Independent advice for recipients of share awards from an employer
- Helen Curtis
- Updated: Wed, 5th Apr 2017
We provide independent advice on your share award. We assess your employment, legal & tax issues. Often we negotiate a better deal. We offer a fixed fee service.
Services for employees or directors include:
Option holder rights
We examine problem areas such as:
- What happens if you leave employment?
- What happens if the business is sold?
- How much do you pay to acquire the shares on exercise?
- How will you dispose of the shares and realise value? For private companies this is a big issue as there is no ready market for the shares.
Special risk for EMI options
Under the legislation for EMI schemes there are a series of events which take away the tax benefits. The events are known as “disqualifying events”.
Disqualifying events for EMI option purposes
Employer’s actions which can defeat your tax advantage under EMI options include:
- The company fails to report the share incentive award to HMRC within the relevant period or fails to grant the award within the deadline set by HMRC.
- Some option schemes prohibit the company from becoming a subsidiary of, or coming under the control of, another company. This includes coming under control of a trust. This means that tax benefits of a share incentive may be lost due to internal reorganisation, e.g. if a new holding company is inserted above the current company.
- The company ceases to trade or, in the case of a start up where a share incentive was granted to an employee when the company was preparing to trade, the company does not start trading within two years of the date of grant of the share incentive.
- The employer varies the terms of the share incentive award or alters the company’s share capital, especially share rights, in a way that affects the value of your share incentive.
Will you know if EMI status is at risk?
Where a disqualifying event under the EMI scheme has already happened the employee’s remedies are limited. There is a 90 day window in which a share award can be “saved”, e.g. an EMI option can be exercised. If the deadline is exhausted preserving the benefit of the option is impossible.
Always require that you are notified of a disqualifying event for EMI options. Including the notification requirement in the EMI documentation creates a contractual right for you. Contractual rights offer better protection.
There are a variety of issues to consider when looking at shareholder rights. Minority shareholders are in a special position but enforcing rights where the documentation is not clear is not always easy.
Tucked away in small print can be provisions which detract from the potential value of your share award.
We look at and point out any problems with the rights set out in the documentation before they arise. For example:
- Articles of Association: which state your shareholder rights, e.g. dividend or voting rights;
- Shareholders’ Agreement: explains when you can sell your shares for how much money. In particular, we check for:
- Good leaver/bad leaver provisions – here we are looking for the value you will receive for any shares you are forced to transfer on leaving employment.
- Compulsory transfers – here we are looking for the circumstances when you will be forced to transfer shares. Usually forced transfer arises on cessation of employment or directorship. We are looking for other circumstances all of which can act to your disadvantage.
- Share valuation provisions – here are looking for how much will your shares be worth.
- Rights of first refusal and pre-emption rights – here we are looking for whether you have an opportunity to acquire shares in the future.
- Business share valuation: usually determines your income tax liability on the gift of shares, and capital gains tax liability on the sale of shares;
- Directors service agreement and employment documentation: here we are looking for share rights upon termination of employment or dismissal of directorship
We help employees with the complications of tax reporting and payment of tax to HMRC.
- Share awards will be subject to income tax and national insurance (social security) in some cases. There may be tax exemptions available if the award is qualified under one of the various HMRC arrangements.
- If the shares decrease in value HMRC does not refund the tax. This means the situation needs working through before the tax is paid.
- Capital gains tax will due on any gain arising on the sale of the shares.
Problem for internationally mobile employees
HMRC run a special set of tax rules where employees are working and resident in different countries at the time of grant, exercise or sale of shares provided as a result of their employment. Non-UK employees who spend some of their time working in the UK may be subject to UK income tax. Those charges may arise on top of tax charged in other jurisdictions.
Solution offered for internationally mobile employees
We review the details and explain how the tax rules will operate. Our service enables employees to report and pay to HMRC the correct amount of tax. The advice will spare the operation of penalties and interest charged by HMRC.
Sales and re-organisations
Your position upon a business sale or re-organisation will depend upon the rules of your employee share scheme and the circumstances of the sale or re-organisation.
- A business sale can give rise to a right to sale proceeds.
- A re-organisation can give rise to a share for share swap but not any proceeds.
Outline of issues for shareholders
If you are a shareholder at the point of sale then you will join with other shareholders to receive proceeds. The issues we look for include:
Forced sale of shares
Will you be forced to sell shares and at what price? The share of the proceeds received will depend upon the class of shares you hold. It may be that you are required to agree to an earn out. An earn out mechanism provides that you receive a slice of consideration on sale and then further instalments of consideration if targets are met. There are tax issues arising on the earn out which we will advise you upon.
We do advise on the tax issues and the availability of entrepreneurs’ relief which reduces your tax on gains down to 10%.
Sale of assets
In some cases the sale of assets will trigger a right of shareholders to receive a capital payment in respect of shares held. Issues can arise where the business sells off intellectual property rights.
Employee share scheme disputes can arise when:
- The employer reduces or claws back the share scheme award;
- The employer and employee disagree about the value of the share incentive award, usually when shares are repurchased; or
- The employee loses tax advantage as a result of employer’s actions.
Our solution for resolving share scheme disputes
We review the facts and provide a steer on what to do. There are sometimes technical arguments which if advanced will bring the dispute to the end – we look for suitable avenues to explore.
Cancellation of share rights
The general rule is that the employer cannot take away rights without your express approval or express powers in the share plan agreement. We look to see what cancellation rights may have been reserved so that you are on notice and able to resist.
Use of discretion under employee share schemes
The use of discretion comes into play in a variety of situations and needs consideration as it could strip you of value.
- For example, on termination of employment or dismissal from directorship in what cases will you be deemed a good leaver?
Claw back of employee share awards
The problem is the employer may want to re-claim share awards in a situation where it has no right to do so. Often the employer will demand a gross repayment of bonuses and share incentives. However, HMRC may deny repayment of any overpaid PAYE.
Solutions for claw backs
The solution depends upon what stage you are at. Ideally, when the award is made an indemnity is secured from the employer to protect against the risk for an employee. If there is no indemnity in place we explore available solutions to resolve the problems.
Glossary of terms used in employee share schemes
Share schemes and options are full of confusing terms. We can tell you what the terms mean to you. Our service helps you to evaluate the real value of the share award or option.
Some key terms are:
“Grant of option:” occurs when you sign the option agreement. However, just because you were granted options, does not mean you have them. The options become yours when they vests into you. Sometimes vesting occurs years after the option was granted.
“Employment related securities:” refers to shares and securities received as a result of any future, current and past employment;
“Exercise” occurs when you covert the options for actual “straight” shares. At this point you become a shareholder. You might also receive dividends, depending on the rights attached to your shares.
“Option” or “share option” is a right to acquire shares in the company at a later date.
“Restricted securities” are securities or interests in securities held by employees or directors which are subject to restrictions which reduce their value. If shares are restricted securities there may be income tax charges when restrictions are lifted or shares are sold.
“Vesting” occurs when you are entitled to the option. Often, vesting is tied to “vesting conditions” or a “vesting schedule”. This means that you must fulfil certain conditions to be entitled the shares.
“Unrestricted tax market value” is a concept used to value private company options and shares for tax purposes. It refers to actual market value of the shares if they were not restricted in any way, e.g. if they had no transfer restrictions.
Track record in providing advice on employee share awards
Our track record in advising executives and employees is extensive. Recent successes include:
- Advised three property management company directors on the issue and sale of Employee Shareholder Shares. The CEO received over £3 million for his Employee Shareholder Shares;
- Negotiated a gift of shares and unapproved options grant for confectionery business director. We negotiated more onerous leaver provisions, so his options vested in tranches after he completed defined years of service;
- Ensured a specialist technology company’s employees maintained their share option rights after a TUPE transfer;
- Recouped options for employee who lost his share option due to his company’s negligence.
- Dealt with issues arising when an employer attempted to change the terms of an EMI option.
- Advised on tax implications arising on option exercises by an employee who was resident in different companies at grant and exercise.
Before you sign your share award agreement, why not ask me to check your employment, legal & tax implications. Why not call or email me now to arrange a discussion.....