Problems with EMI options when selling a business

Companies often establish Enterprise Management Incentives (EMI) share schemes expecting employees to benefit on an exit, only to overlook the options until a sale is on the horizon. If issues have not been addressed in advance, this can lead to unexpected complications.

Sellers are often surprised by the extent of the due diligence required by a potential buyer. One area of particular scrutiny is the company’s EMI options and other employee share awards.

If your business has an EMI scheme and you are considering a sale, reviewing the scheme well in advance can help identify and address potential issues before they delay the transaction. Gannons can assist with EMI reviews as part of the sale process.

Potential pitfalls on sale or exit where there are EMI Options

If a buyer is uncertain about the tax treatment of EMI options, they may take a cautious approach to avoid potential exposure to HMRC challenges. This can lead to additional enquiries and delays, making early preparation important.

Common issues include:

• Failure to make annual filings via ERS online – Companies must submit an annual employment-related securities return for their EMI scheme, including where there have been no reportable changes. The deadline is generally 6 July following the end of the tax year. Missing returns may need to be brought up to date, and penalties may apply.
• Incorrect or incomplete EMI grant notifications – EMI option grants must generally be notified to HMRC within 92 days of grant. The process involves obtaining a scheme reference and submitting the relevant grant notification. Obtaining a reference alone does not complete the notification. Late notifications may affect the tax advantages available, although relief may be possible in certain circumstances.
• Disqualifying events – Events after grant can affect the tax treatment of EMI options. These may include a change of control, the company ceasing to meet the independence requirement or changes to its group structure. For example, acquiring a minority interest in another company may create issues if the EMI company no longer meets the relevant group requirements.
• Changes in employee roles – Employees must satisfy the applicable working-time requirement, generally at least 25 hours a week or, if less, 75% of their working time. A reduction in working hours or a change in employment status may affect the availability of EMI tax advantages.
• Changes in the company’s trade – The company must continue to satisfy the qualifying trade requirements. Certain activities, including dealing in land or shares and providing legal or accountancy services, are excluded, subject to the detailed statutory rules.
• Timing and supporting records – The circumstances surrounding the grant and exercise of options may need to be reviewed, particularly where the company’s circumstances have changed. Clear records, including option agreements and relevant board minutes, can help establish the position and address buyer enquiries.

If you are preparing for an exit, reviewing your EMI arrangements early can give you time to investigate potential problems and consider whether remedial steps are available. Gannons can assist with reviewing EMI documentation, identifying potential issues and helping you prepare for buyer due diligence.

Contact us on 020 7438 1060 to discuss your EMI scheme and planned sale.