What requirements must be met for an individual to have employee-shareholder status?

An employer and an individual can agree that the individual will have employee-shareholder status, thereby forfeiting certain employment rights in return for shares in the employer's company. Section 205A of the Employment Rights Act 1996 sets out the requirements that must be met for such an agreement to be effective.

For an individual to have employee-shareholder status:

  • the employer and the individual must agree that he or she is to be an employee shareholder;
  • the employer must issue or allot to the individual fully-paid-up shares in the company or its parent company, and the shares must have a value of no less than £2,000 on the day of issue or allotment;
  • the individual must give no consideration other than by entering the agreement (ie he or she must not be required to give anything else in return for the shares);
  • the employer must give the individual a written statement setting out information (as specified in s.205A(5) of the Employment Rights Act 1996) on the rights that he or she is giving up and the rights that attach to the shares, including whether or not they carry voting rights or rights to dividends, whether or not they are redeemable and details of any restrictions on their transferability;
  • the individual must receive advice from a relevant independent adviser as to the terms and effect of the proposed agreement; and
  • a "cooling-off period" of seven days must have passed since the day on which the individual receives the advice, before the agreement is entered into.

The employer is responsible for paying the reasonable costs incurred by the individual in obtaining the independent advice, whether or not he or she agrees to employee-shareholder status.