Many employers recognise the benefits of awarding EMI options or unapproved options to employees in order to incentivise and motivate them but there is a fear that what might seem right today may not be right in a few years’ time when those options are likely to be exercised. This may leave an employer wanting to change option terms to react to a change in circumstances after the award of options. However, an award of options can protect company assets, such as IP rights, so it is imperative to change the option terms without losing any of the protections.
We take a look at why an agreement may need to be changed and how this may be done. The key point being that if the agreement is drafted correctly in the first place i.e. allowing for the discretion of the employer to amend certain terms, then changes should not cause an issue.
Why would an employer want to amend a share option agreement?
If there are performance conditions attached to the ability to exercise the options and these are no longer capable of being achieved then an employer may wish to amend them to keep its employees incentivised. It is often the case that a clause is drafted in the agreement which allows the options to lapse when the employee ceases to be employed; however, an employer may wish to allow such a person to retain his options. A change may have to be made to the agreement to allow this to happen.
Quite often employers also wish to amend the number of shares which are under option or the exercise price of the options to reflect changes in the share capital.
Amend EMI option: First step
The first step when contemplating changes to an existing option agreement is to check the plan rules and/or the share option agreement to see whether there is an existing provision which allows for the employer to amend the terms. The same documentation should also be checked to see whether there are any restrictions on the employer from varying the option terms.
If there is no express provision dealing with amending the terms of the share option then the option plan rules may need to be amended or a separate agreement can be entered into seeking to alter the relevant term(s) of the plan rules or the option agreement. The latter may be desired if the change is only required for a particular option holder rather than for all share option holders.
Amend EMI option: Second step
The next step is to consider whether there are any approvals which need to be obtained in order to amend the terms of the options. These approvals may be shareholder approvals or the consent of the option holder.
If options were granted under a tax-advantaged scheme such as an EMI scheme there are other factors to consider. For example, amending EMI option terms could be a disqualifying event if, for example, the market value of the shares under option is increased. The repercussions of this are that EMI options need to be exercised within 90 days of a disqualifying event to benefit from the full tax advantages.
The other factor to consider is that HMRC may view an amendment to the terms of an EMI option to be a grant of a new option.
The option agreement is a contract and usually, as with any contract, it can only be amended with consent of both parties. However, the consent of the option holder may not need to be given if, for example, the amendment is allowed by operating an existing term of the agreement. Whether shareholder approval is required depends on the articles of association or, if shareholder approval was required to set the scheme up, whether approval is required to amend the terms.
If an employer is able to amend the terms of the options and wishes to do so then it is important that these changes are documented clearly, usually in a written agreement and usually by deed (as consideration is unlikely to be given for the amendment). Some changes will even require a notification to HMRC so it is important that an employer knows what is required in advance of making the required changes.
Dual-qualified in the UK and USA and a qualified solicitor since 1998, Helen is a partner and heads up the corporate team, advising start-ups, SME companies, partnerships, entrepreneurs, investors and shareholders.