Share options scheme review - advice for employees

We provide an independent review of share schemes and options for employees and directors.  We flag important points.

We have the experience you will need to understand your position. We help employees and directors receiving shares or options from all types of companies ranging from private companies to larger groups. We can review EMI options, other forms of approved options, unapproved options, growth shares and gifts of shares.

Typical areas to look at under option agreements

• What happens if you leave employment?
• What happens if the business is sold?
• How much do you pay to acquire the shares on exercise of the option?
• How much tax will you pay? - in unquoted companies the value of shares for tax purposes needs to be looked at closely.  The tax value (which is not necessarily the same as the commercial value) determines your income tax liability on the award of shares.
• How will you dispose of the shares and realise value?  For private companies this can be a big issue.
• Provisions which may detract from the potential value of your share award such as good leaver/bad leaver provisions, compulsory transfers, whether you will have rights of first refusal and pre-emption rights
• Share for share or option swaps - If the business is undergoing a re-organisation or share for share exchange there can be implications for option holders and employees who have been awarded shares including growth shares.  Your position will depend upon the terms of the share award which we can review and explain to you.
• Earn out provisions - if included in the option agreement, on sale of the business you may be forced to sell shares and receive a slice of consideration on sale and then further instalments of consideration if targets are met.  There are tax issues arising on the earn out.

Explaining the tax position

We help employees with the complications of tax reporting and payment of tax to HMRC.

• Share awards will be subject to income tax and national insurance (social security) in some cases.  There may be tax exemptions available if the award is qualified under one of the various HMRC arrangements.
• If the shares decrease in value HMRC does not refund the tax.  This means the situation needs working through before the tax is paid.
• Capital gains tax will due on any gain arising on the sale of the shares.

Whilst the payment of tax is a personal matter for the employee or director in practice many employers help their staff.  For example, they will often agree the tax value of shares in private companies with HMRC on behalf of the employees.

Specific risks with EMI options

Under the legislation for EMI schemes there are a series of events which take away the tax benefits.  The events are known as “disqualifying events”.  If there is likely to be a disqualifying event we can look at alternatives to EMI.

Employer’s actions which can defeat your tax advantage under EMI options include:

• The company fails to report the share incentive award to HMRC within the relevant period or fails to grant the award within the deadline set by HMRC.
• Some option schemes prohibit the company from becoming a subsidiary of, or coming under the control of, another company. This includes coming under control of a trust. This means that tax benefits of a share incentive may be lost due to internal reorganisation, e.g. if a new holding company is inserted above the current company.
• The company ceases to trade or, in the case of a start up where a share incentive was granted to an employee when the company was preparing to trade, the company does not start trading within two years of the date of grant of the share incentive.
• The employer varies the terms of the share incentive award or alters the company’s share capital, especially share rights, in a way that affects the value of your share incentive.

Will you know if EMI status is at risk?

Where a disqualifying event under the EMI scheme has already happened the employee’s remedies are limited. There is a 90 day window in which a share award can be “saved”, e.g. an EMI option can be exercised. If the deadline is exhausted preserving the benefit of the option is impossible.

It is recommended that there is a requirement to be notified of EMI disqualifying events.  Including the notification requirement in the EMI documentation puts you in a stronger position.

Resolving share option disputes

Disputes around the award of shares or options to employees can arise when:

• The employer and employee disagree about the value of the shares awarded which is usually when shares are transferred compulsorily; or
• The employee loses a tax advantage as a result of employer’s actions.

We review the facts and provide a steer on what to do.  There are sometimes technical arguments which if advanced will bring the dispute to the end – we look for suitable avenues to explore.  The general rule is that the employer cannot take away rights without your express approval or express powers not set out and agreed when the shares were awarded.

Discretionary share award disputes

Many awards of shares to employees confer on the employer an element of discretion in how the employee will be treated.  We often see the determination of whether an employee is a good or bad leaver left to the discretion of the employer.  There are rules on how discretion can be applied.  If the discretion has not been applied fairly there may be grounds for a challenge which we can guide on.