Free Share Allocation (FSA): what is it?

ll about FSAs: how do they work? What are the companies issuing free shares? And who are the beneficiaries?

Established by the 2005 Finance Act, the free share allocation, or FSA, is a mechanism in favor of employee share ownership.

It is an operation on the share capital allowing a company to allocate shares without financial consideration to its employees and corporate officers.

The aim? To retain, reward, and interest employees and leaders in the company's results.

This device complements the share capital interest solutions (BSPCE, stock options, company savings plan, etc.) and thus enriches the range of mechanisms available to companies to make their employees aware of the challenges of the company's activity.

What is a free share allocation?

Codified in the articles L225-197-1 and following of the commercial code, the free share allocation is an operation allowing employees and leaders to become shareholders of their company and benefit from the rights attached to this status. The company issues shares to all or part of the employees and corporate officers, without any financial consideration.

This process encourages employees to support and participate in the development of the company's activity. It is indeed a complementary remuneration device aimed at motivating the beneficiaries of the FSA.

What differentiates the free share allocation from other employee shareholding devices is that it does not require any cash outflow. The beneficiary does not have to make a contribution or pay an exercise price, as is the case for subscription bonus plans or stock options.

Who can issue free shares?

The AGA scheme covers free shares, so only joint-stock companies, whether listed or not, can carry out this type of operation. Thus, the following can issue free shares:

• Public limited companies (SA);
• Simplified joint-stock companies (SAS);
• Partnership limited by shares (SCA).

Who are the beneficiaries?

Free shares can be allocated to both employees and corporate officers.

As for employees, this can include the employees of the issuing company, but also those of related companies (subsidiaries, parent companies, or sister companies).

Regarding corporate officers, these are individuals who hold management roles, such as:

• The chairman of the board of directors;
• The chairman of the SAS;
• The CEO;
• The deputy CEOs;
• The members of the executive board;
• The manager of the SCA.

In principle, members of the board of directors and the supervisory board cannot benefit from free shares. However, if they are contracted with the company, they are entitled to it in respect of their salaried activity.

Finally, the allocation of free shares can only take place within certain limits:

1️⃣ Individual holding ceiling for beneficiaries: They cannot be allocated free shares if they are already shareholders and hold more than 10% of the share capital. Furthermore, the allocation must not have the effect of granting each beneficiary more than 10% of the company's capital.

2️⃣ Global allocation limit for the company (article L225-197-1 I paragraphs 2 and 3 of the commercial code): the total number of shares allocated cannot exceed 10% of the share capital if the AGA does not target all staff. The limit is increased to 30% when the allocation of free shares concerns all the employees of the awarding company.

How does it work?

n accordance with article L225-197-1 I paragraph 1 of the commercial code, the authorization to freely allocate shares falls under the competence of all the shareholders gathered in an extraordinary general meeting, based on the report of the board of directors or the management board and on the special report of the statutory auditors.

The AGAs may concern existing shares or shares to be issued as part of a capital increase.

In any event, the allocation takes place without financial consideration and is immediate. However, the allocation takes place in two stages:

1️⃣ Acquisition period: this period cannot be less than 1 year. It is only at the end of this period that the allocation becomes definitive and the beneficiary becomes a shareholder of the company. During the acquisition period, the recipient does not enjoy any shareholder rights (voting rights, financial rights, right to information...) but only an inalienable claim right.

2️⃣ Holding period: the AGE has the possibility to provide for a holding period running from the definitive allocation of the shares. If the assembly is free to determine the duration of this period, the cumulated duration of the acquisition and holding periods cannot be less than 2 years (article L225-197-1 I paragraphs 7 and 8 of the commercial code). During this period, the beneficiaries have the quality of shareholder and enjoy the rights attached to it. However, the shares are inalienable, whether free of charge or for a fee.

What is the interest of an AGA?

The AGA presents certain advantages both for the beneficiaries and for the awarding company itself.

For the beneficiaries

For the corporate officer or the employee beneficiary, the AGA mechanism allows him to acquire shares without making any contribution and without risks. Indeed, the recipient makes no investment so he is certain to make a capital gain when selling his securities whatever their value.

For the company

For the issuing company, the free allocation of shares is a way to interest its collaborators in the company's results and to encourage them to participate in the development of the activity.

The AGA also allows the company to retain and motivate its employees and managers in ways other than awarding them bonuses and bonuses. Indeed, a growing company does not necessarily have the financial means to reward its collaborators. It can then freely assign them shares to express its recognition.

Finally, the use of the AGA system is perceived as a sign of the company's growth and contributes to enhancing its image with shareholders and investors alike.

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