The simple joint-stock company: an ESOP built directly into the law

In an s.r.o. or an a.s., employee programmes are built around the constraints of the legal form. The simple joint-stock company is an exception: the legislature gave it a regime expressly designed for participation by employees and collaborators.

Why the j.s.a. is designed for equity participation

Three features make a j.s.a. a natural tool for allocating small interests. A share’s nominal value may be expressed in euro cents or a combination of euros and euro cents (§ 220i(2) of the Commercial Code), so participation can be divided into units as small as the programme requires. Transferability may be restricted or excluded entirely (§ 220k), which prevents the shares from reaching third parties after an employee leaves. The articles may even exclude inheritance of shares, unless the company has a sole shareholder. Where transferability is excluded or conditional on the company’s consent, shares also pass to the company on a shareholder’s bankruptcy or enforcement, at a reasonable value (§ 220q). Part of the architecture for a “bad leaver” is therefore in the statute itself; the employee’s departure as such must be dealt with by contract.

How employee share subscriptions work

Under § 220r, the company itself may subscribe for shares forming its registered capital, intended for transfer to eligible persons. The general meeting approves the subscription and sets the maximum nominal value and subscription window, no longer than 18 months. The articles may dispense with general meeting approval, in which case they set the conditions themselves. The total nominal value of such shares must not exceed 20% of registered capital, subscription must not reduce equity below the statutory threshold and shares must be transferred within five years. A secondary acquisition route also exists: acquisition of already issued treasury shares for the same purpose, for which the articles may dispense with general meeting approval; the other conditions of § 161a apply and the shares must be transferred within five years (§ 220s(1)).

An anti-avoidance safeguard applies: transferring company-subscribed shares to persons other than eligible participants is valid only at nominal value plus share premium and subject to retention of title. Otherwise, it is invalid (§ 220r(4)).

Self-employed developers can participate too

The most valuable detail for technology companies is that eligible persons include not only employees but also individuals operating under a trade or other licence whose work for the company produces intellectual property (§ 220r(1)(b)). External developers, designers and solution architects may participate alongside the core team, something the statutory shortcuts for an a.s. or s.r.o. do not allow. Rights to the contractor’s outputs must be settled contractually.

What to watch for

Three points. First, deadlines run: the 18-month window and five-year transfer period are firm limits, so the programme requires a timetable. Second, general meeting voting requirements: in an investor-backed company, the articles may set them so that no decision on share subscriptions can be taken without the investor. Programme design is therefore closely tied to investor entry documentation. Third, the board is legally required to ensure compliance with the limits (§ 220r(2)). This is not a formality: if shares are subscribed in breach of § 220r(1) or (3), § 161(2) to (5) applies correspondingly, under which board members may be jointly and severally liable for paying up the issue price.

We assess whether a j.s.a. is worthwhile for your programme, from formation and articles to participant agreements, through our ESOP and employee equity service.