Opinion: Glencore IPO will put employee benefits law to the fore

The forthcoming Glencore IPO has made lots of headlines of a very positive nature.

David Cohen
David Cohen

Most noteworthy of all is the fact that this is the most valuable employee-owned company in the history of capitalism, even beating Goldman Sachs. While the ­flotation will make billionaires of a ­handful of senior executives, the rewards of employee ownership will also be enjoyed by 500 long-serving staff.

Providing share incentives for employees should be a priority for every company ­eyeing an IPO. This will be expected not just by the employees themselves, but also by ­institutional investors, who know that it makes sound business sense to engender feelings of ownership among the workers.

General ­corporate or even tax lawyers cannot ­realistically hope to master the ­ever-growing forest of legislation that focuses on employee share ownership – 59 pages of changes are still wending their way through Parliament en route for the 2011 Finance Act. The different potential ­outcomes for employee shareholders are startling: a tax rate at best of no more than 10 per cent, at worst in excess of 75 per cent. Keeping on top of these changes effectively requires a ­specialist approach.

The key aim of this legislative ­hyperactivity is, of course, to curb tax avoidance. With a top income tax rate of 50 per cent, every attempt to obtain an employee benefit that will be taxable as capital rather than income is bound to be scrutinised with a jaundiced eye by HMRC. At the same time there is enduring goodwill towards employee share ­ownership across the political spectrum.

To tap into this goodwill, advisers need to help their floating clients to make the most of the ’approved’ employee share schemes that provide preferential tax treatment. Putting in these plans while a company is still private will avoid the ­costly measure of convening a shareholder meeting to seek approval for any new share plan.

Early planning will pay dividends. Rolling out shares even a few months before an IPO can be a good deal more advantageous than simply allowing employees to purchase shares on the IPO. Shares offered pre-IPO will usually be cheaper and the tax treatment should be more benign.

Apart from teeing up the optimum tax structures, employee incentive lawyers will also need to advise the newly listed client on how to comply with best practice in relation to the timing and disclosure of share dealings by directors and other ­senior executives discharging managerial responsibilities.

Advice will also be given on the ­guidelines for employee share schemes laid down by the Association of British Insurers and other institutional investors. A key demand of such investors is that share awards to senior associates should be subject to the achievement of ­appropriately challenging performance conditions.

These conditions will ­generally be devised by specialist ­remuneration ­consultants, but ­responsibility for drafting should be the province of the lawyers. The aim – not always achieved – is to ensure that at the end of the performance period there is no possible room for debate as to whether or not the target has been achieved.

It will be surprising if headlines such as CityAM’s ’Glencore five worth $23bn’ do not cause at least a short-term uptick in the number of graduates attracted to the world of commodity trading. Perhaps, less dramatically, it will encourage some young lawyers with a basic interest in both ­corporate and tax law to look for a ­synthesis of the two by specialising in employee ­incentives/benefits.

David Cohen is advising Glencore on the UK tax aspects of its upcoming IPO