Management Shares & Employee Share Option Plans: UK Corporate Law Guide

As a specialist corporate solicitor who has advised hundreds of UK companies on their share structures, I’ve witnessed firsthand how management shares and employee shares can fundamentally shape a business’s future. Yet these powerful tools remain poorly understood by many business owners, often leading to costly mistakes that could have been easily avoided with proper legal guidance.

Whether you’re a founder contemplating your company’s equity structure, an investor evaluating a potential opportunity, or a management team member seeking to understand your position, this comprehensive guide will equip you with the knowledge you need to make informed decisions about management shares and employee share schemes.

What Are Management Shares?

Management shares represent a distinct class of shares specifically designed to grant holders enhanced control over company decision-making, often disproportionate to their economic stake in the business. Unlike ordinary shares, which typically carry equal voting rights, management shares can be structured with weighted voting rights, special veto powers, or specific protections that enable key individuals to maintain control even as the company grows and brings in external investors.

Most companies are founded with only ordinary shares, and management shares are a special class introduced for specific control purposes.

In my practice at Zoppi & Co, I’ve structured management share arrangements for businesses at various stages, from early-stage startups to established companies preparing for significant fundraising rounds. The fundamental principle remains consistent: management shares allow founders and key executives to retain strategic control whilst sharing economic ownership with investors and employees.

Key Features of Management Shares

Management shares typically include one or more of the following characteristics:

Additional Voting Rights – Management shares may carry multiple votes per share, giving holders disproportionate influence over company resolutions. For instance, whilst ordinary shares carry one vote each and typically grant all holders the same rights in terms of voting, dividends, and capital entitlements, management shares might carry five, ten, or even 100 votes per share, resulting in different rights and privileges.

Right to vote on specific matters – Management shares may be the only class of shares that is entitled to vote on specific (“reserved”) matters. This is so that the key management decisions are retained by the management team.

Board Appointment Rights – These shares often come with the right to appoint directors to the board, ensuring management maintains representation regardless of their economic ownership percentage.

Veto Powers – Management shareholders frequently hold veto rights over fundamental decisions such as changes to the articles of association, major acquisitions or disposals, alterations to share capital structure, or the appointment of certain senior executives.

Understanding Employee Shares and Employee Share Option Plans

Whilst management shares concentrate on control, employee shares and employee share option plans focus on incentivising, retaining, and aligning workforce interests with company success. Giving employees a stake in the company through employees shares can promote motivation and loyalty, aligning their interests with the long-term success of the business. These mechanisms have become essential tools for UK companies seeking to attract and retain top talent in competitive markets.

Types of Employee Share Arrangements

In my experience advising SMEs and growing businesses, I’ve implemented various employee share structures, each serving different strategic purposes:

Outright Share Grants – Direct transfer of shares to employees, typically subject to vesting schedules that require continued employment or achievement of specific performance milestones. Employees who receive ordinary shares are entitled to dividends and may also receive dividend shares as part of their plan. This approach immediately creates shareholders but requires careful consideration of tax implications and potential complications if employees leave prematurely.

Employee Share Option Plans – These are a type of share option schemes, granting employees the right to buy shares at a fixed price (the exercise price) at a later date. The fixed price is set at the time of grant and remains unchanged until exercise. Employees can benefit financially if the share price increases above the fixed price when they exercise their options. This structure offers significant advantages, particularly regarding tax efficiency and dilution management. UK companies can utilise tax-advantaged, approved schemes such as:

• Enterprise Management Incentive (EMI) schemes – EMI options are the most popular approved scheme for qualifying companies, offering substantial tax advantages for both employer and employee. The emi scheme is especially tax-efficient for startups and SMEs.

• Company Share Option Plan (CSOP) – Available to larger companies that don’t qualify for EMI.

• Share Incentive Plan (SIP) – An all-employee share incentive plan that can provide tax-free benefits.

• Save As You Earn (SAYE) schemes – Savings-related share option plans accessible to all employees.

Unapproved options are also available for companies or individuals who do not qualify for approved schemes. These unapproved options offer flexibility and can be used to incentivise both employees and non employees, such as consultants or advisors, but have different tax treatment compared to approved schemes.

The cost and ongoing costs of setting up and managing these schemes can be substantial, and it is important to consider the cost over the scheme’s lifetime rather than just the initial setup. The benefit of these schemes includes financial incentives, tax advantages, and non-financial benefits such as increased engagement and retention. They are often used to attract new employees and can also be extended to non employees.

The Critical Role of Shareholders Agreements in Managing Share Classes

One of the most frequent mistakes I encounter in my practice is companies issuing management shares or employee shares without a good shareholders agreement in place. This oversight creates a legal vacuum that inevitably leads to disputes, uncertainty, and potential deadlock.

A properly drafted shareholders agreement serves as the cornerstone of any well-structured share arrangement. The alternative (which is often preferable) is to document the same matters in the articles of association of the company. Either of these constitutional documents should comprehensively address:

Decision-Making Frameworks

Your shareholders agreement or articles of association must establish clear procedures for both routine and significant decisions. Whilst management shares may grant enhanced voting rights on specific matters, the document should specify which decisions require unanimous consent, which need special majorities, and which can be taken by ordinary resolution.

In my experience, the most effective shareholders agreements or articles of association categorise decisions into tiers:

Reserved Matters requiring management shareholder approval (or specific supermajorities) typically include fundamental changes to the business, such as altering the share capital structure, disposing of substantial assets, entering into material related-party transactions, and changing the nature of the business.

Board Matters that can be decided by directors appointed through the governance structure established by the agreement.

Ordinary Business Decisions that management can take without shareholder involvement.

Share Transfer Restrictions and Mechanisms

Any shareholders agreement or articles of association governing management shares or employee shares must include comprehensive provisions addressing share transfers. These typically encompass:

Pre-emption Rights – Existing shareholders’ rights to purchase shares before they can be offered to external parties, protecting against unwanted third-party ownership.

Drag-Along and Tag-Along Rights – Mechanisms ensuring minority shareholders aren’t left behind in sale situations whilst preventing them from blocking beneficial transactions. These provisions are particularly crucial when management shares are involved, as they balance control rights with economic fairness. Our comprehensive guide on drag-along rights explores these provisions in detail.

Leaver Provisions – Crucial for employee shares, these clauses specify what happens when employees leave the company, whether as “good leavers” (retirement, ill health) or “bad leavers” (dismissal for cause, resignation). Without clear leaver provisions, departing employees may retain shares indefinitely, complicating future fundraising and creating shareholder register chaos.

Vesting Schedules – Time-based or performance-based conditions determining when shareholders obtain full rights to their shares, protecting the company if key individuals leave prematurely. Although, usually these vesting agreements are documented in a separate contract with the specific employee or manager.

Protection for Minority Shareholders

Whilst management shares concentrate control in certain hands, responsible corporate governance demands adequate protection for minority shareholders, including employees holding modest stakes. Your shareholders agreement or articles of association may need to include safeguards such as:

• Anti-dilution provisions protecting against value destruction from unfavourable financing terms; and

• Exit rights enabling minority shareholders to participate in sale opportunities.

The Relationship Between Management Shares, Articles of Association, and Company Law

A question I’m frequently asked is whether shareholders agreements override a company’s articles of association. The answer requires nuanced understanding of UK company law principles, which I’ve explored thoroughly in our article examining whether shareholders agreements can override articles.

Legal Hierarchy and Constitutional Documents

Under the Companies Act 2006, a company’s articles of association constitute its primary constitutional document, binding the company and its members as a matter of statutory contract. Management shares and employee shares must be created and defined within the articles, specifying their respective rights, restrictions, and preferences.

However, whilst articles provide the foundation, they cannot address every nuance of shareholder relationships. This is where shareholders agreements add crucial value as supplementary contracts between shareholders. Our detailed comparison of shareholder agreements versus articles of association explains these complementary roles.

Ensuring Consistency and Compliance

When implementing management shares or employee share option plans, you must ensure your articles explicitly permit different share classes with varied rights. Standard model articles often require amendment to accommodate management share structures.

The critical principle I always emphasise to clients: your shareholders agreement and articles must work in harmony, not contradiction. Where conflicts arise, courts will generally uphold the articles as the statutory document, potentially rendering shareholders agreement provisions unenforceable.

Share Valuation: Principles and Practicalities

Accurate share valuation is at the heart of any successful employee share scheme, particularly for private companies where determining the market value of shares is far from straightforward. Unlike listed companies, where share prices are publicly available, private companies must rely on established valuation methodologies to assess the value of their shares. This process is crucial not only for setting fair and motivating awards for key employees but also for ensuring compliance with HMRC requirements and maximising the tax advantages available through share schemes.

When valuing shares for employee share schemes, several key factors come into play:

• Gross Assets and Initial Value: The company’s gross assets and the initial value of the business are fundamental starting points. These figures help establish a baseline for what the shares are worth, especially in established companies with significant assets or revenue streams.

• Growth Prospects: For both start-ups and established companies, anticipated growth and future profitability can significantly influence share value. This is particularly relevant when structuring growth shares or options designed to reward employees for driving company performance.

• Market Value: HMRC expects companies to use a reasonable and justifiable method to determine the market value of shares at the time they are granted or options are exercised. This valuation directly impacts the tax implications for employees, including whether they pay income tax or capital gains tax, and at what rates.

The practicalities of share valuation extend beyond compliance. For employers, getting the valuation right ensures that employee share schemes deliver the intended benefits—motivating and retaining key employees, while also providing a tax-efficient way to share in the company’s success. For employees, a fair valuation can mean the difference between paying income tax at higher rates or benefiting from lower capital gains tax rates when they eventually sell their shares.

Ultimately, robust share valuation underpins the integrity and effectiveness of employee share schemes. Companies should seek professional advice to ensure their valuations are defensible, compliant, and optimised to deliver the full range of benefits these schemes can offer.

EMI Schemes: Features, Eligibility, and Advantages

Enterprise Management Incentives (EMI) schemes are widely regarded as one of the most flexible and tax-efficient employee share schemes available to UK companies. Designed to help businesses attract, retain, and incentivise top talent, EMI schemes offer a range of features and advantages that make them particularly appealing for both employers and employees.

Practical Steps for Implementing Management Shares and Employee Share Schemes

Having structured numerous share arrangements for UK companies, I’ve developed a systematic approach that minimises risk whilst maximising effectiveness:

Define each share class

Set out the rights, restrictions and obligations for each share class in the articles of association and, if needed, a shareholders’ agreement. This should include voting rights, dividend rights, rights on a sale, and leaver provisions.

Inheritance tax planning

Consider how the share structure can be used for inheritance tax planning, for example by using growth shares to pass value to the next generation without triggering immediate tax charges. Management shares and employee shares can also be used as part of succession planning to transfer ownership to family members in a tax-efficient manner.

1. Strategic Planning and Objective Setting

Before creating any management share or employee share structure, clearly articulate your objectives:

• What level of control do founders/management require?

• How much equity dilution is acceptable?

• What employee retention period justifies share ownership?

• How will the structure affect future fundraising?

• What exit scenarios must the structure accommodate?

These fundamental questions should drive your structural decisions, not the reverse.

2. Reviewing and Amending Constitutional Documents

Your articles of association must explicitly permit the creation of different share classes with the specific rights you intend to grant. This typically requires:

• Defining each share class (Ordinary A Shares, Management B Shares, Employee C Shares, etc.)

• Specifying voting rights attached to each class

• Establishing dividend rights and preferences

• Clarifying rights on a winding-up

• Setting out procedures for altering share rights

Many companies require special resolutions (75% majority) to amend articles, so plan accordingly.

3. Drafting Comprehensive Shareholders Agreements

As explored throughout this guide, a robust shareholders agreement is indispensable. Given the complexity involved, particularly when balancing management control with employee participation and investor protection, professional legal drafting is essential rather than optional.

At Zoppi & Co, we specialise in creating bespoke shareholders agreements that reflect your specific commercial arrangements whilst ensuring legal enforceability.

4. Obtaining Necessary Approvals and Authorisations

Depending on your company’s existing constitutional arrangements, you may require:

• Board resolutions authorising the creation of new share classes

• Shareholder resolutions approving articles amendments

• Specific consents from existing shareholders if their rights are affected

• HMRC approval for tax-advantaged employee share schemes

5. Completing Statutory Filings and Record-Keeping

Companies House must be notified of certain changes within prescribed timeframes:

• Forms SH01 must be filed within one month of allotting new shares.

• Filing updated articles of association.

• Filing the shareholder resolutions used to pass the decisions.

• The register of members requires updating to show all share classes and holdings.

Failure to comply with these filing obligations can result in criminal penalties for directors and potentially invalidate share issues.

6. Tax Planning and HMRC Compliance

The tax implications of management shares and employee share option plans demand careful attention. Key considerations include:

For Management Shares:

• Potential income tax charges if shares acquired below market value.

• Inheritance tax planning implications for family succession.

• Capital gains tax on future disposals.

For Employee Shares and Options:

• Gains from exercising options or receiving share awards are typically taxed as employment income, and the timing of paying tax can vary depending on the scheme.

• Income tax and National Insurance on share acquisition; some schemes allow employees to avoid paying income tax or national insurance contributions if certain conditions are met, resulting in significant tax or national insurance savings.

• Capital gains tax on subsequent disposal; gains may be taxed at a lower rate if the individual qualifies for reliefs such as entrepreneur’s relief (now Business Asset Disposal Relief).

• National insurance contributions may apply to certain gains, and employers should consider these costs.

• Substantial tax advantages available through HMRC-approved schemes (EMI, CSOP, SIP, SAYE); eligibility for some schemes depends on company size, and larger companies may need to use alternative plans.

• Corporation tax deductions for employer companies.

• It is important to plan for tax implications at the time of an exit event, such as a sale or IPO.

I strongly recommend engaging tax specialists alongside corporate lawyers to optimise your structure’s tax efficiency.

Common Pitfalls and How to Avoid Them

I’ve identified recurring mistakes that companies make with management shares and employee shares:

Failing to Plan for Dilution

Many founders underestimate how quickly their percentage ownership will diminish through fundraising rounds and employee option grants. Before implementing any share structure, model your fully diluted capitalisation table several years forward, accounting for anticipated:

• Employee option pools (typically 10-20% for growing companies)

• Future investment rounds

• Adviser and consultant shares

• Potential acquirer requirements

Inadequate Leaver Provisions

Nothing creates more shareholder disputes than poorly drafted or absent leaver provisions. Your documentation must clearly specify:

• Definitions of “good leaver” and “bad leaver” categories

• Valuation methodology for repurchasing shares

• Compulsory transfer provisions

Over-Concentration of Control

Whilst management shares serve legitimate purposes, excessive control concentration can deter investors and create inflexibility.

Inconsistent Documentation

Few things complicate fundraising or sales processes more than inconsistent share documentation. Your articles, shareholders agreement, option agreements, and board minutes must tell a coherent, consistent story about who owns what and why.

Neglecting Regular Reviews

Share structures appropriate for a startup may become problematic as companies mature. Schedule regular reviews (at least annually or following significant events) to ensure your arrangements remain fit for purpose.

The Impact of Management Shares on Fundraising and Investment

Prospective investors scrutinise share structures intensely during due diligence. Management shares can positively or negatively affect fundraising depending on how thoughtfully they’re structured.

Investor Concerns About Management Shares

Sophisticated investors typically raise several concerns about management share structures:

Entrenchment Risk – Excessive management control may prevent necessary strategic changes or block value-maximising exit opportunities. Investors want assurance that management shares won’t enable founders to reject reasonable acquisition offers.

Economic Misalignment – If management holds disproportionate control relative to economic ownership, investors worry about decisions favouring management over shareholder value maximisation.

Future Fundraising Complications – Subsequent investors may resist investing in companies where earlier management share structures limit their influence or protection.

Management Shares and Exit Events

The ultimate test of any share structure comes during exit events—whether trade sales, private equity buyouts, or public listings. Management shares can significantly influence exit dynamics.

Sale Scenarios and Drag-Along Rights

During company sales, management shares with weighted voting rights affect transaction approval requirements. Sophisticated share structures include drag-along provisions enabling majority shareholders (by value or votes) to compel minority participation in approved transactions.

However, these provisions require careful drafting when management shares are involved. Consider: Should drag-along rights be triggered by economic majority, voting majority, or some combination? What protections prevent management from blocking reasonable offers? As explored in our guide to drag-along rights, balanced provisions protect all stakeholders.

Employee Share Option Plans: Design and Implementation Best Practices

Having implemented dozens of employee share option plans for UK companies, I’ve identified several factors that distinguish successful programmes from problematic ones:

When setting exercise prices and valuing options, it is important to consider not only the market value but also the share price at the time of grant or exercise, as this directly affects the value of the option and the potential gain for the employee.

Eligibility and Allocation

Determine clear criteria for participation:

Role-Based Allocation – Senior executives receive larger grants than junior employees, reflecting their impact on company value

Performance-Based Allocation – Outstanding performers earn enhanced participation, creating meritocratic incentives

Broad-Based Participation – Some companies extend modest option grants to all employees, fostering company-wide ownership culture

Vesting Schedules and Acceleration

Standard vesting schedules span three to four years with possible cliff periods (typically 12 months) before any vesting occurs. This structure ensures employees demonstrate commitment before earning equity.

Consider including acceleration provisions for specific events:

• Single-trigger acceleration upon company sale (options immediately vest)

• Double-trigger acceleration (requiring both sale and employment termination)

• Performance-based acceleration upon achieving specified milestones

Exercise Prices and Valuation

For tax-advantaged schemes, exercise prices must reflect genuine market value at grant date. HMRC scrutinises valuations carefully, particularly for EMI schemes. I recommend obtaining professional valuations to support your pricing and ensure compliance.

Communication and Documentation

Successful employee share programmes require clear communication. Employees must understand:

• What they’ve been granted

• Vesting requirements and timelines

• Tax implications of exercise and sale

• Procedures for exercising options

• Rights and restrictions attached to shares

Provide comprehensive option agreements supplemented by plain-English guidance documents.

Conclusion: Building Robust Foundations for Long-Term Success

Management shares and employee shares represent powerful tools for structuring UK companies, but their effectiveness depends entirely on thoughtful design and professional implementation. Throughout this guide, I’ve emphasised several critical principles drawn from my extensive corporate law practice:

Professional Legal Guidance is Essential – The complexity of share structures, tax implications, and potential pitfalls makes professional legal advice indispensable rather than optional. DIY approaches inevitably create costly problems.

Comprehensive Documentation Protects Everyone – Robust shareholders agreements, properly amended articles, and detailed option agreements prevent disputes, provide certainty, and facilitate future transactions.

Balance Control with Flexibility – Management shares should protect founders’ legitimate interests without creating rigidity that prevents value-maximising decisions.

Plan for the Future – Today’s perfect structure may become tomorrow’s obstacle. Build in flexibility, review regularly, and anticipate how arrangements will function during various future scenarios.

Alignment Creates Success – The most effective share structures align interests among founders, management, employees, and investors, creating shared incentives for long-term value creation.

At Zoppi & Co, we’ve spent years helping UK companies navigate these complex waters. Whether you’re establishing your first management share structure, implementing comprehensive employee share option plans, or reviewing existing arrangements that no longer serve your needs, our corporate law team provides the specialist expertise you need.

Don’t leave your company’s future to chance with poorly structured share arrangements. Contact us today to ensure your management shares, employee shares, and shareholder agreements provide the robust legal foundation your business deserves.

Related Reading:

• Understanding Shareholders Agreement – What Is It?

• Can a Shareholders Agreement Override Articles?

• Share Purchase Agreement vs Share Transfer Agreement

• Corporate Lawyers at Zoppi & Co