A closer look at Restricted Share Plans

A closer look at Restricted Share Plans

A closer look at Restricted Share Plans

Restricted share plans (RSPs) are a form of equity compensation that grants employees shares of company stock with certain restrictions. It can help employers attract, retain, and motivate talent by aligning their interests with those of the shareholders. RSPs can also provide tax benefits for both employers and employees, depending on the type and design of the plan.

In this article, we will explore the key concepts of restricted shares, the different types of RSPs, how they function, and their benefits. We will also discuss the legal and tax implications of RSPs and answer some frequently asked questions on this topic.

Definition of Restricted Share Plans

RSPs are a specific kind of equity compensation where employees receive company shares as part of their compensation package. These shares come with conditions: they either need time or certain achievements before employees fully own them. Additionally, there might be limitations on selling or transferring these shares, such as a holding period or the company’s right to refuse the transfer.

RSPs differ from stock options, which grant the right to buy shares at a set price in the future. Unlike stock options that become worthless if the stock price drops, restricted shares maintain value even if the stock price falls. However, there’s more risk involved with restricted shares – employees might lose them if they don’t meet the ownership conditions or violate transfer restrictions.

Understanding Restricted Shares

Key concepts of restricted shares

Some key concepts are essential to understand when dealing with restricted shares, such as:

  • Fair Market Value (FMV): This is the share price in an open market, determined by stock supply and demand. FMV is typically based on the stock’s closing price during grant, vesting, or sale.
  • Grant Date: The day the company awards restricted shares, establishing the plan’s terms.
  • Vesting Date: When employees meet vesting conditions and gain full ownership of shares. It can be a fixed date, a series, or linked to specific events like an IPO or merger.
  • Vesting Schedule: The timetable dictating when and how shares vest. It can be “cliff vesting” (all at once after a set period) or “graded vesting” (gradual portions over time).
  • Taxation: Involves determining and paying taxes arising from restricted share grants, vesting, and sale. Taxation specifics depend on factors like share type, timing, FMV, and relevant tax laws.

Different types of Restricted Share Plans

There are two main types of RSPs: restricted stock awards (RSAs) and restricted stock units (RSUs). Both are forms of restricted stock, but there are some key differences between them.

Nominal Purchase Price
A nominal purchase price may be required for RSAs, depending on the plan. RSAs entail direct grants of company shares to employees at the grant time, subject to vesting and transfer restrictions.

RSUs, on the other hand, involve commitments to provide shares or a cash equivalent to employees upon vesting, with transfer restrictions.
Share Ownership
Another difference between RSAs and RSUs is the share ownership granted to employees. RSAs confer immediate shareholder status, including voting and dividend rights, unless specified otherwise. Meanwhile, RSUs do not grant actual shares or ownership rights until vesting occurs, and dividend equivalents may or may not be included, depending on the plan.
How Restricted Share Plans Work

How Restricted Share Plans function

In Malaysia, restricted share plans are typically crafted and overseen by the employer, aligning with the company’s compensation strategy. The employer defines eligibility criteria, the quantity and value of granted shares, the vesting schedule, transfer restrictions, and the tax treatment of the plan.

The employer reserves the right to modify, amend, or terminate the plan, guided by the plan’s terms and relevant laws. Additionally, the employer may exercise discretion to expedite or waive vesting or transfer restrictions under specific circumstances, such as a change of control, termination, or the employee’s death or disability.

Upon receiving the grant, the employee must accept and adhere to the plan’s terms. If applicable, the employee may need to pay a purchase price for the shares. Compliance with vesting and transfer restrictions is mandatory, and the employee is responsible for reporting and settling any taxes associated with the plan.

Legal and tax implications of restricted shares

The implementation of RSPs carries legal and tax considerations contingent upon the jurisdiction, plan type, design, and grant circumstances. Some of the common legal and tax issues that may arise are:

  • Securities Laws Compliance: Complying with securities laws and regulations that regulate the issuance, registration, and trading of restricted stock, such as the Capital Markets and Services Act 2007, the Securities Commission Act 1993 in Malaysia.
  • Employment Laws Compliance: Complying with employment laws and regulations that regulate employment terms and conditions, such as the Employment Act 1955 and the Industrial Relations Act 1967 in Malaysia.
  • Tax Laws Compliance: Complying with tax laws and regulations that regulate the taxation of restricted stock, such as the Income Tax Act 1967.

Due to the intricate and case-specific nature of legal and tax implications associated with RSPs, seeking guidance from a certified tax advisor before implementing or participating in an RSP.

How can BoardRoom help

Restricted share plans are a structured equity compensation method providing employees in Malaysia with company shares under specific conditions. These plans can efficiently meet compensation objectives for both employers and employees, offering mutual tax advantages. However, you must consider challenges like potential share loss, tax liabilities at vesting, and legal compliance and grasp the key concepts, types, functions, benefits, and implications of these plans before implementation.

If you’re looking for a dependable partner for your restricted share plans in Malaysia, BoardRoom offers professional corporate services. As a leading provider in Malaysia, BoardRoom assists with designing, implementing, and administering various employee share option schemes, including RSPs, stock options, and performance shares. Contact us today to learn more!

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Frequently Asked Questions (FAQs) on Restricted Share Plans

What is the treatment of restricted shares after employment ends?

Treatment varies based on plan terms, termination reasons, and timing:

  • Pre-vesting termination or voluntary exit: Shares are usually forfeited without compensation.
  • Post-vesting termination or voluntary exit: Employees typically keep shares and pay taxes but face transfer restrictions.
  • Termination without cause, retirement, death, or disability: Pro-rated/full vesting may occur. Transfer restrictions exemptions may apply.

How do restricted shares influence the ownership structure of the company?

Restricted shares can alter ownership structure by adjusting the number and percentage held by employees, management, and existing shareholders. They tend to increase ownership for employees and management but may decrease it for existing shareholders due to share dilution. The influence depends on the granted shares’ number and value, vesting conditions, transfer restrictions, and share market prices.

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