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What might the London Stock Exchange's Private Intermittent Securities and Capital Exchange System ('PISCES') mean for private company employee share plans?

Posted on 22 November 2023

One of the challenges that private companies face is how to create liquidity in their shares in order to allow senior management and employees to un-lock cash value from equity incentives at an appropriate point in time (whether as a reward for goal attainment or in relation to good leaver shareholders). A corporate event in the form of a trade sale, listing to a stock exchange or sale to a private equity house are the traditional exit routes for achieving this. As noted in my colleague Arthur Horsfall's article, other platforms have also sought to provide partial solutions. Trusts can also be used, a statutory Employee Ownership Trust ("EOT") if the disposal is to be a change of control event and an Employee Benefit Trust ("EBT") for a minority interest disposal.

It is rarely desirable for an issuer company to repurchase its own shares as such a transaction, more often than not, results in the vendor shareholder's gain being charged to income tax as if it was a distribution. A third party sale (which includes a sale to a trust) receives more favourable capital gains tax treatment (and in the case of a qualifying sale to an EOT can be a tax-free disposal). 

This proposed new PISCES platform ushers in another choice. So how does this compare to the use of an EBT?

At present any purchase of shares by an EBT is subject to 0.5% stamp taxes. In contrast shares traded on AIM benefit from an exemption to such stock transfer charge. It is not yet known whether the trading of shares on the PISCES would be accorded the same relief as AIM shares but given the inevitable similarity in terms of sluggish liquidity and trading volume we might speculate that such a relief is a possibility. Funding for liquidity is also a factor and the PISCES means that the source of funding is a third party, unlike for an EBT where the trust has to be put in funds (either by way of cash gift or loan) by the trading company group. 

This could therefore be a welcome development. For some private businesses however, there might be a reticence to open up their membership to the public at large, preferring to keep tighter control on their shareholder base and retaining the share transfer restrictions that are customary. 

The existence of the PISCES will also potentially throw up a number of new considerations in relation to share valuation of employment-related securities and assessing the extent to which the shares are readily convertible assets for tax purposes.  We envisage that, like AIM, the PISCES will not be a recognised stock exchange for such purposes. 

Whilst the PISCES may provide a liquidity solution for some, it is not going to eradicate the need for use of an EBT in many cases. 

Other uses of an EBT include acting as nominee to hold the legal title to a share held by a manager. This can be driven by a desire to maintain a degree of privacy as to the identity of the beneficial owner and also as an administrative easement when it comes to managing the register of members and stock transfers. 

A particular type of employee equity incentive arrangement, called a Joint Share Ownership Plan, requires a co-owner to own the legal and intrinsic value beneficial interest whilst the manager owns the upside beneficial interest in the shares. An EBT is typically used as the co-owner. 

An EBT can also act as a vehicle for warehousing a pool of shares on an allocated and unallocated basis and some businesses find this a useful way to manage dilution, notwithstanding that UK private companies can now hold shares in treasury and can simply have an unissued but authorised share option pool agreed for use in fulfilling employee incentive awards. 

A further attraction of an EBT is that it can support price-hedging, by which we mean the EBT can be stocked with shares when the share price is low and those shares can be warehoused until such time as the EBT needs to deliver those shares to employees when share plan awards mature. If the share plan maturity is linked to value-add performance triggers then the cost of provision of the award can be reduced in this way, compared to funding the trust at the time that the share price is higher. 

As such, there remains an on-going need for EBTs, notwithstanding the proposed introduction of the PISCES. It remains to be seen whether there is any appetite, following the recent Government consultation into the taxation of EOT and EBT, for a stamp duty easement to be introduced for EBT share transactions but there might be a greater argument in support of that if PISCES stock transfers were to be conferred with such relief.  

For more information and advice please contact Liz Hunter.

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