The Next Alexa? Surfing the IP Challenges for Artificial Intelligence
13 September 2018
A company share option plan can take many shapes. Choices vary from options schemes which are approved by HMRC such as CSOP, SIP or EMI options. If the employer does not want to bring its share awards under an HMRC qualified plan or cannot qualify as its trading structure falls foul of the rules then there are unapproved options. If the employer does not want to issue physical shares then there are phantom options which pay out against share value but in cash.
The holding company was situated in Jersey. A large proportion of the trade was based in the UK via a wholly owned subsidiary. The group employed 500 employees which meant it did not qualify for the most generous and flexible of all HMRC tax approved plans – EMI options. The employer was keen to implement a tax efficient arrangement for its employees as far as was possible.
We recommended that the company adopts an HMRC approved company share option plan (CSOP) for its UK employees. The group qualified under the CSOP legislation because all subsidiaries were at least 51% controlled. CSOP option holders do qualify for tax exemption on exercise of the option if the qualifying conditions are met. Employees based outside of the UK were awarded unapproved options on the same terms. This was because non resident tax payers do not qualify under any of the HMRC rules.
We worked for a NASDAQ quoted company who operated a stock plan. The parent was keen to bring the employees of its UK subsidiary into participation in the stock plan. Quoted companies can qualify under the CSOP legislation.
We drafted and approved with HMRC an addendum to the US stock plan. The addendum meant that UK employees could participate in the parent stock plan and receive the UK tax benefits attaching to CSOP options.
The UK group traded in countries which prohibited non-resident companies from trading if the subsidiary was controlled outside of the host jurisdiction. In this case, the UK holding company owned more than 51% of the shares in one of its subsidiaries but in order to comply with local trading requirements it did not control the subsidiary. In order to qualify under any UK tax approved company share option plan there is a requirement of control as well as 51% share ownership.
The UK board wanted to motivate a range of employees some of whom were senior directors based in the UK. As far as was possible there was a desire to award shares on tax beneficial terms for the senior directors.
We recommended unapproved options be granted for employees based outside the UK. There are no legislative restraints on the award of unapproved options and these could be granted in the foreign jurisdictions in which the group operated.
For the senior directors based in the UK we designed growth shares. Growth shares provided an opportunity for the growth in value of the group to be enjoyed by the shareholders in the event of sale. The growth qualified for capital gains tax treatment which was more beneficial than income tax treatment. To implement the growth shares we designed a new class of share and amended the articles of association. The growth shares had drag along rights to make sure the business remained attractive for sale.
Our client had been approached to join a new start up as the CEO. The founders did not have shareholder approval to dilute investors with the issue of more shares. He asked us what could be done to secure a share of the capital growth of the business.
We recommended that a phantom option was put in place. The basics were that if milestones were achieved a slice of the proceeds received by the founders on sale of the business would be paid to the CEO. The downside to the phantom option was that the CEO would be subject to tax and national insurance on the proceeds he received. Our client took the view this was better than nothing.
Gannons were a great addition to our team. They realised our future incentive plans.