Share options scheme review - advice for employees

We provide an independent review of share schemes and options for employees and directors, highlighting key terms, potential risks and important points to consider.

We have the experience needed to help you understand your position. We assist employees and directors receiving shares or options from companies of all sizes, from private businesses to larger corporate groups. We review EMI options, other tax-advantaged share schemes, unapproved options, growth shares and gifts of shares.

Typical areas to look at under option agreements

• Leaving employment – what happens to your options or shares if your employment ends?
• Sale of the business – can you exercise your options, and what happens to your shares on an exit?
• Exercise price – how much must you pay to acquire the shares?
• Tax liabilities – what tax may arise when options are granted, exercised or shares are acquired? For unquoted companies, the valuation of shares for tax purposes requires particular care. The tax value may differ from the commercial value and can affect your tax liability.
• Realising value – how and when can you sell your shares? This can be a significant issue in private companies, where there may be no readily available market.
• Restrictions on your shares – how might good leaver and bad leaver provisions, compulsory transfers, rights of first refusal and pre-emption rights affect the value of your award?
• Share-for-share exchanges and option swaps – a reorganisation or share-for-share exchange may affect employees holding options, shares or growth shares. Your position depends on the scheme rules, option agreement and proposed transaction.
• Earn-out provisions – on a sale, some consideration may be deferred and conditional on future targets being met. This can affect when you receive value and the tax treatment of the proceeds.

Explaining the tax position

We help employees and directors understand the tax implications of share awards and options, including reporting and payment obligations to HMRC.

• Income tax and National Insurance – charges may arise when shares are acquired or options exercised, depending on the scheme and circumstances. Certain tax-advantaged arrangements may provide relief if the relevant conditions are met.
• Changes in share value – tax may become payable even where the shares subsequently fall in value. The potential tax liability should therefore be considered before acquiring shares or exercising options.
• Capital gains tax – a gain may arise when shares are sold, depending on the acquisition cost, any amounts already taxed as employment income and the applicable reliefs.

Although the tax liability is generally a personal matter for the employee or director, employers may assist with the process. For example, an employer may arrange an HMRC valuation of shares in a private company. The availability and effect of any tax relief will depend on the specific scheme and the relevant statutory conditions.

Specific risks with EMI options

EMI options can provide valuable tax advantages, but certain events can restrict or remove some of those benefits. These are known as disqualifying events. Where an event is anticipated, we can review the potential implications and consider whether any options are available to protect your position.

Employer actions and changes affecting EMI status may include:

• Failure to meet the relevant reporting requirements or other statutory conditions for the grant.
• A change in the company’s independence or control, including certain group reorganisations.
• The company ceasing to meet the qualifying trading requirements.
• The option holder ceasing to meet the relevant eligibility conditions.
• Changes to the option terms or share capital that affect the option’s qualifying status.

The consequences depend on the event and the applicable rules. Not every change automatically removes all EMI tax advantages.

Will you know if EMI status is at risk?

If a disqualifying event occurs, the timing of any subsequent exercise can be important. In many cases, exercising a qualifying EMI option within 90 days of the event preserves the relevant tax advantages. If the option is exercised later, a tax charge may arise on some or all of the increase in value, depending on the circumstances.

It is therefore worth considering whether the option documentation should require the company to notify option holders of relevant events promptly. A notification provision may help you act within the applicable time limit, although it cannot itself prevent a disqualifying event or guarantee that tax relief will be preserved.

Resolving share option disputes

Disputes can arise where:

• The employer and employee disagree about the value of shares, particularly where shares are being transferred compulsorily.
• The employee loses, or risks losing, a tax advantage because of the employer’s actions.
• The employer exercises discretion under the scheme rules or option agreement in a way the employee considers unfair.
• The employer seeks to change or remove rights attached to an award.

We review the facts, explain your position and identify potential ways forward. Depending on the circumstances, there may be contractual or technical arguments to explore and appropriate avenues for resolving the dispute, including shareholder dispute support.

Whether an employer can change or remove your rights depends on the terms of the relevant documents, any applicable consent requirements and the law. We can help you assess the available options and determine a suitable strategy

Discretionary share award disputes

Some share awards give the employer discretion over how an employee is treated. For example, the scheme rules may allow the employer to decide whether an employee is a good leaver or a bad leaver.

That discretion is not necessarily unlimited. Its exercise may be subject to the terms of the scheme, contractual restrictions and applicable legal principles. If you believe the employer has exercised its discretion improperly or unfairly, we can review the relevant documents and circumstances and advise on potential grounds for challenge.