What are share class restrictions in relation to a share scheme, why they matter and what you need to do?
Share class restrictions are, in a nutshell, the limitations, restrictions and conditions placed on the shares in that share class.
These restrictions define who can hold shares, how they can be transferred, and often carry specific conditions or limitations on voting rights, dividends, and other shareholder privileges.
Some common restrictions we see – and that are often best practice when setting up a share scheme – are clauses such as:
- Drag and Tag clauses which force the shareholder to sell if the majority wish to sell
- Pre-emption rights that give existing shareholders the right to buy the shares first, pro rata. Pre-emption rights essentially restrict the ability of the current shareholder to sell to whomever they like.
- Employee shareholder buy-back rights that mean if an employee leaves they may have to sell their shares back to the company
- Restricted rights to dividends or voting
These restrictions are found in a company's Articles of Association or Shareholders' Agreement.
It's worth adding that share class restrictions don't refer to the commercial vesting terms that you give to the options (e.g. time or performance-based), but rather the restrictions on the shares themselves once exercised.
What do I need to do when creating a share scheme?
The good news is that most share schemes don't require the share class restrictions to be added to the agreement itself, but the restrictions must be made available to the recipient.
Even better news is that when you grant options or growth shares to a recipient via Vestd, they will be able to view the share class restrictions on their agreement summary.
However, the Company Share Option Plan (CSOP) is the exception to the rule in that the share class restrictions must be added to the agreement itself. We will prompt you to add the restrictions (if they are missing) when creating a CSOP scheme.
But before we get ahead of ourselves, we'll explain the process of how to ensure the share class restrictions are available to recipients from the beginning...
How to make share class restrictions visible to your share scheme recipients
When you authorise an option pool, you will select the share class the options will be granted from, and whether that share class has any restrictions.
It's essential to authorise the option pool correctly before granting any options. Once the option pool has been set up, the restrictions will automatically pull into each recipient's option agreement, so they will be made fully aware of any restrictions on acceptance.
These restrictions are found in your company's Articles of Association or any Shareholders' Agreement.
If you have adopted the Vestd Articles of Association, the restrictions will be automatically added to the option pool, so you don't need to add anything else (unless you have a Shareholders' Agreement in place that contains certain restrictions).
If your company is on Model Articles, again you don't need to add any restrictions unless you have a Shareholders' Agreement.
If you do have a Shareholders' Agreement, please add the relevant clauses in their entirety. Chances are the Shareholders' Agreement is a confidential document, so including the relevant clauses in full protects your shareholders while also ensuring your share scheme remains compliant.
For Custom Articles, you must add all share class restrictions when creating the option pool. It's best practice to reference a summary of the restrictions and the clause in which they can be found in the Articles or the Shareholders' Agreement. For example: "Drag along rights as outlined in Article 5.3 of the Company Articles."
If you're creating a CSOP scheme, the class restrictions must be added to the agreement itself. This can be done by adding the restrictions when you create the option pool. Don't worry if you forgot to do this though, as you will be prompted to add the restrictions once the scheme is created and you're adding recipients.
As of April 6 2023, there is no longer a requirement for a company to include in the option agreement details of the restrictions on the shares that can be acquired.
However, EMI recipients will still need to be able to view the restrictions in the company's Articles of Association or any Shareholders' Agreement. The good news is that they will be able to view these documents through Vestd.
This means that the information in this guide is no longer necessary, but you may want to familiarise yourself with share class restrictions as a whole.
For more information, see HMRC's revisions to EMI.
What are the Vestd Articles of Association class restrictions?
The following restrictions are automatically added to your option pool:
The class restrictions laid out in the Articles of Association (available at any time on the Vestd platform including acceptance of the option) with these shares are as follows:
Transfers of Shares (Articles 13, 16)
Leaver Transfers (Article 14)
Permitted Transfers (Article 15)
Compulsory Transfers (Article 18)
Drag along (Article 20)
Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal or financial advice.'