Table of Contents
- What Are New Zealand’s Share Scheme Laws?
- 1. Define the Share Scheme’s Purpose and Eligibility Criteria
- 2. Choose the Right Type of Share Scheme
- 3. Establish a Nominee
- 4. Comply with Reporting Requirements
- 5. Understand the Tax Implications
- 6. Draft Comprehensive Share Scheme Documents
- 7. Communicate Effectively
- 8. Monitor and Review the Share Scheme Regularly
- Key Takeaways
Implementing a share scheme is a strategic move businesses make to attract, retain and incentivise excellent employees. Nevertheless, designing a share scheme requires careful consideration of your particular business, as well as various legal and regulatory factors. This article will take you through eight best practices to adopt when designing an effective share scheme for your New Zealand startup.
What Are New Zealand’s Share Scheme Laws?
Firstly, it is essential to understand New Zealand’s legal framework regarding share schemes. New Zealand has various rules and requirements that you must follow when establishing and managing a share scheme. These regulations primarily fall under the following:
- the Companies Act;
- the Financial Markets Conduct Act; and
- the Financial Markets Conduct Regulations.
In addition to these laws, various taxation and employment laws become relevant when designing and implementing share schemes. As such, seeking legal advice from professionals familiar with New Zealand’s legal landscape is important. They can advise on the rules and regulations that apply to your business.
1. Define the Share Scheme’s Purpose and Eligibility Criteria
One of the preliminary steps in designing a share scheme is defining its purpose and criteria. The purpose of your share scheme might include:
- attracting new talent;
- retaining key employees; or
- incentivising high performance.
Along with outlining the scheme’s purpose, you should also establish eligibility criteria determining which employees can participate. Common eligibility criteria include:
- position of participants;
- years spent with the company; or
- satisfying key performance indicators.
2. Choose the Right Type of Share Scheme
There are various types of share schemes available in New Zealand. These include:
- Employee Share Option Plans;
- Employee Share Plans; and
- Phantom Share Schemes.
Each share scheme has its own unique legal and tax implications. Therefore, you should engage legal professionals specialising in share schemes to determine the most appropriate structure for your company and the goals and objectives of the business.
Understand how an Employee Share Scheme will help your NZ startup attract and retain great talent.
3. Establish a Nominee
You might also wish to consider setting up a nominee who holds and administers employee shares on behalf of the employees. This can help:
- simplify the scheme’s management; and
- ensure legal and regulatory requirements are satisfied.
A nominee structure will not be appropriate for all share schemes. If going down this route, you should be careful to ensure the nominee is set up and effectively managed. Experienced legal professionals can assist with:
- setting up the vehicle to hold shares;
- drafting bare trust deeds; and
- ensuring compliance with your legal obligations.
4. Comply with Reporting Requirements
New Zealand’s securities law requires various disclosure obligations to be met when establishing and implementing share schemes. For example, companies must provide certain financial information to participating employees. You must be careful to ensure you consider and comply with these laws when designing and implementing your scheme.
5. Understand the Tax Implications
Share schemes can have tax implications for both your business and the participants in the scheme. The tax implications depend on the structure of the scheme implemented. This is an area where it is imperative to seek specialist advice. Ensuring you structure your scheme appropriately for your business and participants, including in consideration of the tax implications of that scheme, can be critical to ensuring it remains attractive to your participants.
6. Draft Comprehensive Share Scheme Documents
You must be careful to ensure that your share scheme documents are clear and comprehensive. Depending on the type of scheme you choose to implement, this may include:
- plan rules;
- offer letters; and
- board and shareholder resolutions approving the implementation of the scheme.
The plan rules, in particular, would typically include all terms and conditions of the scheme, including:
- vesting schedules;
- performance criteria;
- exit options; and
- dispute resolution methods.
7. Communicate Effectively
You must develop and implement a robust communication strategy to inform scheme participants about the scheme’s details and their obligations. You should also regularly update participants on the scheme’s performance and any changes to the eligibility criteria. Transparency can prevent misunderstandings and potential legal disputes, making this an essential step.
8. Monitor and Review the Share Scheme Regularly
Finally, you should continuously monitor the performance of the share scheme to evaluate whether it is achieving its intended objectives. You may need to make adjustments to the scheme as circumstances change.
For example, New Zealand’s laws and regulations evolve regularly. This might mean that the way you structured your scheme may need updating. When designing your scheme, you need to factor in how you will keep up to date with these evolutions.
Key Takeaways
Designing an effective employee share scheme requires careful consideration of various legal and financial factors. However, understanding New Zealand’s legal landscape and the best practices for designing a share scheme are critical first steps. Some of the best practices when designing an effective share scheme in New Zealand include:
- defining the scheme’s purpose and eligibility criteria;
- choosing the right type of share scheme;
- establishing a nominee if appropriate;
- complying with reporting requirements;
- understanding the tax implications;
- drafting comprehensive scheme documents;
- communicating effectively; and
- monitoring and reviewing the scheme regularly.
If you need assistance designing a share scheme for your business, contact our experienced startup lawyers to assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 005 570 or visit our membership page.
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