There is little doubt huge strides have been made in recent years to encourage wider employee share ownership in Ireland, and credit is due to the current and previous governments for introducing measures to facilitate it. Legislation providing for employee share ownership trusts (ESOTs), introduced in 1997, has created the basis for employee share ownership plans in Eircom and in many semi-State companies. Meanwhile, 55 save-as-you-earn (SAYE) schemes have been approved since the legislation was introduced last year, and 355 approved profit sharing schemes (APSS), mostly in quoted companies.
However, these measures have had little impact in privately owned companies. The Irish Profit Sharing Association is concerned about this and recommends a number of specific measures to increase employee share ownership in privately held companies.
Many owners of privately held companies are reluctant to extend shares ownership to their employees. There are many reasons for this, some of which are cultural and some structural or technical. The issue of valuing shares in privately held companies is complex. For quoted companies, the share price best reflects investors' consensus as to what the future holds for those companies. Some other measure, however, has to be used for privately held companies. It is practically impossible to devise a single formula that can be applied to all companies. In theory, the value of any financial asset is a function of its future cash returns and expected rate of return.
The Revenue will consider many factors, from the nature of the business, its history from inception, to the economic outlook in general and the condition and outlook of the specific industry in particular. In practice, the value of an unquoted shareholding will, in most cases, be an approximation based on combination of four factors: earnings, dividends, assets and previous sales.
The skill of the valuer is in ascertaining the appropriate rates of capitalisation and the weighting given to each of these factors in the light of the size of the shareholding and the circumstances of the valuation. For companies that sell products or services to the public, generally primary consideration is given to the earning capacity of the business; for investment or holding companies, greatest weight tends to be given to underlying assets.
It is important to simplify this process. The Irish Profit Sharing Association is advocating a self-assessment approach, with the Revenue Commissioners accepting the company's valuations but checking any situation where extraordinary gains are made or where there appears to be a manifest discrepancy.
Once the method of valuation has been agreed, that method would be used for all future valuations, unless and until there was a material change in circumstances.
The lack of liquidity in the shares of a private company makes it difficult to sell them and existing owners are uncomfortable with the prospect of employee-owned shares being transferred out to other shareholders. This could be resolved by making it easier for companies to buy back the shares and introducing measures to make it simpler to run internal markets.
The requirement that the shares for approved schemes must be ordinary shares in the top company can also present problems, particularly where there may be property. An owner may be reluctant to give the employees an interest in the property asset, particularly as the performance of the workforce would have nothing to do with the appreciation in the value of the property. The use of shares in subsidiary companies would overcome this.
The prospect of giving voting rights to or sharing information with employees can also be a major disincentive for owners of private companies. This could be mitigated, for example, by using a trustee, bound by a confidentiality agreement, to act on behalf of the employee shareholders.
Also, the cost of implementing and administering schemes is high. One way of mitigating this cost might be to introduce "umbrella schemes" for groups of companies that want to set up schemes. These could be set up by professional advisers or trade and industry associations and would involve a joint trustee, standard rules, shared administration, etc.
Finally, the Irish Profit Sharing Association is proposing that a specific relief be introduced to encourage owners of privately held companies to sell or transfer shares to employees. This would be a capital gains tax roll-over relief on disposal, where the shares are sold to the trustee of an approved ESOT or APSS. Maoiliosa O Culachain is chairman of the IPSA and ESOP manager at Eircom.
