How to Establish an ESOP in Kenya

An employee share ownership plan, abbreviated as an ESOP is an incentive offered by companies, both private and public to their employees allowing them to own shares in the company at a price that is lower than the market value of the shares. An ESOP allows the employees to take part in the ownership and the decision making of the company.

Regulations guiding the formation of an ESOP

An ESOP for a company that is not listed does not require approvals from any regulatory agency. For a company that is listed, on the other hand, they have to get approval from the Capital Markets Authority (CMA) under the Capital Markets (Collective Investment Scheme) Regulations of 2001 that govern the establishment of an ESOP by a listed company.

A listed company must seek approval from the Capital Markets Authority (CMA) before establishing an ESOP and they must upon the formation of the ESOP register with CMA. ESOPs for listed companies are structured as unit trusts.

The Capital Markets (Collective Investment Schemes) Regulation requires that ESOPs established by listed companies disclose the options granted to the employees under the ESOP. Together with this, they must also disclose the total value of the ESOP in the annual report including the shares and the number of units created and issued.

Management of an ESOP

The management of an ESOP is done by trustees who are appointed under the Trust Deed. In a typical ESOP the trustees are employees except in situations where a corporate trustee is appointed. The trustees with guidance of the Trust Deeds and the Rules may increase the shares held under the ESOP. For a listed company, there should be at least 3 trustees but a corporate trustee can act as the sole trustee.

The certificates representing the units that are owned by employees are not transferable but can be pledged or repurchased by the trustees for cash as an option by the unit holder.

Contents of the Trust Deeds and the Rules

The Trust Deed and the Rules are the constitutive documents in all the management aspects of an ESOP. The trust deed should contain the following details:

  1. Procedure for appointing and removal of the trustees.
  2. Procedure for the creation and the issuance of the units.
  3. Pricing and the valuation of units.
  4. Procedure for the repurchase of units from employees.
  5. Procedure of income distribution.
  6. Procedure of the appointment of unit holders’ entitlement in dividends.
  7. Procedure of the rights and the capitalization issues.
  8. Restrictions and the liability of the trustees.
  9. Register of the unit holders.

What happens in the case of termination of employment?

The procedure of the exit of employees from an ESOP upon termination of their employment is prescribed by the Trust Deed and the Rules. The procedure for each case may be different depending on the circumstances of the termination of employment.

For a listed company, the exit procedure is guided by the Capital Markets (Collective Investment Schemes) Regulations. Upon termination, an employee is to surrender all the certificates representing the units held to the trustees. The trustees, based on the choice of the exiting employee will either transfer the units to an eligible employee or re-purchase the surrendered units.