Company law amended to boost direct employee ownership

The Government has amended company law in an attempt to increase the number of firms offering direct employee ownership schemes.

UK employee owned companies have a turnover of £30bn a year and employ more than 130,000 people. Ministers say these firms are more productive, profitable and more resilient to economic shocks than other businesses.

The new rules mean that a company with employee ownership that issues shares directly to its employees will find it easier to buy back those shares when an employee leaves. It will then be able to reissue those shares when new employees join.

The changes will reduce the administrative burden of share buybacks and enable companies to avoid situations where they become owned predominantly by former employees and others outside the company.

Employment Relations Minister Jo Swinson said: “Evidence shows that employee owned companies can be more profitable, create more jobs and were more resilient during the economic downturn. We are committed to making direct employee ownership more attractive, cutting red tape for companies, and promoting new and more responsible ways of running a business.”

It’s hoped the changes will bring employee ownership to the attention of a wider audience.

Ministers say employee ownership in this context involves the employees of a company having a significant and meaningful stake in that company. To be meaningful, the employees’ stake should go beyond mere financial participation and underpin organisational structures that ensure employee engagement.

Employee ownership can take one of three forms:

• direct employee ownership – employees become individual owners of shares in their company
• indirect employee ownership – shares are held collectively on behalf of employees, normally through a benefit trust
• combined direct and indirect ownership – a combination of individual and collective share ownership.

The measures to improve the system have been introduced through changes to the Companies Act 2006. They impose no additional costs on businesses, but should offer more flexibility and choice.

Please contact Jon Alvarez if you would like more information about the issues raised in this article.