Employee Share Option Plans (ESOPs)
Employee Share Option Plans (ESOPs) are schemes that allow employees to acquire shares in the company they work for, either at a discounted price or for free, as a form of incentive and reward. It is a one of the types of Employees’ share incentive scheme (ESIS). ESOPs can help companies to attract, retain and motivate their key employees, as well as align their interests with those of the shareholders.
At HHS Lawyers, we have extensive experience in advising clients on the design, implementation and management of ESOPs in the UAE. We can help you to navigate the legal and regulatory framework governing ESOPs, as well as the tax and accounting implications of such schemes. Whether you are a public or private company, a start-up or an established business, we can tailor an ESOP solution that suits your specific needs and objectives.
What is an Employee Share Option Plan (ESOP) and How Does It Work?
An Employee Share Option Plan (ESOP) is a type of equity compensation plan that gives employees the right to buy shares of the company at a discounted price, usually lower than the market price. ESOPs are designed to motivate employees, align their interests with the shareholders, and reward them for their performance and loyalty. ESOPs can also offer tax benefits to the company and the employees, depending on the jurisdiction and the plan structure.
ESOPs is a different type of remuneration plans that aim to retain, reward and motivate employees. By giving employees a stake in the company’s performance through an ESOP, employees are encouraged to work harder and smarter, as they will benefit from the company’s growth and success. ESOPs also help employers to keep and attract talented staff members, as the rewards offered under an ESOP increase over time depending on how long an employee stays with the company.
Benefits of Employee Share Option Plans
ESOPs can offer various benefits to both employers and employees, such as:
- For employers, ESOPs can help to create a culture of ownership and loyalty among the employees, as well as improve their performance and productivity.
- It can also reduce the cash outflow for salaries and bonuses, and enhance the company’s reputation and attractiveness in the market.
- ESOPs can provide an opportunity for employees to participate in the company’s growth and success, as well as diversify their income and wealth.
- ESOPs can also increase their commitment and engagement with the company, and foster a sense of belonging and teamwork.
Legal Framework for ESOP in the UAE
The Legal Framework for ESOP in the UAE are mainly the following:
- The Federal Decree-Law No. (32) of 2021 on Commercial Companies (CCL), which is the main law governing the establishment and operation of commercial companies in the UAE. Article (228) of the CCL allows UAE companies to increase their share capital by issuing shares to their employees under a scheme, subject to certain conditions and approvals.
It reads as follows:
“1. The Company may under a Special Decision, increase its capital by the application of the share incentive scheme for the employees of the Company.
- The Company’s board of directors shall submit to the general assembly the share incentive scheme for the employees of the Company.
- The Board Members of the Company may not participate in the employees’ share incentive scheme.
- The Board of Directors of the Authority may issue a decision including the conditions and mechanism to implement an employees’ share incentive scheme.”
The SCA Chairman Resolution No. (11/R.M) of 2016 on the Regulations for Issuing and Offering Shares of Public Joint Stock Companies (SCA Decision), which is the regulation issued by the Securities and Commodities Authority (SCA) to regulate the issuance and offering of shares by UAE public joint stock companies.
How to Apply for Employee Share Option Plans in UAE
ESOPs is a type of Employees Incentive Program (EIP) which is a scheme that allows employees of a company to own shares in the company’s capital as a form of incentive and reward. The Securities and Commodities Authority (SCA) regulates the ESOPs and requires the company to obtain its approval before issuing incentive shares to employees. The following are the steps and procedures to apply for ESOPs:
Step 1: Submit an Application to the SCA
The company should submit an application to the SCA to approve the issuance of ESOPs, along with all the required documents.
Step 2: Hold the General Assembly Meeting
After obtaining the SCA’s approval, the company should complete the procedures for holding the general assembly meeting to approve the ESOPs.
Step 3: Request the SCA’s Approval for Issuing Incentive Shares
At least one month before the end of the ESOPs period, the company should submit a request to the SCA to obtain its approval for issuing incentive shares to employees in accordance with the EIP’s bylaws and the company’s capital increase.
Requirements and Documents for ESOPs
The SCA has set some requirements and documents for the ESOPs to ensure its compliance and transparency. The following are the main requirements and documents for the ESOPs:
Requirements
- The company’s capital should be fully paid, and the net shareholders’ equity should not be less than the paid-up capital, and the market value should not be less than the nominal value of the original shares.
- The size of the incentive shares issued in ESOPs should not exceed 2.5% of the paid-up capital.
- The company should issue a special resolution by the general assembly approving the ESOPs.
- The period between each ESOPs and another should be at least 3 years, provided that the total number of incentive shares for all ESOPs issued or to be issued by the company does not exceed 10% of the total paid-up capital.
- The company should disclose the ESOPs’s data in the complementary notes to the annual financial statements and the governance report.
Documents
- A request addressed to the SCA to approve the ESOPs by allocating shares in the company’s capital.
- The bylaws of the EIP of the company.
- An undertaking from the company’s board of directors to provide any required disclosures to the SCA regarding the ESOPs and not to make any amendments to the ESOPs without the SCA and the general assembly’s approval.
- A draft of the special resolution clause that will be presented to the general assembly for approving the ESOPs.
- A draft of the disclosure statement that will be presented to the shareholders during the general assembly, summarizing the ESOPs’s terms and conditions.
ESOPs are a valuable tool for companies to incentivize and reward their employees, but they also entail legal and practical challenges, especially in a diverse market like the UAE. Companies that wish to implement an ESOP in the UAE should carefully consider the differences and implications of operating in the Mainland or in a Free Zone, and seek professional advice to ensure compliance with the relevant laws and regulations.
Why choose HHS ESOP Lawyers for your ESOP in Dubai?
At HHS Lawyers, we have a team of qualified and experienced lawyers who can help you with all your ESOP needs in Dubai.
- We can advise you on the best way to structure and implement an ESOP that suits your business objectives and complies with the UAE laws and regulations.
- We can draft and review the ESOP documents and agreements and assist you with the registration and approval processes.
- Our legal experts can also provide you with ongoing support and guidance on how to manage and monitor your ESOP and deal with any issues or disputes that may arise.
If you are interested in setting up an ESOP for your UAE-based employees, please contact us today for a consultation. We will be happy to answer your questions and provide you with a customized solution that meets your expectations and requirements.
