A contract by which a company sells new shares to an employee or a consultant, which will then vest over time or upon achieving certain goals. The company will have the right to buy back the unvested shares at the original purchase price and may have the right to buy back the vested shares at fair value if the purchaser leaves your service.
When drafting a Share Vesting Agreement, it is important for you to focus on the following:
• Number and type of shares to be sold;
• Total purchase price of the shares;
• When the sale will take place (i.e. the completion date);
• Relationship between the purchaser and the company (or the group);
• Whether all or only part of the shares are subject to vesting;
• Vesting schedule: whether the shares will vest over time or upon achieving certain goals;
• Length of exercise period for the repurchase option;
• Whether the company will have a call option for the vested shares;
• Length of exercise period for the call option.
Share vesting means the company sells new shares to the purchaser up front, subject to the company's right to buy them back (such a right is called the “repurchase option”). This mechanism is commonly known as "reverse vesting", as opposed to the grant of option to buy shares on a future date under a Share Option Plan, which is known as "forward vesting".
In the Dragon Law app, you may choose whether the repurchase option will extinguish over time or upon fulfilment of certain conditions. The release of shares from the repurchase option is called “vesting”, and the shares that are released are referred to as "vested shares".
When the purchaser leaves the service of the group, the company may exercise the repurchase option over the “unvested shares” to buy them back at the original purchase price. In the Dragon Law app, you may also choose to let the company have a “call option” that gives the right to the company to buy back the “vested shares” at fair value.
In order to facilitate the company’s exercise of the buyback right, Share Certificates of the shares sold are kept by the company secretary in escrow, and the purchaser is required to execute a separate document called a Share Power to authorise the company secretary to take all necessary actions on the purchaser’s behalf when the company exercises its repurchase rights under the Share Vesting Agreement.
Step 1: Check your constitutional document.
Check if the constitutional document of your company restricts buyback of its own shares. If this is the case, consider alternative ways to reward your team (for example by giving options under a Share Option Plan).
Step 2: Create and execute a Share Vesting Agreement on the Dragon Law app.
Step 3: Complete the sale.
On the “completion date” set in the Share Vesting Agreement:
(i) the purchaser will pay the purchase price to the company;
(ii) the company will issue new shares to the purchaser by entering the name of the purchaser in the register of members;
(iii) if there is any Shareholders’ Agreement in place, the purchaser needs to adhere to its terms by signing a Deed of Adherence;
(iv) the Share Certificates for the shares should be sent to the company secretary to hold in escrow. The numbers of the Share Certificates and the number of shares covered by each certificate should match the vesting schedule; and
(v) the purchaser will execute the Share Power as a deed and deliver it to the company secretary.
Step 4: Vest the shares
When shares are vested according to the vesting schedule, the company secretary will release the relevant Share Certificate to the purchaser in respect of that portion of shares.
If and when the company exercises the repurchase option, the company will pay the repurchase price, which is the same as the original purchase price under the Share Vesting Agreement, or the purchase price may be set off against any sums that the purchaser owes the company at that time.
Buying back a company’s own shares is subject to various provisions of local legislation. You should check the following, or if in doubt, consult your company secretary:
- what the procedures are that apply to share buyback (there could be different procedures depending on, for example, whether the repurchase price is paid out of the profits or capital of the company);
- whether a company is allowed to hold its own shares after buying them back; and
- whether stamp duty will apply and, if so, the rates that apply.
You should note that, under the Share Vesting Agreement you create on the Dragon Law app, the repurchase option is deemed to be automatically exercised at the end of the exercise period unless the company informs the purchaser that it does not intend to exercise such a right.
If and when the company exercises the call option, the company will pay the repurchase price, which is equivalent to the fair value of each share. Under the Share Vesting Agreement you create on the Dragon Law app, fair value is determined by the auditors of the company (or an independent firm of accountants).
As an alternative to buying back the shares, the company may choose to convert the purchaser’s shares into non-voting shares, but to do this you will need to first create a non-voting class of shares before the conversion takes place.