Common EMI questions we see in practice

Now that the EMI plan is set up…

“Can my employees exercise their options whenever they like?”

Probably not. The plan documentation must state when exercise is permitted, and it usually isn’t ‘any time after grant’. Examples include within 90 days of becoming a ‘good leaver’, on an ‘exit’ (e.g. a sale of a controlling shareholding), or after a fixed number of years from grant.

HMRC have categorically stated that the point at which an EMI option may be exercised is a ‘fundamental term’ and that a change to a fundamental term will constitute the release of the option and the grant of a new one. Therefore, if exercise takes place before the earliest time specified in the documentation, this is a material risk.

“Can I change the number of shares under option or the exercise price?”

Probably not without triggering the above mentioned ‘release and regrant’ treatment, as these are also ‘fundamental terms.’ If you’re thinking of increasing award sizes, consider granting ‘top-up options’ under the same plan rules.

“Top-up options sound like an easy solution for my top performer. Can I make a copy of their existing option agreement and grant them a second option?”

Care is needed. Whilst doing this would indeed grant an option (assuming the new agreement is properly executed), a conversation with your advisers first is highly recommended.

There are numerous key questions which should be considered in advance. For example:

• What is current tax value of the shares (this may not be the same as it was for the original grant)?
• Where should the exercise price be set and what are the resulting tax implications?
• Do the directors have the necessary authority to grant the option under the company’s articles of association and any shareholders’ agreement?
• What will be the dilutive impact on existing option holders and shareholders?
• Should the terms of the new option mirror those of the original grant, or is a different approach more appropriate?

“Can I cancel an EMI option due to poor employee performance?”

Generally, no. An EMI option agreement is a legally binding contract between the company and the employee. If the employee is subject to disciplinary proceedings or fails to meet specified performance conditions, they will usually be prevented from exercising. Otherwise, they likely have the right to exercise the option subject to the terms of the agreement. If you have concerns about an employee’s performance or conduct, then address this directly and discuss with your HR team and/or an employment solicitor. For future options, consider including performance conditions. These link exercisability of the option to individual and/or company performance.

 “Their EMI option is subject to performance conditions. Can I at least change these?”

Not in the way I suspect you want to. Where an EMI option agreement includes performance conditions, the plan documentation will usually give the board the power to vary or waive them at its discretion. However, EMI performance conditions may not be varied such that they become more difficult to meet.

As a general point, we recommend that any decision to exercise any of the board’s discretionary powers is formally documented.

Special care must be taken when dealing with options subject to time-vesting. If exercise of the discretion effectively accelerates the time when the option is exercisable, then this will not be acceptable, as HMRC will treat this as the release of the option and the grant of a new one.

“Can employees receive EMI shares for free, rather than paying the exercise price?”

Absolutely not. If there’s an exercise price (and the only time there might not be is if the option shares are to be transferred from an existing shareholder, as opposed to newly issued), then the employee must pay it. If the exercise price isn’t affordable, you may wish to consider making a loan to the employee or paying them a bonus. Both of these have tax implications.

“Somebody left a while ago, and we want to let them exercise their option. I think the plan rules say that if the board does not decide to permit this within a certain time after the employee leaves, then their option lapses. We kept planning to meet to discuss what to do, but didn’t get around to it. Is this a problem?”

Possibly, so it’s important to act fast. We would need to read the relevant provisions of the EMI documentation and consider the facts and circumstances in relation to the leaver. We can then advise on the possible routes forward and the tax implications.

“Are there ongoing administrative and tax compliance obligations for EMI plans?”

Yes.

• Firstly, you must register the EMI scheme with HMRC online in advance of 6 July following the end of the tax year in which the first grant of EMI options took place. The tax year runs from 6 April to 5 April
• Secondly, the EMI options must be notified to HMRC online by 6 July following the tax year in which they were granted, otherwise they won’t qualify and the EMI tax advantages will be unavailable
• Thirdly, you must submit an EMI return for each tax year until there are no outstanding options. The deadline for the annual return is 6 July.