Share Option and Share Incentive Schemes

Schedule 8 – in the House of Commons at 12:00 am on 10th July 1973.

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Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford 12:00 am, 10th July 1973

I beg to move Amendment No. 17, in page 52, line 19, leave out from 'allow' to 'to' in line 21 and insert: 'every full-time employee of the company concerned who—

  1. (a) has been a full-time employee of that company for a continuous period of not less than five years; and
  2. (b) is chargeable to tax in respect of his employment under Case I of Schedule E; and
  3. (c) is not less than twenty-five years old.'.

Photo of Miss Betty Harvie Anderson Miss Betty Harvie Anderson , Renfrewshire East

With this we can also discuss Government Amendment Nos, 25, 26 and 27.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

I apologise to the House, because when we took the earlier paving amendment I had misremembered. I thought that it was a paving amendment to this group when it was a paving amendment to another group.

This group of amendments deals with the question of the conditions of membership of, in one case, a profit-sharing scheme which will be exempted from the share incentive legislation, and, in the other, the share savings scheme introduced under this legislation for the profit-sharing scheme.

We now propose that it should be available to full-time employees with continuous service of not less than five years, that it be chargeable to tax in respect of his employment under Case I of Schedule E—I think it is a better test than United Kingdom residence—and that he should be not less than 25 years old. This is to meet criticisms of my hon. Friends. Any profit-sharing scheme that complies with these tests would be a genuine profit-sharing scheme to which we seek to confine the exemption.

The other three amendments are concerned with the minimum entitlement for membership of an employee share-saving scheme. Here again, it is United Kingdom employees chargeable under Case I of Schedule E, the minimum age of 25, and five years' service. I stress that this in no way excludes any company producing such a scheme from making eligible for membership employees with fewer years service or with a lower age, or who are serving overseas, if it wishes. It is merely that the scheme must, at any rate, have the minimum entitlement of these categories to qualify for approval.

Photo of Mr Tam Dalyell Mr Tam Dalyell , West Lothian

At this time of night I simply acknowledge the points the right hon. Gentleman has made.

Amendment agreed to.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

I beg to move Amendment No. 18, in page 52, line 36 [Schedule 8], after 'if', insert '(a)'.

Photo of Miss Betty Harvie Anderson Miss Betty Harvie Anderson , Renfrewshire East

With this we can also discuss Government Amendments Nos. 20 and 22.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

This group of amendments is intended to modify paragraph 4 of Schedule 8 to reflect undertakings I gave in Committee about the drafting. There were two points that had become confused in the drafting by compression into one paragraph. We have separated them. One deals with restrictions on shares and the other with the so-called Stock Exchange companies, which are controlled by employees. I will be happy to answer any questions that hon. Members may have.

Photo of Mr William Clark Mr William Clark , East Surrey

I wish to speak to Amendment No. 22. Paragraph (a) deals with the deposit of the shares with trustees as security for a loan repayable not later than seven years after … acquisition … I believe that a period of seven years is far too short for this purpose. I refer particularly to loans of over seven years.

I do not understand why my right hon. Friend believes that a loan of shares in a share option scheme should be restricted to only seven years. One is entitled to invest four times one's annual salary in a share option scheme. If somebody is earning, £2,000, then four times the annual salary comes to £8,000. If the employee has to repay that in seven years, he must pay out of his £2,000 a year earnings over that period a figure of £1,143.

I tabled an amendment, which was not selected by the Chair, suggesting that the period should be 20 years rather than seven years. I do not mind whether the period is 20 or even 14 years, but I certainly regard a period of seven years as a nonsense. I do not think the Government should expect employers who enter such schemes to pay over £1,100 out of gross salary. Therefore, I hope my right hon. Friend will look at the matter again to see whether the period of seven years can be extended. I regard seven years as an arithmetical nonsense.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

With the leave of the House, perhaps I may reply briefly to my hon. Friend the Member for Surrey, East (Mr. William Clark). It was always the Government's intention to let out from the requirements of approval any employee who acquires shares on normal terms. With regard to the extended definition of restrictions, provided an employer grants a loan to an employee to buy shares and hold the shares as security on repayment of the loan, that restriction would bring the transaction within the legislation with all the consequences that would apply.

1.0 a.m.

It was argued that this was unreasonable and that a mere loan to buy shares with none of the other features of a stock option or a share incentive scheme was not such that it should be brought within this legislation. That was accepted. But it would be highly anomalous if we imposed the seven-year rule for the removal of "clogs" under an approved share incentive scheme while allowing a very much longer period to operate for the exemption on a normal purchase. That is why we have included a provision that the loan should be paid off within seven years if the transaction is to have the benefit of the normal term's exemption.

My hon. Friend asked where was the sense in having that rule if under an approved scheme a man was entitled to have shares up to the value of 4 years of his regular emoluments. The answer is that under an approved scheme it is only a maximum. No one is bound to go up to the maximum. Clearly the amount of stock option or share incentive shares that an executive will take, if he has to do it through a loan, will bear some reference to the amount, availability and terms of any loan that he may get from his employer. Furthermore, it is recognised that in many cases employees who take the maximum will do so knowing that when the time comes and they become full shareholders they will be able to dispose of part of their holdings to pay off the loan on the balance.

If we were now to extend the normal term's exemption beyond the 7-year period we should create anomalies which it would be very difficult to justify. While I shall look again at what my hon. Friend says, I hold out no hope that we shall be able to meet his argument.

Photo of Mr William Clark Mr William Clark , East Surrey

Before my right hon. Friend sits down, why is seven years sacrosanct? What difference does it make if a person is entitled to invest four times his annual salary, which, on my example, means that he has to pay £1,143 out of £2,000 a year? Why do we say that he can have four times his salary? Why not twice his salary? It is illogical for the Government to say that we are having a share incentive scheme with four times the salary if, on a 7-year repayment basis, no one can possibly take advantage of it. It is so much window dressing. Would not it be better if we set it at twice the salary?

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

With respect, my hon. Friend is wrong. If the scheme is an approved scheme the normal term's exemption does not apply. Under the approved scheme and the legislation that this House accepted last year, it was recognised that it was desirable that all the "clogs" should be removed by the end of seven years and that this was a reasonable time limit on the maturity of an option or an incentive arrangement. Therefore we put in seven years.

We are now extending the exemption for the normal term's purchase arrangements and, furthermore, not treating as a "clog" a case where the shares are held by trustees as security for the loan and no more—a bare loan to the employee to buy the shares but the trustees or some- one holding the shares simply as security for the repayment of the loan.

In the circumstances, it is not unreasonable to have regard to the same sort of term. Twenty years may be all right when paying off a loan on a house or some major purchase of that kind. But for the purchase of shares out of income, I think that a seven-year period is a reasonable period of a loan.

As I said, it would create anomalies as between the normal purchase arrangement, if it had exemption for a very much longer period, and the approved scheme where all the "clogs" have to be paid off within seven years. While I see my hon. Friend's point, I do not think that it is a very good one, and while I shall look at what he said, I do not hold out any hope of being able to meet it.

Photo of Mr William Clark Mr William Clark , East Surrey

Again before my right hon. Friend sits down, there will be two different types of employees—

Photo of Miss Betty Harvie Anderson Miss Betty Harvie Anderson , Renfrewshire East

Order. I understood the Chief Secretary to have sat down. We are not in Committee.

Amendment agreed to.

Amendments made: No. 19, in page 52, line 37, leave out from beginning to end of line 15 on page 53 and insert: (c) the acquisition was an acquisition of shares and either of the following conditions was satisfied immediately after the acquisition, namely

  1. (i) that the shares were not subject to such restrictions as are specified in subsection (2A) below, and were not exchangeable for shares subject to such restrictions, and the majority of the available shares of the same class was acquired otherwise than as mentioned in subsection (1) above; or
  2. (ii) that the shares were not subject to such restrictions as are specified in paragraph (a) or (b) of subsection (2A) below, and were not exchangeable for shares subject to such restrictions, and the majority of the available shares of the same class were acquired by persons who were or had been employees or directors of, or of a body controlled by, the body in which they were shares and who were together able as holders of the shares to control that body.

For the purposes of this paragraph shares in a body are available shares if they are not held by or for the benefit of an associated company of that body; and shares are exchangeable for other shares if (whether by one transaction or a series of transactions) they can be exchanged for or converted into the other shares"; and (b) the following were inserted after subsection (2):—(2A) The restrictions referred to in subsection (2) above are—

  1. (a) restrictions not attaching to all shares of the same class; or
  2. (b) restrictions ceasing or liable to cease at some time after the acquisition; or
  3. (c) restrictions depending on the shares being or ceasing to be held by directors or employees of any body corporate (other than such restrictions imposed by a company's articles of association as require shares to be disposed of on ceasing to be so held): "and

(c) in subsection (6)(c) for the words from any restriction "to" class "there were substituted the words" such restrictions as are specified in subsection (2R) above.".'.

No. 20, in page 53, line 15, at end insert—

'(2) Subsection (4) of the principal section shall not apply, and shall be deemed never to have applied, to an acquisition of shares made before 23rd March 1973 if the condition specified in sub-paragraph (ii) of subsection (2)(c) (as substituted by sub-paragraph (1) of this paragraph) was satisfied immediately after the acquisition'.—[Mr. Patrick Jenkin.]

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

I beg to move Amendment No. 21, in page 53, leave out lines 17 to 22 and insert: '5. Subject to paragraph 6A below, in determining for the purposes of the principal section, the principal Schedule and this Schedule (including any valuation made for those purposes)'. Paragraph 5 of Schedule 8 defines what is to be regarded as a "restriction attaching to shares". The amendment provides that such "deemed" restrictions shall be taken into account in valuing the shares. This seems a necessary improvement. I hope that the House will accept it.

Amendment agreed to.

Amendment made: No. 22, in page 53, line 47, at end insert: '6A. For the purposes of subsection (2)(c) of the principal section, shares acquired by any person shall not, by virtue of paragraph 5 above, be regarded as subject to any restriction by reason only of any contract, agreement, arrangement or condition providing for either or both of the following, that is to say—

  1. (a) the deposit of the shares with trustees as security for a loan repayable not later than seven years after the acquisition nor later than the time when that person ceases to hold the office or employment by virtue of which he obtained the right or was given the opportunity to acquire the shares; and
  2. (b) the disposal of the shares, when that person ceases to hold that office or employment, to a person nominated in accordance with the contract, agreement, arrangement or conditions;

if, in the case of sub-paragraph (a) above, he acquired the shares at market value and, in the case of sub-paragraph (b) above, he is required to dispose of them at a price not exceeding their market value'.—[Mr. Patrick Jenkin.]

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

I beg to move Amendment No. 23, in page 54, line 9, at end insert:

Minimum price of shares 8. In paragraph 5 of Part IV of the principal Schedule the words from "and where part of the price" to the end of sub-paragraph (1) and, in sub-paragraph (2)(b), the words "and that price" and the words from "both" to "thereof and" shall be omitted'.

Photo of Miss Betty Harvie Anderson Miss Betty Harvie Anderson , Renfrewshire East

With this amendment it will be convenient to take Amendment No. 34.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

This amendment is inserted to correct the Bill. The effect would be that the acquisition price of a partly-paid share acquired under an approvable share incentive scheme would be treated as equal to the price of a share fully paid on acquisition.

We are meeting the demand, pressed very heavily upon us both on Second Reading and in Committee, to get rid of what is called the reverse discounting. Where part of the price of a share is postponed, the accounting rule would require a discounting for the right to delay the payment of the balance of the purchase price. Representations were made to us—not only by my hon. Friends but by a number of representative bodies outside—that this imposed a severe disincentive on the adoption of incentive schemes. On reflection, it seemed best to abandon this concept, with the result that the full discount will be available for share incentive schemes without having to operate the reverse discount for the delay of the balance of the purchase price.

Photo of Mr Tam Dalyell Mr Tam Dalyell , West Lothian

May I ask which bodies outside particularly pressed this point?

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

With the leave of the House—certainly the CBI, the chambers of commerce and other bodies that have taken an interest in the legislation made this point very strongly to us both last year and this year.

Photo of Hon. Nicholas Ridley Hon. Nicholas Ridley , Cirencester and Tewkesbury

I thank the Government for having made these concessions on Schedule 8. It is very satisfying, when good points are made in Committee, that the Government try to accommodate them. I have noticed that there is general acclamation outside the House for this group of amendments. Therefore, it is right that we should thank by right hon. Friend the Chief Secretary for taking this action.

There is one point about which I have heard nothing from my right hon. Friend. My hon. Friend the Member for Surrey, East (Mr. William Clark) made some fairly powerful inroads on the question of the way in which the accounting is to be done in the balance sheets of companies entering into such transactions. I know that this is not the moment to expect an answer, but I hope that the Chief Secretary will bear it in mind and perhaps issue some guidance. I thought that my hon. Friend was very convincing on this point, and it would be nice to feel that the companies will not be left in confusion if they enter into some of these transactions.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

With the leave of the House, I will respond to that point. I think my hon. Friend recognises that this is not the moment to go into this matter in detail. I have written to my hon. Friend the Member for Surrey, East (Mr. William Clark) and I will write to my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) giving him the same information.

I shall consider whether it would be appropriate for the Inland Revenue to issue some form of guidance, but I think that this is probably more a matter for the accountancy bodies than for the Inland Revenue.

Photo of Mr William Clark Mr William Clark , East Surrey

May I make it clear that I do not agree with the last letter that my right hon. Friend wrote to me.

Amendment agreed to.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

I beg to move Amendment No. 24, in page 54, line 14, after 'which', insert 'directors or'.

Photo of Miss Betty Harvie Anderson Miss Betty Harvie Anderson , Renfrewshire East

With this we are to take Amendments Nos. 30 and 31

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

The effect of the amendments is to enable directors to partici- pate in savings-related share incentive schemes—that is to say schemes for the generality of employees—but it is made clear in the Bill that if they do they will not be eligible to participate in any executive-type share incentive scheme. They are mutually exclusive.

There seems no reason why, because a company may not have introduced an executive scheme, directors should not participate in a scheme available for the generality of employees in the company.

Amendment agreed to.

Amendments made: No. 25, in page 54, line 26, after ' company insert: 'who is chargeable to tax in respect of his employment under Case I of Schedule E'.No. 26, in page 54, line 27, leave out 'eighteen' and insert 'twenty-five'.No. 27, in page 54, line 29, leave out 'two' and insert 'five'.No. 28, in page 54, line 33, leave out 'disregarded' and insert 'treated'.No. 29, in page 54, line 34, at end insert:'as issued otherwise than under a scheme approved under that Schedule'.No. 30, in page 55, line 25, leave out 'his employer' and insert:'the company of which he is a director or employee'.No. 31, in page 55, line 40, after second 'the', insert 'director or'.—[Mr. Patrick Jerkin.]

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

I beg to move Amendment No. 32, in page 55, line 45, at end insert: 'and to which Part III of this Schedule does not apply'.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

Amendment No. 32 is consequential upon the amendment to allow a director to participate simultaneously in a savings-related share incentive scheme and a savings-related share option scheme. It excludes a director who is a member of an executive-type share option or share incentive scheme.

Amendment No. 33 is a major new addition to the Bill and extends the SAYE share savings scheme to include share option schemes. The case for doing this was pressed hard in Committee, notably by my hon. Friend the Member for Dartford (Mr. Trew) who felt that there was a much greater chance of companies being prepared to introduce SAYE share savings schemes if we could extend them to option schemes and not have them only for share incentive schemes.

We undertook to look at that argument and I think that in these amendments we have devised a scheme that will allow companies to introduce their SAYE employee share saving schemes in the form of option schemes rather than in the form of the more traditional share incentive schemes.

Photo of Mr Tam Dalyell Mr Tam Dalyell , West Lothian

Can the right hon. Gentleman remind us of the cost to public funds of doing this?

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

We have said all along that it is impossible to quantify the cost to public funds because it is impossible to estimate the extent to which these schemes will be taken up. I think that there is a greater probability of the SAYE schemes being adopted if they include option schemes as well as the sort for which the Bill originally made provision.

Photo of Mr Peter Trew Mr Peter Trew , Dartford

As my right hon. Friend was kind enough to refer to me, may I express my appreciation of the Government's having made it possible to extend share option schemes to shop floor schemes? This, coupled with the ending of the discounting penalty, will increase the flexibility and value of these schemes.

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Photo of Dr John Gilbert Dr John Gilbert , Dudley

Since this is the last opportunity to say anything about the amendments to Schedule 8, I would not want to disappoint hon. Members opposite by letting it be thought that the attitude of this party to share option and incentive schemes has changed in the last few weeks, although we have kept silent on this series of amendments.

One of the reasons that the Chief Secretary found it difficult to answer the question of my hon. Friend the Member for West Lothian (Mr. Dalyell) about the cost to the Exchequer is that not only is it difficult to know how many companies will set up such schemes: it is also difficult to know how many will have to dismantle them as soon as we form the Government.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

It is important to know whether the Labour Party will pledge itself to abolish the employee savings-related schemes. It has made its position clear on the option and incentive schemes, but does this position extend to schemes available to the generality of employees and to shop floor schemes? We have read with interest its proposals for compulsory employee participation, which it envisages will, in 50 years, involve employees owning all the companies for which they work. That scheme requires more working out, but it would be interesting to know whether the Labour Party proposes to repeal the legislation in the Bill.

Amendment agreed to.

Amendment made: No. 33, in page 55, line 48, at end insert