Interactive Investor

Don’t be shy, ask ii…why do directors buy tiny amounts of shares?

15th April 2021 08:44

Keith Bowman from interactive investor

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David Glowacki asks: why do company directors sometimes buy a tiny amount of shares in addition to their main holding, called matching l think. For example, one company I follow recently had three directors buy just 24 shares each.

Keith Bowman (pictured above), Equity Analyst, interactive investor, says: There are a number of reasons why directors buy shares in the company they work for, and normally they spend many thousands of pounds doing so.

The first and most common reason is that they believe the company’s prospects are good, and that the shares will reflect anticipated growth by rising in value over time. This is seen by many investors as a signal to follow suit and buy the shares themselves, the thinking being that directors – or insiders - are in the best position to know the state of their own company. If they’re buying, something good must be in the pipeline.

Some fund managers actively look for sizeable director shareholdings, so called ‘skin in the game’, as part of their company assessments.

There are rules that govern when directors can buy, of course, which prevents trading when they have ‘inside’ information by virtue of working at the company, that other investors do not. This might be just before the announcement of results, for instance.

Directors can also be gifted company shares as part of a bonus award as an incentive to make sure they hit targets.

Long-term incentive plans (LTIPs) are typically used by companies listed on the stock market to reward senior executives. Those with a LTIP will normally have to wait at least three years before the plan vests, which is when they can cash in, and then only if the targets set as part of the plan were achieved.

Share incentives to directors and other staff are also often made under tax advantaged schemes known as Share Incentive Plans (SIP). These give employees income tax, capital gains tax and National Insurance Contribution (NIC) advantages when they buy or are given shares in the company they work for.

Under a SIP, shares can be awarded to staff in four different ways.

  1. Free shares up to a value of £3,600 in any one tax year, often as part of a bonus award.
  2. Bought or paid for by directors out of pre-tax salary and known as partnership shares. Inland Revenue cash value limits apply.
  3. ‘Matching shares’, which companies can give to match partnership shares acquired. They can give directors up to two free matching shares for each partnership share purchased.
  4. Dividend shares arising from dividends from other shares held in the plan. This is dependent on the whether the individual SIP allows this.

Therefore, small allocations of shares often occur when a company is matching the partnership shares bought by staff.

Directors and some senior managers who have regular access to inside information are deemed to be so-called persons discharging managerial responsibilities, or PDMR’s. That means they must disclose, or make public, their share dealings as part of the Market Abuse Regulation (MAR) that UK companies must follow.

In a recent example at Kier Group, the construction business announced that two senior managers acquired shares under its Share Incentive Plan. Each bought 162 partnership shares and were given 81 matching shares.

Under the terms of the SIP at instrumentations firm Spectris, “each eligible participating employee can purchase partnership shares using monthly contributions deducted from salary, and the company awards one matching share for every five partnership shares purchased by participating employees.”

It’s why the chief executive and finance director both recently disclosed the purchase of four partnership shares and award of one matching share.

Any employees involved in Share Incentive Plans and looking for guidance should always speak to a professional tax advisor.   

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