Although the terms are often used interchangeably, "growth shares" are shares which increase in value gradually as the value of the shares of the company they represent grows, while "flowering shares" are shares which acquire certain rights only after a specific trigger event or target is achieved.
So, for example, a growth share might participate in the value of a company over, say, £2m, whereas a flowering share might become entitled to dividends only when the company is worth more than £2m.
We recently advised on a growth share plan in a quasi partnership where the existing shareholders wanted to preserve the first £500,000 of capital value between themselves, with a new holder of growth shares participating equally with them in any capital value above that amount. We have also advised a VC backed high growth company where key executives held flowering shares which acquired a significant value if a certain exit value was achieved.
Variations on growth and flowering share arrangements are endless and, given that there is no set formula, we believe that our track record and experience in this area provides enormous added value to clients.
However, growth shares and flowering shares are taxed differently. If done properly growth shares should result in capital gains tax treatment for employees (as opposed to income tax) and should incur a minimal cost for the employee because their shares will have little or no value until some further growth or event occurs.
Flowering shares, however, are subject to income tax - they are treated as "convertible shares" for tax purposes. The boundary between growth shares and flowering shares is not always clear and, given the difference in tax treatment, professional advice should be taken.
Putting such a structure in place involves creating a specific new class of shares and amending the articles of association of the company. The articles will specify the rights attaching to the shares. These will include matters such as voting, income and capital rights and any performance targets and leaver provisions, perhaps including good/bad leaver variations.
The growth/flowering shares are issued at their current market value. As mentioned above, this will usually be very low as there will have to be underlying growth in the value of the company, or a hurdle jumped or target met, before the growth or flowering shares participate in that value. It is advisable to get a robust professional valuation, as you cannot agree the value of such shares with HMRC prior to their issue. These arrangements can also be used in conjunction with HMRC's tax-favoured "Employee Shareholder Status" shares or EMI share options - note that HMRC will agree a value in advance for growth shares which qualify for Employee Shareholder Status, but have recently announced that, due to lack of resources, they may withdraw agreeing valuations for tax approved share option plans.
As with the issue of any shares or options to employees, HMRC should be notified through the new online system.
Talk to us
If you would like to discuss growth or flowering share arrangements or any other aspect of employee share ownership or incentives, please contact Jonathan Oxley or Melanie List in our Employee Share Ownership Team.
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