Are you looking to motivate and retain your employees and executive managers? Do you want them more involved in the development of the company? To do this, stock options are an interesting capital participation solution.
A true employee shareholding scheme, stock options, or share options, were introduced by the law n°70-1322 of December 31, 1970 relating to the opening of subscription or purchase options for the benefit of the personnel of companies.
These are subscription or purchase options granted by a joint-stock company (SA, SAS, SCA) and offering the possibility for beneficiaries to subscribe or purchase shares at a price determined in advance.
Once the option is exercised, they become shareholders within the company and enjoy the rights attached to this status. They also have the opportunity to sell their shares to make a capital gain if the share has increased in value since the date of the option exercise.
Here is the procedure to follow to assign share options to your employees and your managers!
1. Prior authorization from your shareholders
Setting up a stock option allocation plan requires the prior approval of shareholders, gathered in an extraordinary general meeting (EGM). In accordance with article L225-177 of the Commercial Code, the EGM can authorize “the board of directors or the management board to grant, for the benefit of the salaried personnel of the company or some of them, options giving the right to subscribe shares”. The assembly then delegates to the governing body the task of implementing the assignment of share options.
💡The assembly determines the period during which its authorization is valid. This period cannot exceed 38 months.
The authorization covers the following points:
1️⃣ The allocation of stock options;
2️⃣ The issuance of shares resulting from the exercise of stock options;
3️⃣ The express renunciation of current shareholders to their preferential right to subscribe to shares issued as and when the options are exercised (article L225-178 of the Commercial Code).
Once these points approved, the assembly must set the following allocation modalities:
2. Identification of Beneficiaries and Determination of Grant Conditions by the Governing Body
In case of delegation granted to the governing body of the company, it determines all the grant conditions that have not been set by the shareholders during the Annual General Meeting (AGM). In this regard, it specifies:
- The identity of the beneficiaries;
- The nature of the options (subscription option or purchase option);
- The number of shares to which the options entitle;
- The exercise conditions;
- The possible holding period.
💡The subscription option allows the beneficiary to purchase new shares as part of a capital increase. The purchase option means that the beneficiary purchases existing shares, i.e., previously issued by the company.
The governing body can decide to grant stock options to employees. Under the article L225-180 of the Commercial Code, it can grant purchase or subscription options to all or only certain members of the staff.
Employees of companies or economic interest groups (EIG) owning, directly or indirectly, at least 10% of the capital or voting rights of the company granting the options can also benefit from stock options.
In addition to employees, corporate officers can receive options on securities as long as they hold a management position, according to article L225-185 of the Commercial Code. Thus, the following can be granted options:
- The chairman of the board of directors;
- The chief executive officer;
- The deputy chief executives;
- The members of the executive board;
- The manager of a share-based company.
The governing body should also not disregard the limits imposed by article L225-182 of the Commercial Code when determining the grant modalities. Indeed, employees and corporate officers holding more than 10% of the share capital cannot be granted stock options. Moreover, the total number of options granted cannot entitle to the purchase or subscription of shares exceeding one-third of the company's capital.
3. Drafting of the Stock Option Grant Plan Regulations
Once the grant conditions have been determined, it is essential to formalize the operation. To do this, a Regulation of the Grant Plan must be drafted. It reviews and details the modalities set by the assembly and the governing body, such as the characteristics of the stock options (nature of the option, number of underlying shares...) or the acquisition schedule.
The drafting of a contractual commitment, or mini shareholders' agreement, is also strongly recommended. It ensures that the beneficiary, as a future shareholder of the company, adheres to the provisions of the pact concluded between the current shareholders. The goal is to avoid any deadlock situation and thus guarantee the smooth functioning of the company.
Given the stakes and the consequences that the granting of stock options can have on your employee shareholding, and more generally on the sustainability of your company, we encourage you to seek legal advice to draft this documentation.
4. Granting and Monitoring of Stock Options
In order to materialize the grant, the company sends all the documentation mentioned above to the employee.
With the grant, the company thus grants the beneficiary the right to subscribe or purchase a certain number of shares, at a predetermined price.
This subscription is often conditioned by the implementation of acquisition conditions, at the end of which the beneficiary can exercise the option.
💡The shares resulting from the granted options are non-transferable until the option is exercised, in accordance with article L225-183 paragraph 2 of the Commercial Code.
At Equify, we accompany you in each of the steps of the stock options grant procedure, from the organization of your grant plan to the management of events subsequent to the grant.