An Employee Stock Option Plan, more commonly referred to as ESOP, is a corporate strategy, according to which, employees will have the opportunity to acquire interest under the form of stock or ownership in the company. This strategy aligns the interests of the company’s employees along with the interests of the company’s shareholders therefore, giving employees the proper incentive to work harder and be more productive. The equation outlined by the adoption of an ESOP is very simple: the higher the company’s performance is, the higher the value of their individual rewards will be. This is extremely beneficial for the company’s success and growth; it’s sort of an investment in the company’s future.
In this article, we are going to provide an overview of ESOP in the United Arab Emirates (UAE), namely in terms of effectiveness and applicability.
Before we get into the details of ESOP, a preliminary distinction is necessary to properly understand how business is generally conducted in the UAE. In fact, the UAE treats “Mainland” and “Free Zone” businesses and legal entities in different ways and subjects each of them to different regulatory frameworks.
Initially, UAE Mainland Companies experienced difficulties when adopting ESOP for their employees. However, things took a clearer approach with the adoption of the new Corporate Federal Law which came into effect on 1 July 2015 (the UAE Federal Law for Commercial Companies – Law No.2 of 2015 (CCL)).
While the majority shareholding rule continues to apply for Mainland Companies (also knows as the 51% local shareholding requirement) more flexible regulations have been introduced by the CCL. The most important of these regulations concern the pre-emption rights of existing shareholders. Upon the enactment of the CCL, existing shareholders of a public joint-stock company no longer have pre-emption rights when it comes to the issuing shares pursuant to an ESOP. This comes a long way in terms of making the adoption of an ESOP significantly easier compared to the previous regulation, which allowed existing shareholders to have priority to subscribe to any new shares, without any distinction being made. Such lack of distinction, could, in fact, could block the company from executing an ESOP which would derive it from any true meaning
Additionally, the CCL referred to the Emirates Securities and Commodities Authority (ESCA) to provide the “mechanism and conditions of implementation” of ESOPs. Based on ESCA’s requirements, shares issued pursuant to an ESOP shall not exceed 10% of the company’s share capital increase. The ESCA also indicates that an ESOP must specify:
- The number of ESOP shares.
- The adopted price when acquiring the shares.
- The conditions and procedures for executing the ESOP.
- The determination of the employees benefiting from the ESOP.
- The implications of such employees leaving their employment whether by dismissal or resignation.
Free Zone Companies
Free Zone Companies are subject to a more flexible set of corporate rules and regulations. The main distinguisher with Mainland Companies lies in the fact that Free Zone Companies are not subject to any foreign ownership limitations. While each Free Zone maintains its own set of rules and regulations when it comes to business set-up and conduct, the mutual factor remains that ESOP is much easier to enforce in these Free Zones. Some Free Zones such as the Dubai International Financial Center (DIFC) and the Abu Dhabi Global Market (ADGM) have taken this a step further by offering ESOP plans. Another key advantage deriving from the flexibility offered by Free Zones lies in the fact that they do not have a mandatory specific scheme to adopt when it comes to ESOP, which leaves companies in charge to plan them in as they prefer and based on their own discretion.
Generally, it is highly recommended to adopt an ESOP for employees in companies looking to create a high-performance strategy in order to achieve success and future growth. Should you decide to do so, make sure that it’s beneficial in your particular case and that you follow the proper mechanism to make sure all the legal framework is properly set in place. ESOP is also a subject to keep in mind whenever you’re signing a new shareholders’ agreement as it is usually included in the “Reserved Matters” section.
To learn more about ESOP in general and its applicability in the UAE in particular, you can always Book a Consultation with a lawyer by visiting our Plans page.