Overview on Employee Stock Ownership Plans (ESOPs)

16 Mar 2022

The Employee Stock Ownership Plan (ESOP) is a corporate strategy where the employees will have the opportunity to obtain interest under the form of stock or ownership in the company. This strategy motivates the employees’ work and is a win-win relation because the higher the entity’s performance, the higher the value of their individual recompenses. According to UAE Federal Law Number 2 of 2015 on Commercial Companies (CCL), the UAE Companies can with a special resolution approved by their general assembly, raise their share capital to implement an ESOP for UAE-based employees. The CCL does not allow to participate in ESOP the company’s directors; it is only for the company’s employees. Additionally, the existing shareholders of a public joint-stock company do not have preemption rights regarding shares dispensed in line with an ESOP. The Commercial Companies Legislation lays down that Emirate Securities and Commodities Authority (ESCA) will provide a resolution on the mechanism and conditions of implementation of ESOPs. The regulation of the ESOPs depends on the company; there are mainland companies and free zones companies in UAE

Mainland Companies

A mainland company is an onshore company registered by the Department of Economic Development (DED) of the related Emirate. This type of company is authorized to trade in the UAE local market and outside UAE. Concerning the Employee Stock Ownership Plans in mainland companies, the Federal Law Number 2 of 2015 (CCL) lays down existing shareholders’ preemption rights. Furthermore, according to ESCA’s requirements, shares issued under an ESOP must not surpass 10% of the company’s share capital increase. As per ESCA, the ESOP must specify:

  • The circumstances and procedures for implementing the ESOP.
  • The quantity of ESOP shares.
  • The accepted price when obtaining the shares.
  • The determination of the employees benefiting from the ESOP.
  • The consequences of such employees leaving their employment, whether by dismissal or resignation.

Free zone companies

A free zone company is a company formed in a unique jurisdiction that comes under a particular Emirate. It has its regulations and a regulatory body that is the Free Zone Authority; because of that, it is effortless to implement the ESOPs in the free zones, there is not a mandatory scheme to adopt for applying the ESOPS, each company could design these plans according to their preferences. There are approximately 40 free zones in UAE, such as the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM). We will focus our attention on the ADGM regulations about the Employee Stock Ownership Plans (ESOPs). According to Companies regulations, 2015 of the Abu Dhabi Global Market, article 525 lays down an exception to preemption right in employee’s share schemes where the existing shareholders' right of preemption does not apply to the allocation of equity securities that would, apart from any renunciation or assignment of the right to their allowance, be detained under or selected or transferred under an employees’ share scheme. As per article 633 of the Companies resolution 2015, under an employee’s share scheme, the company can make an off-market purchase, but the company’s resolution must first authorize the purchase. The authority shall stipulate the maximum number of shares approved to be acquired and determine the highest and lowest prices that may be paid for the shares. In the case of registration of resolution and supporting documents for the purchase of own shares for the purposes of or under an ESOP, the company must approach the capital market lawyers for legal services and the following documents should be sent to the Registrar

  • A copy of the solvency statement.
  • A copy of the resolution.
  • The amount paid and unpaid on each share.
  • A statement of capital with the total number of shares of the company, the aggregate issue price of those shares, and for each class of shares:
  1. Prescribed particular of the rights attached to the shares
  2. The total number of shares of that class
  3. The aggregate issue price of shares of that class.

The Registrar shall register the documents delivered to him, and the resolution will take effect with the registration. After the resolution proceeds, the company shall also deliver to the Registrar a statement by the director confirming that the solvency statement was produced not more than 15 days before the date on which the resolution was approved and provided to members the written resolution. Nevertheless, if the entity delivers to the Registrar a solvency statement that was not provided to members, a contravention of the company’s regulation 2015 is committed by every officer of the company who is in default and there is a fine. Article 663 open the possibility by any member and creditor of the company to applicate to the Court to cancel the resolution, but the application shall be made within giving (5) weeks after the passing of the resolution and maybe complete on behalf of the persons allowed to produce it by such one or more of their number as they can designate in writing for the purpose. Article 1021 of the same regulation stated that ESOPS has the main objective of encouraging and enabling the holding of shares or debentures of a company by or for the benefits of:

  • The employees or former employees of the entity, any subsidiary of the company or the company’s holding company or any subsidiary
  • The spouses, living spouses or children or step-children or such employees or former employees.