Upload
pkf-francis-clark
View
30
Download
2
Embed Size (px)
Citation preview
Incentivise Key Staff- EMI and other options involving share
ownership for employees
Breakfast Briefings: Winter 2017/189th January 2018
pkf-francisclark.co.uk
Administration
pkf-francisclark.co.uk
.
Presentations followed by discussion
Presenter Topic
Martin Brown
Tax Director, PKF Francis Clark
Employees and shares – designing a
long term incentive
Giles Dunning
Partner, Stephens Scown
Employees and shares – legal
matters
Richard Wadman
Corporate Finance Director, PKF
Francis Clark
Valuation of minority interests.
Employees and shares – designing a long term incentive
Martin Brown January 2018
Long Term Incentives
And Retention
• Shares can make a great incentive
• Incentive – Employee value directly linked to
shareholder value
• Long Term Retention – Value linked to Exit
• Low cash cost to business – funded by ‘buyer’
• Communication is key
• VALUE = PERCEPTION
pkf-francisclark.co.uk
Long Term Incentive Plans (LTIP)
• Cash LTIP
• Share Ownership
• Deferred purchase
• Growth shares
• Share Options
• EMI plans
• CSOP
pkf-francisclark.co.uk
Designing a share plan
pkf-francisclark.co.uk
Things to think about
Focus on commercial needs, not the tax wrapper.
• Which employees/directors will participate, will more join in
the future?
• What is within their influence?
• What does good look like for the company/the individual?
• What are the shareholders trying to achieve in the long
term?
• What are your KPIs?
• Will the plan deliver a meaningful value of reward?
• How will the participant realise value from the award?
Tax
• It is EXCITING (honest)!!
• Right = 10%
• Wrong = 60.8%
(Very Wrong = Over 100%)
OK Maybe not exciting: but expensive and
complex
pkf-francisclark.co.uk
Employees and Shares – Legal Matters
Giles Dunning, Partner
Stephens Scown LLP
Direct Employee Share Ownership
Key legal aspects:
• Immediate dilution of existing Shareholders
• Leaver provisions - Good Leaver
- Bad Leaver
• Facilitating an exit
• Tax advice needed – usually an immediate tax charge.
Dilution of Existing Shareholders
Example: Fred owns 100 Ordinary Shares of £1.00 each in
Quidditch Supplies Ltd (QSL). QSL issues 10 new Ordinary
Shares of £1.00 each to its Sales Director, George. Fred now
owns just under 91% of the Ordinary Shares of QSL and George
owns just over 9% of the Ordinary Shares.
Effects of Dilution – Voting Rights
In a Shareholder meeting both Fred and George would have 1
vote each on a show of hands. On a poll vote or written
resolution each share would carry one vote so Fred could cast
>90% of the votes.
Ordinary Resolution – Requires more than 50% of the votes
cast on a show of hands, poll vote or written resolution.
Special Resolution – Requires 75% of votes cast.
Conclusion – Fred has “control” and could remove George as a
director in a general meeting.
Effects of Dilution – Income Rights
• QSL wishes to declare a final dividend of £250 per Ordinary
Share (requiring an ordinary resolution)
• Fred would be entitled to a dividend payment of £25,000
• George would be entitled to a dividend payment of £2,500
• QSC’s retained distributable profit is reduced by £27,500.
Effects of Dilution – Capital Rights
• QSL is valued at £1m.
• The net proceeds after deducting the estimated costs of a
sale would be £925k.
• Fred would be entitled to circa £841,750 of the net proceeds.
• George would be entitled to the balance of the net proceeds -
£83,250.
• Fred’s ultimate share in the “equity” would be diluted by
£83,250.
Employee Departure
• Example: George receives an offer from Bludgers (South
West) Ltd, a key competitor. He decides to leave but wishes
to retain his shares in QSL.
• What can QSL do about this?
Leaver Provisions
• There are no provisions in the Companies Act 2006 or the
Model Articles requiring an employee to surrender their
shares on cessation of employment.
• Fortunately, Fred instructed his solicitor to amend the articles
of association of QSL prior to issuing shares to George.
• On reviewing the updated articles Fred finds a “compulsory
transfer” provision requiring a departing employee to offer
their shares back to the other Shareholders.
Good Leaver vs. Bad Leaver
• George accepts he is bound by the leaver provisions but
values his Shares at ‘at least £100k’.
• Fred consults the articles which include valuation
mechanisms for a “good leaver” and a “bad leaver”.
• A good leaver is entitled to receive a pro rata share of the
market value of the Company without discount for minority
interest.
• A bad leaver is only entitled to the par value of their shares
i.e. £1 per share.
Good Leaver vs. Bad Leaver
• A good leaver is defined as an employee who leaves by
reason of death, critical illness or ‘retirement’.
• A bad leaver is defined as a departing employee who is not a
good leaver.
• George changes his mind about leaving.
Facilitating an Exit
• Fred and George receive an offer from Nimbus 2000 Ltd of
£850,000 for the entire share capital of QSL.
• Fred wishes to accept the offer but George refuses as its
lower than the previous valuation of QSL. Nimbus threatens
to withdraw the offer if they can’t acquire 100% of QSL.
• Fred recalls his solicitor talking about drag and tag articles
being useful if he wishes to sell and consults to the articles
again….
Facilitating on Exit
• The articles contain a drag along clause stating that if the
holders of over 50% of the shares of QSL wish to sell, they
can compel the other Shareholders to join in the sale at the
same price per share.
• Confronted with the articles, George changes his mind and
agrees to sell.
Employee Share Options
• A legal right to acquire shares in the future at a set price
• Future dilution of existing Shareholders
• Vesting / exercise conditions
• Timing of exercise (exit only?)
• Tax advice needed – usually tax charge arises on exercise
• Consider whether the company can grant EMI options to
receive more favourable tax treatment.
Vesting / Exercise Conditions
• Time based vesting
• Performance based voting
• Time and performance based voting
• Keep it simple, objective and achievable.
Timing of Exercise / Exit Only Options
• Employee share ownership / dilution only occurs when
options are exercised.
• Exercise can take place immediately before an exit mitigating
risks of dilution (Exit Only).
• Share option rules can allow for cashless exercise of exit only
options allowing exercise price to be paid out of sale
proceeds.
Timing of Exercise / Exit Only Options
• Exercise notice (if executed as a deed) can appoint majority
Shareholder as attorney of the option holders to execute sale
documentation on their behalf.
• If share options can be exercised before an exit consider
direct share ownership protections as per above slides.
The information in this presentation is intended to be general information onlyand should not be interpreted as legal advice. English law is subject to changeso whilst Stephens Scown LLP seeks to ensure the information contained in thispresentation is up to date and accurate, the law can change quickly and noguarantee is made as to its accuracy which means the information should notbe relied upon. Presentation slides should not be viewed as an alternative toprofessional advice and Stephens Scown LLP does not accept liability for anyaction taken or not taken as a result of this information.
Disclaimer
Valuation of Minority Interests
Richard Wadman January 2018
Introduction
pkf-francisclark.co.uk
• Valuation of shares in unquoted companies is not an exact science
• The only method to confirm any valuation is to complete an open market sales transaction. (*)
• Our indication is therefore purely our opinion on the amount that could be realised by sale of the shares in the current market.
• The appetite of buyers and market conditions change constantly, all of which may influence the value of the shares. (*)
• Others may place a different value on the shares
• Tax• define market value in accordance with s272 of Taxation of Chargeable Gains Act
1992 and associated relevant tax case law.
• (* = value or price?)
Methodologies
pkf-francisclark.co.uk
• See handout in pack
• Company valuations• Discounted Free Cash Flow (Net Present Value)
• Net Asset Value
• Comparable Earnings (to arrive at Enterprise Value, then adjust to Equity Value)
• Minority shareholdings• Discounting future dividend income
• Company valuation, then apply a minority discount to a prorated value
pkf-francisclark.co.uk
• Use when/ if:• Historic dividend income stream relevant to a minority shareholder
• Planned dividend income stream
• Calculation, requires assumptions on:• Dividends
• Discount rate
• Period (perpetuity or shorter?)
Discounting future dividend income
pkf-francisclark.co.uk
• “The valuation must reflect the extent to which a potentialbuyer of the asset can control, influence and derive enjoymentfrom the asset. Usually, if the degree of control of the asset isless than 100 per cent, then the value of the percentage shareof the asset will be less than a pro-rata proportion of theasset’s total value. In terms of unquoted shares, there aremany degrees of control, usually determined by the votingpower of a particular block of shares. These range from fullcontrol, including power to liquidate the company, to a small ornon-existent influence over the company’s affairs of a minorityshareholding.”
• Published material indicates that for “small minority holdingsthe discount might be up to, say 90% if there is no expectationof return, either in the form of dividends or capital”.
Minority discounts
pkf-francisclark.co.uk
• HMRC Share and Asset division guidance:
• …up to, say 90% if there is no expectation of return, either in the form of dividends or capital”.
Minority Discounts
pkf-francisclark.co.uk
Valuations: basis used (c 100 valuations; out of 133 logged)
70%
8%
3%
6%
11%2%
Valuation basis
Enterprise Value (Comparableearnings)
NPV
DCF
Dividend yield
NAV
Recent transaction used asbenchmark
Incentivise Key Staff- EMI and other options involving share
ownership for employees
Breakfast Briefings: Winter 2017/18 Wrap up: Richard Wadman, Francis Clark 9th January 2018
Next…
Q&A and/ or discussion
• With opportunity for Q&A for presenters
• Discussion
Future presentations
• “Tomorrow’s World…” (06/02/18) – invite in pack
• “End of year tax planning ideas” (07/03/18)*
• Finance in Cornwall (18/04/18)
pkf-francisclark.co.uk
(c) copyright PKF Francis Clark, 2016
You shall not copy, make available, retransmit, reproduce, sell, disseminate, separate, licence, distribute, store electronically, publish, broadcast or otherwise
circulate either within your business or for public or commercial purposes any of (or any part of) these materials and / or any services provided by PKF Francis
Clark in any format whatsoever unless you have obtained prior written consent from PKF Francis Clark to do so and entered into a licence.
To the maximum extent permitted by applicable law PKF Francis Clark excludes all representations, warranties and conditions (including, without limitation,
the conditions implied by law) in respect of these materials and /or any services provided by PKF Francis Clark.
These materials and /or any services provided by PKF Francis Clark are designed solely for the benefit of delegates of PKF Francis Clark.
The content of these materials and / or any services provided by PKF Francis Clark does not constitute advice and whilst PKF Francis Clark endeavours to
ensure that the materials and / or any services provided by PKF Francis Clark are correct, we do not warrant the completeness or accuracy of the materials
and /or any services provided by PKF Francis Clark; nor do we commit to ensuring that these materials and / or any services provided by PKF Francis Clark
are up-to-date or error or omission-free.
Where indicated, these materials are subject to Crown copyright protection. Re-use of any such Crown copyright-protected material is subject to current law
and related regulations on the re-use of Crown copyright extracts in England and Wales.
These materials and / or any services provided by PKF Francis Clark are subject to our terms and conditions of business as amended from time to time, a
copy of which is available on request.
Our liability is limited and to the maximum extent permitted under applicable law PKF Francis Clark will not be liable for any direct, indirect or consequential
loss or damage arising in connection with these materials and / or any services provided by PKF Francis Clark, whether arising in tort, contract, or otherwise,
including, without limitation, any loss of profit, contracts, business, goodwill, data, income or revenue. Please note however, that our liability for fraud, for
death or personal injury caused by our negligence, or for any other liability is not excluded or limited.
PKF Francis Clark is a trading name of Francis Clark LLP. Francis Clark LLP is a limited liability partnership, registered in England and Wales with registered
number OC349116. The registered office is Sigma House, Oak View Close, Edginswell Park, Torquay TQ2 7FF where a list of members is available for
inspection and at www.pkf-francisclark.co.uk. The term ‘Partner’ is used to refer to a member of Francis Clark LLP or to an employee. Registered to carry on
audit work in the UK and Ireland, regulated for a range of investment business activities and licensed to carry out reserved legal activity of non-contentious
probate in England and Wales by the Institute of Chartered Accountants in England and Wales. Partners acting as insolvency practitioners are licensed in the
UK by the Institute of Chartered Accountants in England and Wales. A partner appointed as Administrator or Administrative Receiver acts only as agent of the
insolvent entity and without personal liability. Francis Clark LLP is a member firm of the PKF International Limited network of legally independent firms and
does not accept responsibility or liability for the actions or inactions on the part of any other individual member firm or firms.
Disclaimer & copyright
pkf-francisclark.co.uk