HM Revenue and Customs (HMRC) has issued guidance on the inclusion and use of discretions awarded to directors in Enterprise Management Incentive (EMI) share option plans. While this is generally welcome, caution is still needed when drafting and operating EMI share option plans. We have summarised below the key insights, of particular relevance to our growth clients who already have, or are considering implementing, an EMI share option plan.
- Director discretions in share option plans can be specific (meaning the discretion can be used in relation to a specific event, such as the use of a discretion to treat a leaver as a good leaver, the event being the termination of the employment relationship) or general (meaning the discretion is not connected to any particular event, such as a general ability for the directors to determine an option is exercisable at any time). The use of a specific discretion included in an EMI share option plan may be acceptable to HMRC. However, the use of a general discretion is not likely to be acceptable and would likely result in the loss of EMI tax treatment. If an EMI share option plan gave directors a discretion to permit an exercise at any time and directors use this discretion to permit the exercise of EMI options it is now clearer that HMRC would consider this would likely result in the loss of EMI tax treatment.
- Certain share option plans only allow options to be exercised on an exit event (such as a sale, IPO or other change of control), which are commonly known as “exit-only plans”. Other share option plans allow options to be exercised as soon as they have vested, which we will call “non-exit-only plans”. Care will be needed where a discretion to accelerate vesting of an EMI option (for example, on an exit event) is included in a non-exit-only plan. This may be relevant where an EMI share option plan sits as a sub-plan to a stock option plan of a US parent company, as such US plans are typically non-exit-only plans.
- The use of a discretion to bring forward the date on which an EMI option may be exercised will not be acceptable. For example, in exit-only plans which do not grant a right of exercise to a good leaver, it is now clear that HMRC would consider the use of a general discretion to allow a leaver to exercise their vested EMI option when they leave rather than waiting to exercise until an exit not to be acceptable.
In summary, if there is any uncertainty, advice should be taken when directors exercise a discretion in an EMI share option plan to ensure EMI tax treatment is preserved.
If you have any questions or would like to discuss, please contact Anna Humphrey.