Republic of Belarus: business will have the right to grant shares to its employees
From April 28, 2021, Belarusian business will be provided with the right to sell shares to its employees or transfer shares free of charge.
Such a right gives an opportunity to use employee stock options in Belarus, which are widely used in world practice.
For reference: employee stock options are usually used for the additional motivation of key employees (such as top management and the strongest employees who perform the main functions). The employees are given the opportunity to receive company shares subject to certain conditions (for example, upon achievement of KPIs, or after a certain period of employment with the company). Such an opportunity encourages employees to more actively participate in the development of the company, which contributes to the growth of its capitalization and also increases employee loyalty.
The High Technologies Park of the Republic of Belarus experience
For the first time, the right to enter into option agreements was granted in 2018 to residents of the High Technologies Park of the Republic of Belarus (HTP). The residents of HTP has a right to conclude option agreements with other residents of HTP or with third parties; however, it was not explicitly explained whether an HTP resident could conclude option agreements with its employees. In practice, such option agreements were most often used in M&A transactions.
The significance of this amendment is that it, firstly, apply to all companies registered in the Republic of Belarus (not only to HTP residents) and, secondly, explicitly stipulate the possibility to transfer shares to employees.
In order for an employee to receive shares, the business must follow several steps:
Step 1: Determine to whom shares will be transferred.
In accordance with the law, shares can be transferred not only to an employee of the company but also to a member of the board of directors (the latter is not required to be an employee of the company).
Step 2: Determine whether the employee will have to pay for shares.
The company can sell shares to the employee (i.e., the employee will have to pay money in order to receive shares) or transfer it free of charge (the employee receives shares for free).
Step 3: Make changes to articles of association.
Before transferring shares, the company must amend its articles of association – it must be fixed in the articles of association that the company has such right to transfer (sell) shares to its employees.
Step 4: “Reservation” of shares.
The company can transfer only shares that belong to the company itself (are “reserved” on the balance sheet of the company).
Usually, all shares are distributed among shareholders, so shareholders should sell part of their shares to the company to have shares on the balance sheet. By agreement between shareholders, they can each sell an equal number of shares, so the ratio of ownership will not be changed, or not equal – in this case, shares are “reserved” by reducing shares of only one or more shareholders, “without prejudice” to the others.
For reference: The company can hold shares for no longer than 1 year. After 1 year, the company has to either 1) distribute such shares among all shareholders or sell shares subject to the pre-emptive right, or 2) if it was decided to transfer (sell) shares to the employee, transfer (sell) such shares to the employee.
Step 5. Making a decision on the transfer of shares.
In world practice, employee stock options assume that the transfer of shares will be subject to certain conditions. Under the current law, such a connection between the actions of the employee and the emergence of his/her right to demand the transfer of shares is established only in relation to state-owned companies. In such companies, the transfer of shares may be exercised free of charge only on the condition of achievement of the company’s performance indicators upon expiration of the established terms. For private businesses, the law regulates only the process of making a decision on the transfer of shares, and the criteria for its implementation are not regulated.
The decision on the transfer of shares must be taken unanimously by shareholders (if at least one person votes against it, shares cannot be transferred).
It is important to understand that when the employee receives shares, this automatically grants the employee certain rights of a shareholder, such as the right to vote and receive dividends. These rights can be limited by amending the articles of association and by entering into a shareholders’ agreement, but it is impossible to completely deprive a shareholder of these rights.