rights

You could also opt to grant SARs to your employees. SARs are distributions linked to the value movements of the company or its shares. When SARs are granted, employees are not granted voting rights in the company’s general meeting. They are only granted a personal right to a possible future distribution if the conditions under which the SARs were granted have been met. The advantage of granting SARs is that the entrepreneur is entirely free and flexible in determining the conditions applicable to the SARs.

Are you considering letting your employees participate in your company? We will be happy to discuss with you the form of employee participation that would suit your company. The tax aspects of the various forms are of course also important, and we will be pleased to discuss this with your tax consultant.