Getting in is easy. But are you sure you know how you are getting out?

October 24, 2019

The recent changes proposed by the FCA due to the Woodford Investments situation should be an important reminder to private companies as well as listed ones

Recently, the FCA advised that it would finally be going ahead with a rule change that it proposed last October. Under this change of rules, a new investment category of ‘funds investing in inherently illiquid assets’ (FIIA) will be created. Funds that fall into this category will be subject to additional requirements, including increased disclosure of how liquidity is managed.

Whilst these changes will not come into effect until 30 September 2020, it is worth considering whether your business – and in particular any privately held, owner led businesses – would fall into this definition of a FIIA (despite being unlisted).

Without doubt, long term incentive plans (“LTIPs”) are important in all companies and businesses as a tool to assist with both long term retention and productivity. Studies undertaken into this area show that the mere act of having some form of LTIP increases retention by about 1/3rd.

However, it is the prospect of a meaningful pay out under an LTIP which can be the motivating factor for many executives and employees.

Unfortunately, over the past few years, we have seen many LTIPs which are ultimately ineffectual because there is no practical and cost effective way for payments to be made – the most typical example of this is where a private company issues shares but there is no subsequent sale of the business to third parties. The individual is left holding a share which will not have any value unless the existing shareholders (directly or via the company or an EBT) purchase the shares – methods which may not be popular due to the increased costs involved.

Should you consider that your LTIP might have fallen into this category, there are incentive structures that could still deliver your key commercial aims.

For further information or to discuss any questions you may have, please contact Stuart James.

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