Yeo Boon Kiat Partner Allen & Gledhill LLP

Darren Low Senior Associate Allen & Gledhill LLP

Jaewon Yoon General Counsel Jungle Ventures

Issuing shares to employees confers on them a sense of ownership in the company ... As the employees stand to benefit from an increase in the value of the company, they are incentivised to stay in, and help to grow, the company. 

A.         EMPLOYEE INCENTIVE SCHEMES

1.         Introduction

This section is intended to provide background and information regarding various types of common employee incentive schemes, the advantages/disadvantages of each such type of scheme, and practical considerations in structuring and implementing such schemes.

2.         Background

Employee incentive schemes are schemes under which employees are rewarded for meeting prescribed benchmarks or key performance indicators (“KPIs”). Such incentives typically serve to recognise and reward employees for their hard work, and motivate them to work to the best of their abilities.

Incentive schemes usually come in two forms: share incentive schemes and cash incentive schemes. This section will primarily focus on discussing share incentive schemes, as such schemes are more common in the context of start-up companies.

3.         Share incentives

Under a share incentive scheme, employees are granted shares in the company. These shares may be granted over and above an employee’s regular salary, or in exceptional cases, form part of it. Additional corporate formalities also apply in respect of share incentives.

In general, issuing shares to employees confers on them a sense of ownership in the company, and may help to align the interests of the employees with the long-term interests of the company. In particular, as the employees stand to benefit from an increase in the value of the company (which will be reflected in a higher share price), they are incentivised to stay in, and help to grow, the company.

Types of share incentive schemes

There are two main schemes under which a company may grant shares to its employees, as detailed below.

A general observation is that ESAPs are typically granted to founding members or employees of a company, while ESOPs are typically granted to normal employees.

Tax treatment of share incentive schemes

In respect of shares granted on or after 1 January 2003 under any ESOP or ESAP, the gain derived from such plans is taxable if the employee is granted the options or shares while exercising employment in Singapore.

Factors and considerations in structuring share incentive schemes

Factors that a start-up company should consider in structuring a share incentive scheme include the following:

• Eligibility: The company should identify the intended types and number of participants of the share incentive scheme. This will allow the company to determine if there are any regulatory considerations which would apply, as well as the size of the participant pool. It is useful to also consider if any eligibility criteria should apply with respect to participation. Note that due to the dilutive effect and potential voting rights in connection with share incentives, share incentive schemes (particularly ESAPs) with voting shares are typically given to senior and/or key employees of the company (which may include the founders of the company).
   
• Conditions and KPIs to be met: The company should identify the conditions and KPIs which must be met before share options or shares are granted to or vested in the employee. These conditions and KPIs should be in line with the company’s commercial and business goals, and set with a view of enabling the share incentive scheme to function effectively as a motivator for the employees.
   
• Quantum and Price of shares: The company should consider the amount of shares that that employees will be awarded or have the right to purchase under the share incentive scheme. In respect of share options, the company may also wish to determine the designated share price (or formula for calculating share price) to be paid by the employee when exercising the share options granted to him.
   
• Situations of Forfeiture and Clawback: The company should consider the circumstances or conditions which would result in the forfeiture of share options or shares that have not vested, or the recovery of shares that have been awarded or granted.

The company should also consider the mechanism by which shares that have been awarded may be recovered.

Features of share incentive schemes

When a share option is exercised, the shares which are allotted may be new shares, shares which are transferred from existing shareholders, or shares issued from the company’s pool of treasury shares.

Share incentive schemes usually include a cliff period. The cliff period refers to the period of time that an employee must remain in the employ of the company before share options start accumulating. If, during the cliff period, an employee resigns from the company, or the employment of the employee with the company is otherwise terminated, the employee will not be entitled to any share options.

Share incentive schemes also typically include a vesting period. The vesting period refers to the period of time before the share options or shares become exercisable by, or the rights in the shares become fully vested in, the employee. Typically, such vesting occurs on a pro rata basis over a stipulated period of time (e.g. 3 years). If an employee leaves during the vesting period, the employee will generally only be entitled to rights that have already vested in the employee as at the last date of employment. In practice, the vesting period is generally what appears to keep employees in the company for the long term.

One concern with share incentive schemes is that of share dilution.

• As new shares are issued to employees under this scheme, the shareholding of existing shareholders will inevitably be diluted. This can be mitigated by setting aside a separate “ESOP pool” comprising a certain percentage of the company’s equity. Shares to be granted pursuant to the exercise of share options will be granted out of this pre-determined “ESOP pool”. The implementation of such “ESOP pools” are commonly preferred or required by investors of start-up companies.
• In addition, if shares issued under a share incentive scheme are voting shares, the ability of the existing shareholders to pass resolutions may also be directly affected. Start-up companies may therefore wish to consider creating a new class of shares with no voting rights, and issue only shares of such class for the purposes of the share incentive scheme. This ensures that existing shareholders retain their ability to pass resolutions without requiring the cooperation and consent of the new shareholder-employees.

Requirements for the issuance of shares

Before shares in the company can be issued, whether under an ESAP or pursuant to the exercise of a share option, the directors of the company must first obtain the authorisation of the company’s existing shareholders under section 161 of the Companies Act (Chapter 50) (“CA”) for the issuance and allotment of shares. Authority under section 161 of the CA may either be obtained for a single issuance of shares, or for the issuance of shares more generally. For efficiency, the latter (a “blanket” authorisation for the issuance of shares) is usually obtained from the shareholders at the Annual General Meeting of the company every year.

Under the Securities and Futures Act (Chapter 289) (“SFA”), any offer of securities or securities-based derivatives contracts, including shares and share options, must be accompanied by a prospectus. To avoid having to comply with this requirement, which may entail incurring significant costs, start-up companies typically rely on the exception under section 273(1)(i) of the SFA (which contemplates offers to employees), or the private placement exception under section 272B of the SFA.

4.         Cash incentives

While less commonly used by start-up companies than share incentives, a company may also consider adopting a cash incentive scheme, which provides for cash payments to be made to an employee when certain KPIs are met by the employee.

Singapore law does not prescribe a maximum or minimum cash incentive amount, and the company generally has the discretion to determine the amount of cash incentives to be awarded to an employee.

However, under a cash incentive scheme, employees are not given a stake in the business. As such, their interests may not be aligned with the long-term interests of the company.

B.         OVERVIEW OF EMPLOYMENT LEGISLATION IN SINGAPORE

This section aims to give a broad overview of key legislation and practices under Singapore law. Note that the information here is for general guidance only, and is not intended to be exhaustive or comprehensive. Advice from legal counsel should be obtained in respect of any specific legal issue.

1.         Background on Employment Law in Singapore

Under Singapore law, there is general freedom of contract between an employer and an employee to mutually agree on the employee’s terms of employment. In most cases, an employer has fairly wide discretion in determining the benefits which it wishes to provide to its employees. Note however that certain statutory requirements prescribed under Singapore law would still apply.

The Employment Act (Chapter 91) (“EA”) is the main employment legislation in Singapore. In general, all employees are covered under the EA, save for seafarers, domestic workers and public servants.

The EA prescribes certain minimum conditions of service that employers are required to provide to their employees. Such minimum conditions of service include:

• minimum days of statutory annual leave and statutory sick leave;
• statutory maternity leave and childcare leave benefits;
• paid public holidays;
• statutory protection against wrongful dismissal; and
• the provision of key employment terms.
  • between 7 to 14 days of statutory paid annual leave;
  • up to 16 weeks of statutory maternity leave;
  • up to 12 weeks of statutory adoption leave;
  • up to 2 weeks of statutory paternity leave;
  • shared parental leave, which allows a male employee to share up to 4 weeks of his wife’s statutory maternity leave; and
  • up to 6 days of statutory childcare leave per year (for employees with children below 7 years of age), and 2 days of statutory extended childcare leave per year (for employees with children between 7 and 12 years of age).

Certain additional statutory protections set out in Part IV of the EA (in respect of matters such as rest days, hours of work, overtime pay etc.) apply only to (a) workmen who earn a basic monthly salary not exceeding S$4,500, and (b) non-workmen who are not employed in managerial or executive positions and receive a basic monthly salary not exceeding S$2,600.

Apart from the EA, certain other statutory obligations apply in respect of the employment relationship. These include contributions to be made by an employer to the Central Provident Fund (“CPF”), and the provision of statutory parental leave benefits (e.g. maternity, paternity and childcare leave benefits) if certain eligibility criteria are met. These statutory obligations are set out in more detail below.

2.         Probation

There is no legal requirement for employees to undergo probation under Singapore law. It is nevertheless common practice for employees to be subject to a probationary period before they are confirmed in their position, as this allows the employer to evaluate the employee’s performance and ability to work with his co-workers. Singapore law does not mandate any maximum or minimum probationary periods, or impose any conditions or restrictions on the setting or extension of a probationary period. It is not uncommon for probationary periods to range between one to three months, although this period ultimately depends on how long it takes for the employer to assess the relevant employee.

During an employee’s probationary period, an employer may provide in the employment contract that certain contractual rights and benefits of the employee may not apply.

3.         Bonus/Annual Wage Supplement (“AWS”)

Singapore law does not prescribe any mandatory bonus or AWS payments (commonly known as 13^th month payments) to be provided by an employer to its employees. Any bonus or AWS payment to be made to an employee (and the terms of any such bonus, including as to frequency and amount) is at the discretion of the employer.

4.         Dismissal

Employment in Singapore is generally on an “at-will basis”. Under the EA, both the employer and the employee have the right to terminate the employee’s employment by giving notice, or by paying the other party a sum equal to the employee’s salary at his gross rate of pay in lieu of the applicable notice period. The notice period for both the employer and the employee must be the same.

Under the EA, an employer may after due inquiry dismiss an employee immediately without notice on the grounds of misconduct inconsistent with the express or implied conditions of the employee’s service. An employee’s poor performance does not, in and of itself, constitute misconduct for the purposes of such dismissal.

If an employee considers that he has been wrongfully dismissed, the employee may lodge a complaint with the Employment Claims Tribunal, which is a tribunal intended to provide employers and employees with a speedy and low-cost forum to resolve their employment-related disputes. In this connection, the Tripartite Alliance for Fair & Progressive Employment Practices (TAFEP) has issued a set of Tripartite Guidelines on Wrongful Dismissal (“Tripartite Guidelines”), which sets out illustrations and guidelines on what constitutes wrongful dismissal. The Employment Claims Tribunal will have regard to the Tripartite Guidelines when deciding a wrongful dismissal claim.

5.         Central Provident Fund contributions

The Central Provident Fund Act (Chapter 36) imposes an obligation upon all employers to pay monthly contributions at certain prescribed rates to the CPF in respect of the wages of each employee who is a citizen or permanent resident of Singapore. Note that CPF contributions are not required, and in fact not allowed, in respect of foreign employees holding work passes.

After making the requisite contributions to the CPF, the employer is then entitled to recover a prescribed amount from the monthly wages of the employee. It is an offence for an employer to seek to recover any amount in excess of the prescribed amount.

6.         Restrictive covenants

As a starting point, restrictive covenants (such as non-competition and non-solicitation provisions) in employment contracts are prima facie unenforceable under Singapore law.

When seeking to enforce restrictive covenants, the employer must demonstrate that (a) there is a legitimate interest of the employer to be protected, and (b) the restraints sought to be imposed are reasonable in terms of, inter alia, scope, duration and geographical extent, and are no wider than reasonably necessary to protect the legitimate interests of the employer.

In determining whether a particular restrictive covenant is enforceable, the courts will generally look to factors such as the position, job scope, and seniority in respect of each specific employee, the extent of his access to and influence over customers of the employer, the duration of the restrictive periods and the geographical area of the restriction. There are, however, no strict rules as to when such a restrictive covenant will be deemed reasonable and enforceable, as each situation is peculiar to the specific interest of the employer to be protected.

Further, if restrictive covenants are set out as standard provisions in a template document, the employer may face some challenges in satisfying the Singapore courts that such restrictions are necessary to protect the legitimate proprietary interests of the employer. For instance, the Singapore courts may view such restrictive covenants as being a general boilerplate, as opposed to a restriction specifically tailored to apply only to particular employees and in respect of which the employer had put in thought and consideration.

The enforceability of restrictive covenants will ultimately be a question of fact, having regard to the relevant facts and circumstances, and employers should seek advice from legal counsel in respect of the drafting and structuring of restrictive covenants as and when necessary.

­7.         Statutory Leave Benefits

Under the EA and the Child Development Co-Savings Act (Chapter 38A), employees are entitled to certain minimum statutory paid annual leave, statutory paid sick leave and various forms of statutory paid parental and childcare leave, in each case, subject to the employees meeting the relevant conditions stipulated in the respective legislation. Such statutory leave benefits include:

8.         Personal Data Protection Act

The Personal Data Protection Act 2012 (No. 26 of 2012) requires an organisation to, amongst other things, prior to collecting, processing, using or disclosing personal data of an individual, inform such individual of the purpose(s) for which the personal data will be collected, processed, used or disclosed. This includes personal data of its employees.

From an evidentiary perspective, it is recommended that express consent for any collection, use or disclosure of personal data be obtained, to minimise any risk of argument as to whether an employee’s personal data is being used for a permitted purpose. Further, should the information sought to be used, disclosed or transferred be confidential to the employee, the consent for the use of such information (in particular, consent for the disclosure to third parties) should be obtained.

AUTHORS

Yeo Boon Kiat Boon Kiat regularly advises on a wide range of general corporate and commercial transactions. These include advising on employment-related matters, such as employment contracts, handbooks and policies, employee incentive plans, collective bargaining and industrial relations, work passes, and structuring the transfer and termination of employment.

Darren Low Darren is an Associate with Allen & Gledhill’s Corporate and Commercial practice, and regularly advises on employment-related matters. These include the review and preparation of, and advising on, employment contracts, handbooks, policies, and the documentation relating to the transfer and termination of employment.

Jaewon Yoon Jaewon Yoon currently serves as General Counsel of Jungle Ventures, a Singapore-based venture capital firm.  He has been active in Singapore's venture capital and tech start-up space since moving to Singapore in 2015, after working at global law firms in New York, Hong Kong and San Francisco.

Disclaimer: This article is intended for your general information only. It is not intended to be nor should it be regarded as or relied upon as legal advice. You should consult a qualified legal professional before taking any action or omitting to take action in relation to matters discussed herein. This article does not create an attorney-client relationship and is not attorney advertising.

 

Published 29 May 2020