EMPLOYEES’ SHARE COMPENSATION SCHEME IN NIGERIA

1.0 BACKGROUND

1.2 This edition of Akintunde Esan's Legal Illumination is on a Company that has a share compensation scheme that is not pronounced desirous of establishing a pronounced Employees’ Share Ownership Plan (ESOP) via an Employees’ Share Ownership Trust (ESOT) to hold the company’s shares in trust for the employees awarded or granted its shares pending a vesting period and subject to vesting conditions.

1.3 The Company is now contemplating on the appropriate Trust Administrator for ESOT and thus considering whether to establish an Employees’ Trustee Scheme or to make use of its Employees’ Cooperative Scheme as the Trust vehicle for holding the Company’s shares in trust for its employees.

2.0 FACTORS TO CONSIDER

2.1 The following are the relevant factors to consider before establishing Employees’ Share Ownership Trust via the vehicle of an Employees’ Trustee Scheme or its Employees’ Cooperative Scheme.

2.2 Management and Control

2.2.1 The Company warehouses various portion of shares by transferring them to the Trustee who becomes the registered owner of the shares on behalf of members of staff of the Company. The ESOT is required to be managed by a corporate Trustee Company or Trust Manager generally appointed by the Company and whose appointment can only be terminated by the Company. Thus, the Trustee Company or another other party to the ESOT will be taking instructions from the Company and not the employees.

2.2.2 The Cooperative Society  is owned and controlled by the employees who have equal shares and equal votes, thus, If the ESOT is managed by the Employees’ Cooperative Society, the ESOT will be tacitly be controlled by the employees since the Cooperative Society is owned and managed by the employees.

2.3 Taxation

2.3.1 The benefit that accrues to an employee under the ESOT is liable to tax, but the Company is not liable to pay any tax as per ESOT, but it is required to compute tax on the difference between the actual price and exercise price and remit to the relevant authorities. Dividend received by a limited liability company from a unit trust scheme is exempted from tax. Dividends received by individual from a unit trust scheme is liable to personal income tax, the Trustee of the scheme will apply withholding tax at 10% on the dividend and remit to the LIRS.

2.3.2 Cooperative Societies enjoy tax exempt status. Though, the income of registered Cooperative Societies is exempted from taxation, however, the benefits that accrue to the employees under the ESOT are liable to tax and to be remitted by the Company.

2.4 Cost

2.4.1 The ESOT is not ideal for companies with less than 30 employees due to the administrative cost of setting up ESOT. The Company funds the purchase of the shares ESOT. The Trustee Company or Trust Manager or capital market operators will charge the Company for all the services rendered toward the actualization and administration of the ESOT.

2.4.2 A Cooperative Share Scheme would be less expensive, due to lower set up and on-going administration costs. The administrative cost of managing the ESOT will ordinarily be on the Society since it is managing it for the benefit of its members.  

2.5 Legality

2.5.1 The ESOT Trustee will issue a unit or certificate evidencing the employees’ right or interest in the ESOT. The use of such structure has legal complications and requirement making it fall within the definition of Unit Trust Scheme.

2.5.2 No legal personality  can perform any act or enter into any agreement or transaction for the purpose of administering a Unit Trust Scheme, unless such person is:

a. incorporated under CAMA; and 

b. registered as a fund or portfolio manager by the Security Exchange Commission (SEC). 

2.5.3 Section 315 of the Investment and Securities Act (I.S.A.) defines "capital market operator" as any person, individual or corporate, duly registered by SEC to perform specific functions in the capital market.

2.5.4 The Managers, Trustees or Custodians of an Employee Share Ownership Trust or Unit Trust Scheme are statutorily recognized as capital market operators, thus,  must be  body corporate incorporated under the Companies and Allied Matters Act (CAMA) and licensed by the Securities and Exchange Commission (SEC) in order to legally operate as such.

2.6 CONCLUSION 

2.6.1 The ESOT can only be managed by a Trustee Manager incorporated under CAMA and licensed by the SEC. The legal implication of this is that while an ESOT can be legally operated as a Unit Trust Scheme under the I.S.A., the  Employees’ Cooperative Scheme cannot be used as a legal vehicle for ESOP or ESOT of the Company on the grounds that a Cooperative Society:

• is not a body corporate incorporated under the CAMA

 

• is not statutorily recognized as a corporate capital market operator under I.S.A.

• lacks the corporate qualification and professional competence to operate as capital market operator or act as a Fund Manager, Trustee or Custodian of a Unit Trust Scheme under the I.S.A. See S.38 (1) I.S.A.

• is not licensed by the SEC to operate as a Manager, Trustee or Custodian of an Employee Share Ownership Trust  or Unit Trust Scheme; and

• SEC lacks the regulatory authority over the activities of Cooperative Societies scheme.  

2.6.2 Any advantage that using Employees’ Cooperative Scheme for ESOT may have is of no consequence on the ground that, there is no statutory or legal frame for using it as a Unit Trust Scheme under the Investment and Securities Act.

You may consult with Akintunde Esan (the Legal Adviser Online) for further legal illumination on Employee's Share Compensation Scheme in Nigeria.

EMPLOYEE'S SHARE COMENSATION SCHEME IN NIGERIA is a legal illumination of AKINTUNDE ESAN known as The LEGAL ADVISER ONLINE. Akintunde Esan is the Managing Partner & Principal Consultant @ ASE OLODUMARE CHAMBERS (Legal Practitioners/Consultants & Chartered Mediators)