Case Study

EMI options exercised upon merger

Our client, an English company, merged with a US company based in Georgia. As a result, the companies created a new Delaware LLC (Limited Liability Company). The English Company owned 15% of the Delaware LLC.

The merger

A Contribution and Exchange Agreement governed the merger. This agreement included earn-out provisions

Earn-out provisions

The earn-out provisions would either increase or decrease our client’s shareholding in the Delaware LLC. If they met their targets then its share of the Delaware LLC increased. However, failure to meet targets would result in its share of the Delaware LLC decreasing.

Operating agreement

An operating agreement governed the relationship between our client and the US company. This agreement is similar to a shareholders’ agreement.

Leaver provisions

The operating agreement contained good and bad leaver provisions. For the first two years following the merger, English employees could only own shares in the Delaware LLC whilst employed by the Delaware LLC. This meant that any employee who left their post, or was dismissed for negligence within the two year period would have their company shares revoked. However, if employees were forced to leave for health reasons, or because they were made redundant, i.e. they were good leavers, then they could keep their shares.

EMI options

The merger entitled some employees to exercise their EMI options on the English company’s shares. On exercising their options, these employees received shares in the new Delaware LLC.

The EMI documentation defined the procedure for employees exercising their EMI options. When the English company issued the options, they did not agree the form that the NIC (National Insurance Contribution) NIC would take with HMRC. We agreed the NIC with HMRC before the deal closed. Thus, the employees had no income tax or national insurance liabilities when they exercised their options.

The Contribution and Exchange Agreement’s earn-out provisions affected these employees’ shareholding. Their shareholding depended on whether the English company met targets.

Even minority owners could impact the Delaware LLC’s operations and sale-ability. Hence, the shareholders required these employees to sign documents agreeing to abide by the Operating Agreements’ terms which included preservation of trade secrets.


Catherine Ramsay

Manages to explain difficult concepts in easy to understand language. In tune with her clients.

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