EMI and Capital Reduction Demerger

In this instance the matter was complicated as EMI options were held in Recruitment Ltd over a total of 75 shares (equal to approx. 7% of the fully diluted share capital).  These EMI options would become exercisable on a change of control arising from the share for share exchange to place Recruitment Holdco on top of Recruitment Ltd and would lapse (i.e. cease to exist) if not exercised within 90 days of the change of control.

A key question was whether holders of EMI options should exercise their options and become shareholders in Recruitment Ltd (and participate in the capital reduction as shareholders).  We were mindful that the option holders would not be receiving any money to exercise their options.  Also given the amounts required to exercise, option holders were unlikely to want to exercise their options without funding to meet their exercise prices.  Further, option holders would not have the opportunity to sell their shares (if they were to exercise their EMI options) since there was no third party exit.

Instead, Recruitment Holdco made an offer to option holders to exchange their Recruitment Ltd options for new options over Recruitment Holdco’s shares.  This meant that the option holders would not participate in the capital reduction as they would not become shareholders, but would surrender their old options for new options over shares in Recruitment Holdco.

It was decided that option holders should have the opportunity to exchange their EMI options for EMI options over Recruitment Holdco’s shares (a ‘roll-over’).   The option holders decided to accept the roll over offer rather than to exercise their options.  Separately, an EMI option plan could be put in place for the employees of Software over its share capital in the future.

To grant EMI qualified options in exchange, there were a number of conditions that had to be satisfied.  These included that the share classes and the rights and restrictions in Recruitment Holdco’s shares had to ‘mirror’ those in Recruitment Ltd.  EMI options granted in exchange (including the replacement option agreements) are required to be granted on equivalent terms to the old options over shares in Recruitment Ltd (including as to number of shares subject to option and the exercise price payable).

We reviewed the old option agreement and EMI option plan rules and prepared EMI replacement option agreements to effect the roll-over of options. Option holders received an identical number of options (75) over shares in Recruitment Holdco at the same exercise price per share as their old options.

The replacement options also had to be notified to HMRC (via online notification) within 92 days of grant for the replacement options to qualify as EMI options.  We took our clients through the HMRC portal procedure which is far from easy.