Share plans and share hedging
Produced in partnership with Renu Birla
Share plans and share hedging

The following Share Incentives practice note produced in partnership with Renu Birla provides comprehensive and up to date legal information covering:

  • Share plans and share hedging
  • Why do companies use EBTs to share hedge?
  • What is share hedging?
  • Illustrative strategy
  • Factors to consider when share hedging
  • Holding surplus shares in trust
  • Cash flow versus cost
  • Dividends
  • Tax
  • Corporate governance
  • More...

Share plans and share hedging

Typically when a company adopts a new plan, it will initially plan to satisfy awards either:

  1. using newly issued shares, or

  2. using existing shares purchased in the market usually through the establishment and use of an employee benefit trust (EBT) which will acquire shares in the market or from individual shareholders in order to satisfy awards granted under the company’s share plans

This Practice Note considers the practice of share hedging for the purposes of an employee share plan and the main issues that must be addressed in order to manage the potential costs, and the financial risks of share hedging.

In summary, a company must balance:

  1. the need to purchase sufficient (but preferably not surplus) shares in advance of the exercise of options/acquisition of shares by employees, and

  2. the need to reduce the costs of doing so by buying them when the share price is low

Why do companies use EBTs to share hedge?

Companies operating share plans (such as via the grant of options or conditional share awards and/or direct share acquisitions) commonly need to ensure that they adhere to concerns regarding:

  1. the dilution of existing shareholder interests—where appropriate, taking into account institutional shareholder guidelines such as those of the Investment Association (IA) and the Pensions and Lifetime Savings Association (formerly known as the National Association of Pension funds) (see Practice Note:

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