Vesting in the UK

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    How do we set up vesting in the UK?

    Jonathan Lea

    The type of vesting arrangement I see in the UK is whereby the shares are issued but bought back under certain circumstances for a limited period of time, say up to 10 years when the shares fully vest. The contractual provision will state that to ensure an individual’s incentive to continue working on developing the company, his/her shares shall be subject to a repurchase right in favour of the company for a limited period of time (also called vesting). If for whatever reason the company doesn’t wish to carry out its re-purchase right, the remaining shareholders may also have a re-purchase right pro rata their ownership of the company. Depending under what circumstances the shareholder leaves the company the value of their shares may be calculated at (for example) either market/fair value or nil value.

    The re-purchase right is usually exercised in the event that a shareholder’s employment with the company is terminated. The shares vest in accordance with a table (often contained in a shareholders’ agreement). The shares will be considered fully vested (in this example) at the end of the ten year period when the re-purchase right lapses. The table will show the amount of the shares the leaver gets to keep in a leaver scenario, while the rest of the leaver’s shares are covered by the re-purchase right and must be sold back (if you include definitions of a ‘good leaver’ and a ‘bad leaver’ then this valuation may be different depending on the circumstances).

    There is normally a deadline whereby the company (or the shareholders as the case might be) must exercise the re-purchase right after the effective termination of the employment relationship. If for whatever reason neither the company nor the shareholders want to exercise the re-purchase right, the leaver shall keep their shares which remain covered by the shareholders’ agreement.

    Also, if there is an exit, merger or other liquidation event, the remaining buy-back rights fall away and all outstanding shares vest in their entirety immediately prior to such event.

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