Employee Share Schemes Law: EMI Schemes & Company Share Option Plan

Employee share incentives come in a range of different forms and formats, the most common is a share option (an agreement allowing an employee hold shares at a point of time in the future) which have always been popular but have become more widely used as businesses become aware of what they are and the tax efficiencies available in respect of a number of them. There are however a wide spectrum of arrangements available to suit every structure and business, some involve options but others involve employees actually holding shares.

There is no point in having an employee incentive in place if the employee does not understand its value, or they do not provide the right rewards at the right time, so it is important to get this work correct.

Some of the arrangements you could implement include:

Enterprise Management Incentive (EMI) – EMI Schemes are one of the most popular employee incentives around. The essence of the EMI Scheme is to grant employee right to acquire shares in a tax efficient manner. Broadly under this arrangement employees can benefit from being taxed on a capital gains basis rather than income tax so it is a highly efficient way to incentive employees. Ultimately if you want to grant an employee a fixed amount following tax paid, then the less tax payable, the less costly the scheme is for the other shareholders.

Unapproved Share Options – Not all businesses and employees will qualify for EMI, and if that is the case, many clients will look to implement an unapproved share option scheme which is basically the same right to acquire shares as under an EMI Scheme but without the tax benefits. Historically unapproved share options are seen as tax inefficient (which is often the case) but the tax inefficiencies can be limited by the way that the Unapproved Share Option scheme is structured, so it is important to have advisers that know the different choices.

LTIP arrangements – LTIP arrangements are common for listed companies and incorporate a range of different option or bonus arrangements. We have worked with clients on numerous instructions to assist in putting these arrangements in place. Again, usually relatively inefficient from a tax perspective, it is important to have an adviser that knows how to structure the scheme properly to limit any tax impact.

Growth Shares – A model that allows employees to hold shares which share in the future increase in value of the business only. The benefits of growth shares can be that it allows employees to hold shares rather than options, and because they share only in the increase in value, this can limit the tax payable.

Of course the above are just some examples, and we are often also instructed to advise on similar arrangements for non-employees such as consultants or non-executives.

A large part of implementing the incentive arrangements will be the tax implications and we will always work with your tax adviser to ensure that the implications of any incentive arrangement are as beneficial as they can be. Often the reason for the incentive arrangement is to take advantage of the tax benefits.

There is plenty to think about before implementing these incentive arrangements, just some of them will be:

  • Are there any performance or value criteria to be met before the option can be exercised?
  • What if the employee leaves?
  • What happens if the employee dies or becomes unwell?
  • Should options vest meaning that even following leaving a certain proportion of options can be exercised?
  • What happens on a sale? Can options be exercised prior to a sale?
  • What documentation does the employee need to execute when exercising the option?
  • When the employees’ shares are sold what sale documentation are they required to execute, and does the employee need to give the same warranties and restrictive covenants as the main shareholders even though they are probably a small minority?

Of course incentive arrangements can be as simple or as complex as are needed, but it is important to consider all of the options and possibilities. If you don’t consider something, then you might not know its worth.

Whether you need a broad incentive arrangement, or one that’s more complex and tailored for your business, Moore Barlow can guide you through it in a way that business owners and their employees understand. We’ve done it many times before and have significant experience in this area of law – so if you’re looking for something, come and talk to us.

Our corporate team is based in Guildford, Richmond and Southampton, so we can help wherever you and your business are based. We help clients create bespoke and highly motivating share incentives for employees. Contact our employee share schema and incentives solicitors now.

Contact our solicitors

Get in touch with our legal experts for advice.