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Explore the Employee Share Option Plan held in a Cayman Islands trust

January 2024

22 January 2024 - With increasing competition, and a global war for talent across key sectors and industries, companies are continuously looking for ways to attract and retain skilled employees who contribute to business growth and success. One effective way of incentivizing employees, which has grown in popularity in recent years, is the Employee Share Option Plan (ESOP) also known as an Employee Stock Option Plan.

What is an ESOP?

It is a type of compensation program offered by a company for the benefit of itself, and that of its employees, providing them with the opportunity to purchase company shares at a predetermined price, also known as ‘exercise price’ or ‘strike price’, within a specified period of time.

The company grants eligible employees the right to purchase a certain number of company shares at a preset price. This grant is typically subject to certain conditions, such as vesting periods or performance-based criteria.

Once the options have vested (i.e., the employee has met the conditions), the employee can exercise them by purchasing the shares at the predetermined exercise price, which is often set at the fair market value of the company's shares at the time of the grant.

After exercising the options, the employee becomes a shareholder of the company and has the potential to benefit from any increase in the company's share price, as well as to sell them if applicable, in the open market. This will always depend on the private financial goals of each individual and the market conditions at the time they consider a potential sale.

As part of its corporate finance strategy, and with the aim at aligning the interest of employees and shareholders, an employer can decide to set up a trust, which in turn will hold an ESOP.

Qualifying employee participants are naturally driven to contribute more with the aim of improving the company’s performance to achieve tactical goals. These employees are usually encouraged to commit long-term to a company’s growth in return for an ownership interest in the business, with the associated financial rewards.

Why consider a Cayman Islands trust for holding an ESOP?

Long recognized for its modern but sophisticated trusts law, the Cayman Islands is a leading jurisdiction specialized in the establishment and management of different types of trusts. This includes the Cayman Special Trusts Alternative Regime (STAR) Trust, a unique form of statutory trust offering a different twist to the traditional trust structure. Combined with the fact that the Cayman Islands generally has no gift, estate, income or capital taxes for individuals and companies, there is fiscal neutrality for trusts established in the jurisdiction.

There are three essential parties in an ESOP trust:

  1. Trustee(s) – this could be (1) an individual, (2) a licensed trust company under the Banks and Trust Companies Act (2021 Revision), or (3) a private trust company.
  2. Settlor – this would be the company that creates the ESOP trust.
  3. Beneficiaries – the employees of the settling company who would benefit from the Trust property i.e. the company’s shares once the time comes.

The key benefits of a Cayman Islands ESOP trust

For employees:

  • There is greater protection for employees who become Beneficiaries of the Trust, with all the rights and remedies provided for under Cayman trusts law.
  • As soon as the ESOP is established in trust, the shares are ring-fenced. The company shares are issued to the trustee(s), to hold in line with the terms of the plan; this benefit ultimately gives greater comfort to employees.

For a company:

  • Through a trust structure, a company will have the convenience of acquiring and transferring shares between its shareholders and employees, without the need for the company to issue further shares or purchase its own ones.
  • Where a Cayman STAR Trust is used, an additional layer of confidentiality can be applied as the company can specify which employees are not entitled to know what shares have been awarded to other employees.
  • A company can use an ESOP trust in pre-IPO situations as a way to implement share award schemes for employees.

In summary, ESOPs are commonly used as a tool to attract and retain talented employees by aligning their interests with the company's growth, and offering them an additional financial incentive.

However, it is important to note that the specific details and terms of an ESOP in trust can vary from company to company. Employees should therefore carefully review the plan they are being offered, and consult with financial advisors or legal professionals to understand the implications and potential risks involved, as well as any generational transfer and rights associated to those shares under trust.

As an integral part of the Citco Corporate Solutions companies, the Commercial Trust Team at Citco Trustees (Cayman) Limited has significant experience supporting corporate clients with a variety of specialist services for all forms of commercial trusts.

If you are looking for assistance with an ESOP trust, or have any enquiries relating to other Cayman Islands trusts, please get in touch.

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