Unapproved share options

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The design of unapproved options can be very creative. Unapproved options are implemented by all types of companies for a wide range of reasons. Unapproved options are usually considered in cases in which – for whatever reason – implementation of HMRC tax efficient approved share options are not possible.  

If the shareholders do not want to tie up physical shares, then phantom options are implemented. These are even more flexible than unapproved options. 

Can we help you?

We act for both employers or recipients of unapproved options and other share-based awards. We are very familiar with all sorts of issues which can arise.

To help you understand if we could help you we have highlighted some examples of unapproved share options we have implemented. We do discuss the tax payable on share incentives by the employees, directors or consultants so those points are understood before we start drafting to be efficient with time. Our commercial and tax teams work closely together to deliver all the support you will need.

Options for employees working in different countries

We designed and implemented of a multi-jurisdictional scheme for a Jersey based parent company with subsidiaries in the UK, Dubai, USA and Russia. We carried out an extensive viability analysis, designed the scheme for the holding company, and rolled out the scheme across the different jurisdictions through our global network. The scheme included the facility to award HMRC approved options to the UK employees.

HMRC tax approved options could not be implemented for the employees of the UK subsidiary. This was because in order to trade in some of the countries there were restrictions imposed under the local jurisdiction on ownership of the trading subsidiaries. Unfortunately, this meant that the group did not qualify under the UK legislation governing tax approved options.

Review of unapproved option grants for key employees

We reviewed the unapproved option arrangements for key employees of a successful finance company. The trade meant that the business could not qualify for any of the HMRC approved option arrangements. The employees asked us to look in particular at the provisions relating to dilution of share capital on future share issues and upon what would happen if they ceased to be employed.

We helped the employees negotiate a position so that if they were good leavers from employment they would be able to exercise their unvested unapproved options. We also secured agreement that having exercised the unapproved option the employee would not be forced to transfer their shares unless they were bad leavers.

Performance based unapproved share options

We designed a bespoke performance based share option scheme for three key employees of an e-gaming company. Unapproved options were chosen as they were easier to implement, given the existing investment agreement signed with key investors, and they found favour with the shareholders.

Options for a CEO

We advised the CEO of an offshore property development company’s UK subsidiary ultimately on the issue of unapproved options. Property development is not a qualifying trade under parts of the UK legislation making EMI options impossible.

Acquisition of a business via the use of options

We acted on behalf of a director buying into a successful bakery business based in South Kensington. The director received a mixture of shares and unapproved options. We drafted put and call options.

The put option gave our client, the buyer, the right to force the baker to sell the balance of his shares in three years’ time, if the buyer wanted to acquire all of the business by acquiring any shares retained by the baker. We negotiated on the formula to be used to calculate the consideration payable upon exercise of the put option.

The call option gave our client the right to sell shares back to the baker if the financials did not transpire as promised.

Phantom option review

We reviewed a phantom option being given to participants. Here the controlling shareholder did not want to use shares. The idea behind the phantom option was to pay out to participants on the sale of the company in cash the amount that they would have received if they were shareholders. We looked at the method for calculating the payment owed to the participants and how the value of deferred consideration would be recognised.

There were several classes of shares in the company. This meant we had to peg the price payable per phantom share to the value received by the controlling shareholder. Without such pegging, there was a risk that lesser consideration would be paid to shareholders of other classes of shares. If that was the value used to calculate the cash payable under the phantom options then the participants would lose out.

We explained the tax implications and HMRC reporting obligations.

  • Clearly experts in designing and drafting commercial share option arrangements