The European Commission introduced its proposal for a regulation establishing a…
The European country with the most experience in employee participation is the United Kingdom. Here, as far back as the 1950s, conservative intellectuals and politicians sought an answer to the threat posed by the rise of the communist movement and the increasingly strong Labour Party. This gave rise to the concept of "owner democracy". The concept's objective was and is to create a legal framework that enables as many citizens as possible to share in the increase in value of assets in a country. The central instrument for this is employee participation.
If we are to believe the statements in the press, we can expect the modernisation of the legal framework for employee participation in Germany before Christmas. If we compare the concepts that were discussed in Britain over 70 years ago with those that prevail in Germany, it is clear that the reform is long overdue. And at least in one respect this reform could also bring about a fundamental change in social policy.
The key points of discussion for improving the framework conditions for employee participation are as follows:
1. Adjustment of the framework conditions under corporate law; to this end, creation of a separate category of shares for employees, whose confirmation, issue and transfer should be possible in digital form and without notarisation to the maximum extent conceivable.
2. Creation of legal certainty in the valuation of shares; to this end, procedures are to be set up to enable young growth companies to be valued appropriately and cost-effectively.
3. Creation of incentives for reinvesting payouts from employee participation schemes, e.g. by creating allowances (Freibeträge).
4. Equal tax treatment of employees vis-à-vis founders and Investors.
The key points of the reform are No. 3 and 4. Although a separate share class (No. 1.) would be a real nice-to-have, the existing ESOP (Employee Stock Ownership Plans) at least functions on a purely contractual basis. The shortcoming which has always been inherent in these programs, namely that they are "not genuine shares" and therefore do not function to the same extent as an incentive for employees, has been somewhat put into perspective due to the strong market penetration of these programs. Today it is standard practice for most start-ups to have a virtual employee participation scheme. A restriction is to be made here for foreign top executives who are used to the allocation of genuine shares from other legal systems; greater persuasion is still required here.
Also the evaluation of the start-ups (No. 2.) does not play a major role in the implementation of the employee participation programs or the signing of the allotment offer by the beneficiary employee. The programs are designed in such a way that there is no dry income in any scenario, which would be the case if taxes were incurred with allocation and not with inflow of exit proceeds. There is also usually little discussion when it comes to defining the strike price as the underlying asset, from where the employee participates in the increase in value of the company. Either the valuation agreed with the investors is taken as a basis here or some other minimum valuation, which is however more oriented to the scope of the employee participation program and the (virtual) share of the program than to the actual value of the company.
No. 3. would be a real improvement for Germany as a business location. It is true that in a functioning start-up ecosystem, successful founders often become important investors after an exit, often showing much greater foresight than other VC investors; at least this is the experience with regard to the USA and Silicon Valley. Today, the very large number of founders is themselves involved in their start-up through a founder holding company. If exit proceeds flow into the holding company, these can also be reinvested without incurring taxes. Since the ESOPs are usually concluded directly with the employees, the employees here are in a worse position in relation to the founders, without any apparent reason for this. An exemption for re-investments from the ESOP beneficiary would therefore be very welcome.
No. 4. however, would represent a shift in paradigm that can only be welcomed. It has never been evident why an employee has to tax any proceeds from a virtual employee participation scheme as income from employment while founders and investors who at least de facto generate the same proceeds from the same transaction have to tax them via the much lower capital gains tax. Also in this respect a reform is urgently needed.
In summary, it becomes obvious that for Germany as a location for start-ups, the reform would in any case not be a Christmas present but simply a measure long overdue.
As soon as the law is passed, we will again provide you with information here and offer a workshop on how employee participation programs should be structured in future.
