What is the award of free shares in a company?

A company may decide to allocate its own shares to its employees free of charge.

The beneficiary employee does not immediately become the owner of the shares. It is mandatory that a time elapse between the date of allocation of the shares and the date when the beneficiary employee becomes owner. This time is called vesting period.

The company determines the length of the vesting period, but respecting the minimum legal period of one year (except in the case of invalidity of the employee).

The company may also freely set a retention period for shares. This means that the employee cannot sell the shares before the end of this period, even if he or she became the owner after the end of the vesting period.

The accumulation of the vesting period and the retention period may not be less than 2 years.

An employee cannot therefore resell the free shares received from his company before the expiration of 2 years from the date of allocation.

The allocation of free shares is different from other similar operations that also allow the employee to benefit from the shares of his company:

• Purchase on more favorable terms than the market (stock options)
• Purchase via a capital increase reserved for employees who are members of the company savings plan
• Purchase via reserved sales, under advantageous conditions (haircuts).

The operation can be organized for the benefit of all employees or only a part of them.

In the event of the award of free shares to Chief Executive Officers, the listed company must meet at least one of the following conditions:

• The business awards free shares to all its employees and at least to 90% all employees of its subsidiaries
• The business awards options to all of its employees and at least 90% all employees of its subsidiaries
• At least 90% employees of french subsidiaries are covered by a derogatory or voluntary incentive or participation agreement, and the methods of calculating these agreements are improved before the free shares are awarded
• All eligible employees of the business and at least 90% all eligible employees of its French subsidiaries benefit from an additional contribution or incentive payment

The decision to award free shares to employees must be taken by an extraordinary general meeting.

The decision must specify whether the award is made to all employees or only to some of them and which ones.

The award of free shares of a company may also benefit workers who are not its employees directly, but who are employed by companies belonging to the same group.

These are the following:

• Employees of businesses where the company awarding the free shares directly or indirectly owns at least 10% of capital or social rights
• Employees of businesses that hold directly or indirectly at least 10% the capital or social rights of the company which awards the free shares
• Employees of businesses of which at least 50% capital or social rights are held directly or indirectly by a company which in turn owns directly or indirectly at least 50% of the capital of the company which awards the gratuitous shares.

The total number of shares awarded free of charge is a maximum 15% social capital.

To calculate this percentage, the following shares must be withdrawn from the share capital:

• Shares that were awarded free of charge at a previous general meeting and whose beneficiaries have not yet become definitive owners (vesting period in progress)
• Shares that were awarded free of charge at a previous general meeting and whose mandatory retention period has ended.

In small and medium-sized companies, if the award concerns only certain categories of salaried staff (e.g. employees whose remuneration does not exceed a certain amount), the total number of shares awarded free of charge may be up to 20% social capital.

If the award concerns a significant group of employees, the total number of shares awarded free of charge may be up to 30% social capital. A significant group of employees is a group of employees who meet the following two criteria:

• Employees whose salaries represent at least 25% of the total gross salaries paid in the last financial year of the company
• Employees whose total number represents at least 50% company personnel.

If the award concerns all employees of the company, the total number of shares awarded free of charge may be up to 40% social capital.

The allocation of free shares by the general meeting is provisional.

The allocation of free shares becomes final after a certain period of time.

This time is called vesting period.

The duration of the vesting period is fixed by the general meeting, but the law stipulates that it must be at least 1 year.

The extraordinary general meeting may also provide for a mandatory retention period for free shares.

The mandatory retention period shall run from the end of the vesting period.

The cumulative duration of the vesting period and the retention period may not be less than 2 years.

The shares can therefore be sold no earlier than 2 years after the allocation by the General Meeting.

The main income generated by the allocation of the free shares is the “ acquisition gain ». It corresponds to the value of the shares on the market at the time when the award becomes final, i.e. at the end of the vesting period.

The sale of the free shares may allow the beneficiary to generate a second income, called “capital gain on the sale of securities”. This second income corresponds to the increase in the value of the shares between the end of the vesting period and the day of the sale.

These 2 revenues are taxed after the sale of the shares. They must be reported with the income for the year of the sale of the shares.

The applicable tax regime the income from the sale of the free shares varies according to the date of the definitive acquisition of the shares and the date of the resale of the shares.