EMI Schemes & Company Share Option Plans

Employee share incentives come in a range of different forms and formats, the most common of which is a share option (an agreement allowing an employee to hold shares at a point of time in the future). These have always been popular, but became increasingly prevalent as businesses took advantage of the tax efficiencies available. There is, however, a wide spectrum of arrangements to suit every structure and business – some involve options; others involve employees actually holding shares, or payments linked to share performance.

It is pointless having an employee incentive in place if the employee doesn’t understand its value, or the incentive fails to provide the right rewards at the right time. It is vital, therefore, to get this work done correctly.

Arrangements to benefit your employees could include:

Enterprise Management Incentive (EMI)

EMI Schemes are one of the most popular employee incentives, their aim being to grant employees the right to acquire shares in a tax-efficient manner. Under this arrangement, employees benefit from being taxed on a capital gains basis rather than through income tax, making it a highly efficient way to incentivise them.

If you want to grant your employees a fixed amount following the tax they’ve paid, the less tax that is payable, the less costly the scheme is for the other shareholders.

Unapproved Share Options

Not all businesses and employees will qualify for EMI, and many clients will therefore look to implement an unapproved share option scheme – 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 tax inefficiencies can be limited by the way that the Unapproved Share Option scheme is structured, so advisers must know the different options, and how they can affect the tax position.

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, because they tend to be rather inefficient from a tax perspective, it is important to have an adviser who knows how to structure the scheme properly, in order to limit any tax impact.

Growth Shares

These allow employees to hold shares which have a stake in the future increase in value of the business only. Growth shares can enable employees to hold shares rather than options, and sharing only in the increase in value has the benefit of limiting the tax payable.

The above are just a few examples of arrangements available, and we are often also instructed to advise on similar arrangements for non-employees, such as consultants or non- executives.

Summary

Much of the work of implementing incentive arrangements centres on the tax implications, and we will always liaise closely with your tax adviser to ensure that the implications of any incentive arrangement are as beneficial as they can be. Often, the main reason for setting up an incentive arrangement is to take advantage of the tax benefits.

A few questions worth considering before implementing incentive arrangements might include:

  • 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?

Incentive arrangements can be as simple or as complex as circumstances require, but it is important to consider all the options and possibilities in order to know their potential value to you.

Whether you need a broad incentive arrangement, or one that’s more complex and tailored for your business, we at Moore Barlow have substantial experience in this area of law and offer guidance in a way that business owners and their employees understand. Come and talk to us.

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

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