Share Option Agreement - EMI Scheme
This Share Option Agreement - EMI Scheme is between a Company and a Grantee, giving the latter the right to exercise the option to subscribe for new shares within a specified period of time. The document is intended to be used as part of the Enterprise Management Incentives (EMI) Scheme. These are not the scheme rules, which would be specific to the company involved and drafted after independent advice is sought.
The Enterprise Management Incentives (EMI) Scheme is one of four HM Revenue & Customs approved employee share schemes. The other schemes are:
- Company Share Option Plan (CSOP)
- Share Incentive Plan (SIP)
- Save As You Earn (SAYE or Sharesave)
EMI options are tax advantaged options aimed at small, high risk companies. EMIs are intended to help these companies recruit and retain high calibre employees and to reward the employees for taking a risk by investing their time and skills in helping the company grow. A qualifying EMI option must take the form of a written agreement between the grantor (the company) and the grantee (the employee).
The recipient must be an employee. These options are not intended for those that own and run the company (non-executives and consultants are also excluded). HMRC sets out threshold tests such as the amount of hours a week an employee must work for the company in order to be eligible. Currently this is at least 25 hours a week or 75% of the employee’s working time. This information, as well as all other up to date and relevant information regarding EMIs is available on the HMRC website, www.hmrc.gov.uk.
As a broad overview, there is no limit on the number of employees that can be given options. The total value of the options given to each employee cannot exceed £250,000 at the time of grant (there are however specific rules regarding EMI individual limits which should be checked on HMRC’s website). The overall total of EMI options that a company can grant cannot exceed £3 million worth of shares at any one time.
The shares under option must be part of the ordinary share capital of the qualifying company, fully paid up and not redeemable. The terms of the option must be set out in writing at the time of grant. This is most usually done by means of an option agreement.
Options must be exercised within 10 years. The EMI plan should be registered with HMRC and the company must notify HMRC within 92 days of the options being granted.
To qualify to grant EMI options, a company must:
• be independent of other companies (it must not be under the control of another company or have any arrangements in place to become a subsidiary – this may exclude joint venture companies);
• only have qualifying subsidiaries,
• have gross assets that do not exceed £30 million;
• have fewer than 250 employees;
• be a trading company (there are certain excluded activities); and
• have a permanent UK establishment.
There is more detail on each of these criteria on HMRC’s website and companies can seek HMRC clearance that they meet the requirements.
On grant there is no income tax or National Insurance Contributions to pay. Similarly there will be no tax or NIC charge when the option is exercised, provided the option is exercised within 10 years. Beyond this period, tax relief will be lost. Again it is advisable to check the latest tax position with HMRC.
On disposal, capital gains tax will be charged. However Entrepreneur’s Relief may be available.
An EMI option agreement should set out the parameters of how the relevant scheme will operate, including dealing with any terms and conditions the company wants included, for example, how and when options should lapse?
This EMI Option Agreement contains the following clauses:
1. Interpretation
2. Grant of Option
3. Exercise of Option
4. Cessation of Option
5. Variation of Capital
6. Winding up
7. Sale
8. Automatic transfer
9. Drag along
10. EMI Scheme
11. Company re-organisation
12. Miscellaneous
Optional phrases / clauses are enclosed in square brackets. These should be read carefully and selected so as to be compatible with one another. Unused options should be removed from the document.
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