Share Options

Lawyers to set up the best share option structure for your business.

Share Options

We have the experience you will need to help you decide whether to offer share options and if so, which type of the multitude of arrangements possible is the best.

We cut down on the need for many different sets of advisers as we can handle the whole process for you from design, implementation, communication through to HMRC reporting.

Years of experience have left us attuned to the needs of employers.

Share options offer employers a choice

In the UK there is far more choice for employers in terms of the type of arrangement to pick than is on offer elsewhere in the world.

HMRC tax-advantaged options

Four types of option arrangements confer special tax advantages for employers and employees if various legislative requirements are satisfied – these options are known as HMRC tax advantaged options (formerly known as HMRC approved options).

The types of tax-advantaged share options schemes are listed below. Please visit our pages on each of these types of HMRC tax-advantaged share options.

EMI Share Options

When we are dealing with private companies the starting point will always be EMI share options.  Of all the option arrangements possible in the UK EMI outshines on many fronts and is particularly tax effective.   In some cases EMI options cannot be awarded as the qualifying conditions are not met – in those cases we will consider alternatives which can be tailored for the business.

Non-tax-advantaged options

If you do not fit into one of the four types of HMRC tax-advantaged options you can still grant options which are known as non-tax-advantaged (formerly known as unapproved options). You choose non-tax-advantaged share options, as the fact they are not HMRC approved does not mean they are somehow unlawful or not acceptable to HMRC.

Flexibility for employers

Employers have flexibility when it comes to implementation of share option awards.  Benefits for employers include:

  • The ability to design the option rights and the terms to suit the need of the business.  Some HMRC tax-advantaged option plans have to be offered to the entire workforce.  A benefit of EMI is that the employer gets to chose who receives options, how many and how much the employee has to pay for them.
  • Avoiding complications that can arise if voting rights are conferred;
  • There are no shareholder rights such as the right to request access to company financial information; and
  • Options do not dilute existing shareholders until exercise.  However, we always recommend a share capital table is prepared before the options are granted so that employers and their shareholders understand the dilution that will arise on exercise.

Position of option holders compared with shareholders

Unlike options, shares give the employee ownership of the company.  If you gift shares to employees, in most cases, the articles of association or shareholders agreement will require amendment to deal with compulsory transfer situations such as leaving employment.

There is no need to change the articles of association or shareholders’ agreement for option holders until they become shareholders. In the case of options which are only exercisable upon sale of the business there may never be need to change the articles. This is because the option holder exercising upon the sale will only be a shareholder momentarily.

Upon sale, exercise is usually wrapped up with the sale documentation to eliminate the risk of the option holder not consenting to the sale.

A share award gives rise to:

  • An opportunity to bring profits made on the shares within the capital gains tax regime which carries a lower rate of tax than profits taxed to income.
  • An immediate charge to income tax and often national insurance on any benefit conferred upon award of the shares.  With an unapproved option there is no tax on award.
  • Risk for the employee as if the shares decrease in value HMRC does not refund the income tax or national insurance paid on award.
  • Immediate dilution for shareholders.  With a non-tax-advantaged option there is no dilution until exercise.

We use our experience to help employers design the best arrangements for their business.

Position with share options on termination of employment

An advantage of either type of options is that if employees or directors leave the business before they have exercised their options the usual position if that the option will lapse. It is possible to draft the share option documentation in such a way as to remove the employer from liability to pay compensation for loss of share option rights.

By contrast, if any type of option has been exercised and shares have been provided to the employee or director the position on leaving employment is not as straight forward. There is no automatic lapsing. The position will depend upon what is set out in the articles and or shareholders agreement. The company may buy back shares from departing employees or directors and these can either be cancelled or recycled for future awards by either holding them in an EBT or in the company’s treasury account.

Legal advice for employees offered share options

We review share option proposals offered to employees and directors.  Our specialist expertise helps us spot the issues employees and directors need to be aware of.

Please do contact us to discuss your queries.  We are always happy to quote and provide an outline scope. We are known for being practical and cost effective.  Companies with option arrangements in place out-perform those that do not offer share incentives.

Catherine Ramsay

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

Let us take it from here

Call us on 020 7438 1060 or complete the form and one of our team will be in touch.