Can you amend employee share options?

Businesses grow and develop, which can create a need to amend existing share options awarded to employees. We look at what changes may be possible and how they can be implemented.

Amending an employee share scheme can create two significant legal and practical issues. First, can the employer change the terms of the shares or options without the employee’s consent, and how might the employee respond? Second, changes to tax-advantaged options can have important tax consequences and may affect their tax-advantaged status.

We advise employers with employee share schemes, as well as employees where an employer proposes to change previously agreed terms or claims that existing options are no longer valid.

Why amend the terms of an employee share option grant?

Based on practical experience, common reasons for amending options include:

• Performance conditions -  the targets attached to exercise may no longer be appropriate or achievable. Targets may have been too ambitious, or changes to the business may have made them less relevant.
• Employee leavers - an option agreement may provide for options to lapse when an employee leaves. An employer may instead wish to allow the departing employee to retain some or all of their options.
• The option is under water - this occurs where the exercise price is higher than the current value of the shares. This can reduce the incentive value of the options.
• Change of control -following a sale, the new owners may wish to replace existing options over shares in the seller with options over shares in the acquiring group. Some plans provide for this type of rollover, but where they do not, the existing arrangements may need to be reviewed.
• Share Capital changes - employers may need to amend the number of shares under option or the exercise price following changes to the company's share capital
• The articles and/or shareholders agreement  -amendments to the company’s constitutional documents or shareholders’ agreement may affect the rights attaching to shares issued following the exercise of options. For example, standard articles may not contain appropriate provisions dealing with leavers, or may lack drag-along and tag-along rights needed to facilitate an exit.

How to implement share option changes

The first step when considering an amendment is to review the plan rules and share option agreement to establish whether the employer has a contractual right to amend the terms. Employee consent may be required, and board or shareholder approval may also be necessary.

The appropriate approach will depend on the type of option. Broadly, options fall into two categories:

• Non-tax-advantaged options;
• Tax-advantaged options, including EMI options.

Where an amendment is permitted, it should be properly documented, which may include board minutes and a written variation or deed. The appropriate form of documentation will depend on the terms being changed. Some changes may also need to be reported to HMRC, so the tax and reporting consequences should be considered before the amendment is implemented.

Non-tax-advantaged options

Non-tax-advantaged options are generally more flexible than tax-advantaged options. Subject to the terms of the relevant documentation and the employee’s consent where required, the terms can usually be amended.

Where existing options are cancelled and new options granted, this will generally create a reportable ERS event. The relevant details should be included in the company’s annual ERS return where required.

Tax advantaged options

The position is more complex where the options are tax advantaged, such as EMI options. HMRC considers whether a change amounts to a new option based on the nature and extent of the variation. Minor changes which do not affect the fundamental terms or increase the value of the shares under option may be acceptable.

The fundamental terms of an EMI option include the number of shares, the exercise price and when the option can be exercised. A more than de minimis improvement to these rights can result in the release of the existing option and the grant of a new one.

This can have significant tax consequences. A new EMI option may require a fresh valuation, and changes that increase the value of the shares or cause the EMI requirements to cease being satisfied can be disqualifying events.

However, not all amendments are prohibited. HMRC’s current guidance allows certain changes in specified circumstances, including some extensions to the exercise period of existing EMI options following the changes introduced from 6 April 2026. The precise requirements depend on the type of option and the company’s circumstances.

It is therefore important to establish the tax consequences before making any amendment, particularly where an exit is approaching. An incorrectly structured variation could affect the employee’s tax position and potentially create additional costs for the company, including employer NICs.