Free share allocations (FSA) are an employee stock ownership mechanism that allows a company to allocate shares to certain employees and executives without financial consideration.

Introduced by the 2005 Finance Act and codified in Articles L.225-197-1 et seq. of the Commercial Code, this program aims to align employees’ interests with the company’s performance and growth.

In practice, the company grants shares free of charge to designated beneficiaries, who will become shareholders at the end of a vesting period. The objective is twofold: to retain talent and to align the interests of employees and executives with those of the company and its shareholders.

AGAs complement other employee stock ownership and equity compensation tools, such as BSPCEs, stock options, and company savings plans.

What does a free share grant entail? 

As codified in Articles L225-197-1 et seq. of the Commercial Code, a free share grant is a transaction that allows employees and executives to become shareholders of their company and to enjoy the rights associated with that status. The company issues shares to all or some of its employees and corporate officers without any financial consideration. 

This initiative encourages employees to support and participate in the company’s business development. It is, in fact, a supplemental compensation program designed to motivate the recipients of the free share grant.  

What distinguishes the free allocation of shares from other employee stock ownership programs is that it does not require any outlay of funds. The recipient is not required to make a contribution or pay an exercise price, as is the case with stock option plans or stock warrants. 

Who can issue bonus shares? 

Since the AGA program involves free shares, only corporations—whether publicly traded or not—can carry out this type of transaction. Thus, the following entities may issue free shares: 

• Public limited companies (SA); 
• Simplified joint-stock companies (SAS); 
• Limited partnerships with share capital (SCA).
   

Who are the beneficiaries? 

Free shares may be granted to both employees and corporate officers. 

In the case of employees, these may include employees of the issuing company, as well as those of affiliated companies (subsidiaries, parent companies, or sister companies).

Corporate officers are individuals holding executive positions, such as: 

• The chairman of the board of directors; 
• The president of the SAS; 
• The Chief Executive Officer; 
• Deputy Chief Executive Officers; 
• Members of the executive board; 
• The manager of the SCA. 

Since December 1, 2023 (Article L225-197-1 of the Commercial Code), the legal framework for the allocation of bonus shares has been relaxed for corporate officers. From now on, anun d company may grant shares to executives of its subsidiaries or of any entity in which it holds (directly or indirectly) at least 10% of the capital or voting rights.

In principle, members of the board of directors and the supervisory board are not eligible to receive bonus shares. However, if they are bound to the company by an employment contract, they may be eligible for such shares in their capacity as employees. 

What are the limits on such grants?

The grant of bonus shares may only take place within certain limits: 

1️⃣ Individual holding limit for beneficiaries: they may not be granted free shares if they are already shareholders and hold more than 10% of the share capital. Furthermore, the grant must not result in their exceeding this threshold.

2️⃣ Overall allocation limit for the company (Article L225-197-1 I, paragraphs 2 and 3 of the Commercial Code): the total number of shares allocated as bonus shares may not exceed 15% of the company’s share capital. 

This limit may be increased to:

• to 20% if the company is an unlisted SME and grants shares only to certain categories of employees;
• to 30% if the allocation benefits a large portion of the employees (indicative criteria: employees representing at least 25% of total gross salaries for the last fiscal year and at least 50% of the workforce);
• and up to 40% if all employees benefit from the allocation.

It should also be noted that above 15% (or 20% for SMEs meeting the criteria defined above), the disparity in allocations among employees may not exceed a ratio of 1 to 5.

How does it work? 

Pursuant to Article L225-197-1 I, paragraph 1, of the Commercial Code, authorization to issue shares free of charge falls within the purview of all shareholders meeting at an extraordinary general meeting, based on a report from the board of directors or the executive board and a special report from the statutory auditors.  

Extraordinary General Meetings may concern existing shares or shares to be issued as part of a capital increase. 

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

1️⃣ Vesting period: This period may not be less than one year. Only at the end of this period does the allocation become final, and the beneficiary becomes a shareholder of the company. During the vesting period, the grantee does not enjoy any shareholder rights (voting rights, financial rights, right to information, etc.) but only a non-transferable claim. 

2️⃣ Holding period: The Extraordinary General Meeting (EGM) may establish a holding period beginning on the date of the definitive allocation of the shares. While the meeting is free to determine the duration of this period, the combined duration of the vesting and holding periods may not be less than 2 years (Article L225-197-1 I, paragraphs 7 and 8 of the Commercial Code). During this period, beneficiaries have the status of shareholders and enjoy the rights attached to that status. However, the shares may not be transferred, either for consideration or without consideration. 

What are the benefits of an AGA? 

The AGA offers clear advantages for both the beneficiaries and the granting company itself. 

For beneficiaries 

For the corporate officer or employee who is the beneficiary, the AGA mechanism allows them to acquire shares without making a personal financial contribution. Unlike stock options, the grantee bearsno risk of capital loss . Since the shares are received free of charge, the beneficiary is guaranteed to realize a capital gain upon sale, regardless of how the share price fluctuates, as long as the share retains a positive value.

For the company 

For the issuing company, the grant of free shares is a way to align its employees’ interests with the company’s results and to encourage them to contribute to the growth of the business. 

The free share allocation also allows the company to retain and motivate its employees and executives in ways other than by awarding them bonuses and incentives. Indeed, a rapidly growing company does not necessarily have the financial means to reward its employees. It can therefore grant them shares free of charge as a token of appreciation. 

Finally, issuing stock options sends a positive signal to the market. It demonstrates that the company is financially sound, confident in its future, and committed to sharing its future successes with its teams.

Conclusion

The AGA program is an employee stock ownership mechanism that allows for the allocation of shares without any initial investment on the part of the beneficiaries. However, its implementation remains strictly regulated by law, requiring prior authorization from shareholders as well as compliance with vesting periods and, where applicable, holding periods.

Beyond its legal structure, the AGA involves significant tax and social security implications. While the favorable French tax regime is attractive, special caution is required for beneficiaries residing abroad. Local taxes and social security contributions applicable in countries of residence can vary significantly, making it essential to analyze international tax treaties to avoid any double taxation or unforeseen costs for the company and its employees.

Sources:

• Article L225-197-1 of the Commercial Code
• the 2005 Finance Act