Free share allocation: an instrument for employee loyalty and motivation

It is not uncommon for some managers to wish to reward their employees by granting them free shares.

Indeed, it is a complementary remuneration mechanism which aims to motivate and retain certain employees.

Through the allocation of free shares, employees can be rewarded for their participation in the development of the company.

Employees can thus build up a portfolio of securities.

However, support is necessary in order to control the entry of these new partners and protect the founding partners by allowing them to retain a majority for strategic decisions.

The advantage of such an instrument

The free allocation of shares does not involve any financial risk for the beneficiaries, who do not have to make any payments, and guarantees them the realization of a gain upon the possible resale of their shares.

The scope of application
of this advantage

All joint stock companies can set up a free share allocation plan for the benefit of their employees (L 225-197-1 of the Commercial Code): these will be public limited companies, simplified joint stock companies, or even limited partnerships by shares.

Attention, the installation
of such a process requires
to follow a specific procedure

• A first phase relating to the meeting of an extraordinary meeting of partners which must decide:
  • • of the principle of free allocation of shares;
    • to award a certain number of free shares to all or part of its employees while respecting the legal ceilings imposed by law (see below);
    • to set a minimum duration of the vesting period by employees (i.e. the period during which beneficiaries can, if they wish, acquire the free shares);
    • to set a retention period for the shares by employees (i.e. the period during which the beneficiaries will not be able to resell the shares granted free of charge).

This authorization can be used by the manager for a period which must be set by the meeting and which cannot be longer than 38 months.

• A second phase under which the manager is competent, within the limits set by the initial meeting, to determine:
  • • the identity of the beneficiaries of the allocations, either among all salaried staff, or in the category(ies) which will have been defined by the initial meeting;
    • the allocation criteria (defined period for the acquisition and retention of securities from the acquisition of the securities by the latter).

It should be noted that the manager can add additional conditions: For example, the obligation for the beneficiaries to still be employees at the time of the definitive allocation of the shares (when the vesting period expires), conditions of individual performance of the beneficiaries, seniority or even financial performance of the company whose shares are allocated.

• A third phase consisting of the signing of a regulation of the allocation plan by the members of the staff and the company.

• A fourth phase relating to the duration of acquisition of free shares by the employee: This vesting period cannot be less than one year, but it is possible to provide for a longer vesting period. During this period, the employee will be able to acquire the securities.

• A fifth phase relating to the definitive acquisition of shares by the beneficiary employees: this phase occurs at the end of the acquisition period, once the conditions and criteria set by the award decision are met.

• • • The company must transfer the originally agreed number of shares.
    • The company will carry out a capital increase equal to the new shares created.
    • From this date, the employee becomes a partner of the company and can exercise his political and financial rights.

• A sixth phase of conservation of titles by newly associated beneficiary employees: Employees who benefit from the shares must, in fact, respect a retention period already set by the first general meeting of shareholders.

In this regard, the sale, donation of ownership of free shares, or even the rental of said shares, constitute a violation of this retention obligation.

However, we would like to point out that since August 8, 2015, it is no longer mandatory to provide for a retention period.

However, we advise you to plan for such a period, in order to ensure that the shareholding is fixed for a minimum period.

• The establishment of employee shareholding will necessarily result in the dilution of the percentage of participation of the founding partners.

However, this dilution is limited by the overall ceiling established by law, concerning the free allocation of shares.

In this regard, in order to encourage employee shareholding, Law No. 2023-1107 of November 29, 2023 relaxed the conditions for free allocation of shares by raising the allocation ceilings, and consequently modified articles L 225-197-1 and L 225-197-2 of the Commercial Code.

Concerning the overall ceiling:

• The overall general ceiling on the total number of free shares, benefiting only certain categories of staff, is increased to 15% of the share capital whereas previously, it was set at 10%.

• For SMEs (headcount less than 250 employees and balance sheet total less than 43 million euros or turnover excluding tax less than 50 million euros) and whose shares are not admitted to trading on a regulated market, the ceiling is raised to 20% of the capital social.

• However, when the free shares benefit all of the company’s employees (“democratic” AGM), law 2023-1107 increases this ceiling to 40% of the share capital (art. L 225-197-1, I-al. 3 modified) instead of 30%, subject to compliance with certain conditions.

Concerning the individual ceiling:

• It is important to highlight that no free shares can be allocated to an employee already holding more than 10% of the capital.

• However, the law on value sharing relaxes the methods for calculating this individual ceiling. As a result of this modification, the employee who has reached the individual ceiling will again be able to benefit from a free allocation of shares after 7 years.

Furthermore, the drafting of a shareholders’ agreement concluded between the founding partners and the new members of the salaried staff will make it possible to guarantee the stability of the company’s shareholding (non-dilution clause, shareholding limitation clause, clause governing the exit of salaried partners, confidentiality clause, non-competition clause).

Finally, the establishment of new shares with different rights (preferred shares) from those of other shares (ordinary shares), including in particular the suspension of voting rights for a fixed or determinable period, will be an additional tool to allow the safe entry of employee shareholding.

This system is also open to non-associate directors, the latter of whom may be rewarded by the granting of free shares.

If you are interested in setting up shareholder employment, do not hesitate to seek the legal practice and support of LEGALPROTECH-AVOCATS.

by Anouk Thomar