Company Value Shares: A Novel Approach to Employee Participation
On January 1, 2024, Austria’s Flexible Company Act (FlexKapGG) introduced the Austrian Flexible Company (FlexCo), a new private limited liability corporation (Kapitalgesellschaft) alongside the established GmbH and AG. This legislation arose from the Austrian notary profession’s resistance to fundamental reforms of the GmbH, particularly regarding notarial duties. The FlexCo aims to streamline company formation and administration, especially for startups, by reducing the need for notarial involvement.
Beyond limited liability, the FlexCo offers several advantages: fractional shares for flexible ownership, expanded capital raising options, simplified share transfers, streamlined shareholder resolutions, and a reduced minimum share capital, all designed to enhance startup flexibility and attractiveness. In 2024, approximately 0.6% of newly established startups opted for the FlexCo structure.
Another distinguishing feature of the FlexCo is the introduction of non-voting “Company Value Shares” (or “Enterprise Value Shares”), specifically designed for employee participation. This unique share class is exclusive to the FlexCo and unavailable in other Austrian corporate forms.
Traditional Employee Participation in Other Corporations
Prior to the FlexCo, employee participation in companies was primarily achieved through two methods:
- Direct Share Ownership: Employees could become traditional shareholders, offering a straightforward approach. However, employers often hesitate to grant voting rights, fearing the dilution of control. Furthermore, the “dry-income problem” arises when shares are sold to employees below market value, triggering immediate income tax obligations, even if the company’s value later declines. This tax burden diminishes the attractiveness of direct share ownership.
- Granting of Privileges: Employees could receive various privileges that mimic the economic benefits of share ownership without conferring substantial influence over corporate decisions. These privileges include profit-sharing rights, phantom stock options, or silent partnerships. However, these constructs do not provide actual ownership or guaranteed implementation of promised benefits.
Employee Participation via FlexCo Company Value Shares
The Austrian Flexible Company addresses the shortcomings of traditional employee participation by introducing Company Value Shares (or Enterprise Value Shares).
Company Value Shareholders possess certain rights:
- They are entitled to attend general assemblies and receive information about written voting procedures.
- They have the right to ask questions and receive comprehensive information during general assemblies.
- They may inspect company books 14 days prior to general assembly meetings.
However, Company Value Shareholders do not have voting rights in general assemblies, nor do they have pre-emptive rights in capital increases.
Company Value Shares offer several protections for employees:
- Tag-along Rights: In the event of an exit by company founders, Company Value Shareholders have the right to sell their shares under the same conditions.
- Exit Rights: Employees can sell their Company Value Shares upon termination of employment, according to the company’s articles of association.
- Tax Advantages: The “dry-income problem” is mitigated by deferring taxation until the shares are sold, provided certain conditions are met. Additionally, under specific circumstances, reduced or lump-sum taxation may apply.
Summary
The FlexCo simplifies the formation and administration of private limited liability companies in Austria. Its innovative employee participation scheme, featuring Company Value Shares, addresses the shortcomings of traditional methods. This allows companies to attract and retain top talent while enabling employees to share in the company’s long-term success. The FlexCo, with its reduced setup costs and limited liability, is a highly recommended legal structure for establishing businesses in Austria.
