The shadow chancellor's proposal for inclusive ownership funds could lead to a number of market-distorting behaviours, writes Thomas Dalby (Gabelle).
The shadow chancellor announced a new form of employee share ownership structure in his speech to the Labour Party conference on 24 September 2018.
The proposal
The new structures, to be called ‘inclusive ownership funds’ (IOF), would be compulsory for companies with more than 250 employees, smaller companies would be able to set up IOFs on a voluntary basis. The IOFs would be governed by trustees, drawn from the company’s employees.
Companies with an IOF would be compelled to transfer 1% of their shares to the IOF each year, until the IOF held 10% of their share capital. Dividends paid on the shares would be used to pay bonuses of up to £500 per year to each employee.
Any surplus dividends received by the IOF would be remitted to a national social dividend fund. The shadow chancellor has stated that the assets of the social dividend fund would be earmarked to pay for public services and welfare, but there are also suggestions that the fund would be used to make payments to workers (the advance details do not make it clear whether this is limited to employees of companies with IOFs who have not received the full £500 or is intended to be a supplement to the £500 IOF payment or a wider benefit for workers more generally).
The scheme seems to envisage that the shares held by the IOF will be voting shares, with employee representatives deciding on how the voting rights will be exercised.
The IOF would not be able to alienate the shares that it held by selling them or transferring them to the employees.
Analysis
As it is currently presented, the IOF structure seems squarely aimed at traditional listed-company structures: companies with a single class of shares, which make regular dividend payments to investors.
The bulk of the companies within this measure’s scope are privately held, backed by private equity (PE) investors or subsidiaries of foreign parents: companies that are listed on foreign exchanges apparently fall outside the scope of these measures and it is not clear how these rules could be enforced for overseas companies with a London listing and a largely non-UK workforce.
Both privately owned companies and PE-backed companies often use a share structure made up of multiple share classes, each with distinct rights. Very often such companies do not pay dividends, aiming to build capital value ahead of an exit.
Another question prominent in the minds of business owners would be what would happen in the event of an exit: would it mean a bonanza for employees? Or for the Treasury? Or would the IOF structure be a ‘poison pill’, killing off potential future transactions?
Taken at its crudest, the IOF structure could be seen as an effective 10% levy on dividend payments, with the social dividend fund as the main beneficiary; a potentially significant cost for companies.
Another concern will be the constitution of the management of the IOFs, how the trustees will be selected and whether there will need to be an extensive process of employee consultation before votes.
There are worries that this measure could lead to a number of market-distorting behaviours: groups could fragment to fall below the headcount limit; employers may choose not to expand their operations for fear of becoming subject to the rules; companies could de-list from London in favour of a listing in Frankfurt of New York.
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Labour’s inclusive ownership plan
The shadow chancellor's proposal for inclusive ownership funds could lead to a number of market-distorting behaviours, writes Thomas Dalby (Gabelle).
The shadow chancellor announced a new form of employee share ownership structure in his speech to the Labour Party conference on 24 September 2018.
The proposal
The new structures, to be called ‘inclusive ownership funds’ (IOF), would be compulsory for companies with more than 250 employees, smaller companies would be able to set up IOFs on a voluntary basis. The IOFs would be governed by trustees, drawn from the company’s employees.
Companies with an IOF would be compelled to transfer 1% of their shares to the IOF each year, until the IOF held 10% of their share capital. Dividends paid on the shares would be used to pay bonuses of up to £500 per year to each employee.
Any surplus dividends received by the IOF would be remitted to a national social dividend fund. The shadow chancellor has stated that the assets of the social dividend fund would be earmarked to pay for public services and welfare, but there are also suggestions that the fund would be used to make payments to workers (the advance details do not make it clear whether this is limited to employees of companies with IOFs who have not received the full £500 or is intended to be a supplement to the £500 IOF payment or a wider benefit for workers more generally).
The scheme seems to envisage that the shares held by the IOF will be voting shares, with employee representatives deciding on how the voting rights will be exercised.
The IOF would not be able to alienate the shares that it held by selling them or transferring them to the employees.
Analysis
As it is currently presented, the IOF structure seems squarely aimed at traditional listed-company structures: companies with a single class of shares, which make regular dividend payments to investors.
The bulk of the companies within this measure’s scope are privately held, backed by private equity (PE) investors or subsidiaries of foreign parents: companies that are listed on foreign exchanges apparently fall outside the scope of these measures and it is not clear how these rules could be enforced for overseas companies with a London listing and a largely non-UK workforce.
Both privately owned companies and PE-backed companies often use a share structure made up of multiple share classes, each with distinct rights. Very often such companies do not pay dividends, aiming to build capital value ahead of an exit.
Another question prominent in the minds of business owners would be what would happen in the event of an exit: would it mean a bonanza for employees? Or for the Treasury? Or would the IOF structure be a ‘poison pill’, killing off potential future transactions?
Taken at its crudest, the IOF structure could be seen as an effective 10% levy on dividend payments, with the social dividend fund as the main beneficiary; a potentially significant cost for companies.
Another concern will be the constitution of the management of the IOFs, how the trustees will be selected and whether there will need to be an extensive process of employee consultation before votes.
There are worries that this measure could lead to a number of market-distorting behaviours: groups could fragment to fall below the headcount limit; employers may choose not to expand their operations for fear of becoming subject to the rules; companies could de-list from London in favour of a listing in Frankfurt of New York.
