Employee Share Schemes / Options
The Corporate Commercial Solicitors at Myerson have many years of experience in drafting all kinds of share option schemes
We have seen a greater take up in employee/executive share option schemes having seen successions of governments and think tanks promoting their virtues. The main reasons that such share schemes are used is to:
- Attract individuals to a senior role or to retain them over a long period of time
- Motivate senior employees to increase performance and achieve greater targets and/or
- Get more “buy in” from employees as it allows them to share in the success of the company
Share schemes can be either approved by HMRC or not. If they are approved the person receiving the option shares and/or the company issuing them will benefit from certain tax reliefs which further enhances their value as compared to non-approved schemes or cash bonuses.
In order to be an approved scheme, the scheme, the company and the employees must qualify under the relevant legislation.
Please click on the links below to find out more about Share Option Schemes:
- Types of Share Schemes
- Employee Benefit Trusts (EBT’s)
- Conditions to Exercising Options
- Further Considerations
As an alternative to a share option scheme, you may wish to consider giving employees shares under which they will sacrifice certain employment rights in return for certain tax benefits. For more information on this, please contact us.
Types of Share Schemes
There are a number of types of share scheme that are commonly used, including the following:
Enterprise Management Schemes (EMI)
EMI options are by far the most popular as they can be drafted for all employees (subject to satisfaction of working time and other criteria) as part of a scheme or tailored to the requirements of each individual.
Being an approved scheme, the employee will, subject to satisfaction of certain conditions, benefit from relief from income tax and national insurance contributions (NICs) on the receipt of the shares as well as entrepreneurs relief on capital gain tax on a subsequent sale of the shares.
The conditions to exercise the options may be flexible and can be subject to specific performance targets or alternatively simply by a minimum time requirement.
Company Share Option Plan (CSOP)
CSOP’s are approved schemes giving the employee income tax and NICs relief on the receipt of the shares. They do not need to apply to all employees and can be subject to performance criteria.
However they can only be exercised at least 3 years after their grant in order to receive the tax benefits.
Save As You Earn Schemes (SAYE)
These are both a share option scheme as well as a savings scheme and are more popular in companies with large numbers of employees. They apply to nearly all employees making it more complex to administer.
As an approved scheme, the employee receives income tax and NICs relief.
Share Incentive Plans (SIP)
These allow employees to acquire shares as opposed to share options. There are 4 types of share available under a SIP: free shares, partnership shares, matching shares and dividend shares.
These schemes are very flexible as the company can decide the elements it wishes to implement and the level of award.
These are very flexible and are beneficial where the shares under option do not qualify under any approved schemes. These are usually a lot cheaper to set up and maintain, but do not have any of the tax benefits of the approved schemes.
Employee Benefit Trusts (EBT’s)
EBT’s are commonly used in larger employee share schemes such as CSOP’s, SAYE schemes and SIP’s where the EBT is required to acquire and hold shares in the company to provide benefits to both employees and former employees.
They can also be used to simply “warehouse” shares on behalf of the company.
Conditions to Exercising Options
Share options can include a number of different types of conditions which need to be achieved before the option can be exercised. These can be performance or event related, for example:
- Performance conditions – these can be based on financial performance of the company overall such as sales or profit or on an individual or team basis or
- Event conditions – the most common event is a sale of the company (known as an “Exit Only Option”), but other events could be a minimum length of service
The conditions could also be a mixture of both, for example a sale of the company provided that the sale value is of a minimum amount.
When considering granting a share option scheme, time should also be spent thinking about the following matters:
Type of share under option
Subject to any restrictions governing the shares that can be granted under an option, careful consideration should be had as to the rights which those shares will have.
For example, will they be voting or non-voting, will they have the right to receive dividends and will they participate in the proceeds of a sale of the company (and, if so, to what extent)?
If it is likely that the options are capable of exercise prior to an exit, thought should be had as to whether the employees should sign up to a shareholders agreement. For more information about shareholders’ agreement, please click here.
Articles of association
If different share classes are needed, it will be necessary to ensure that the company’s articles of association are reviewed prior to the grant of the option so that the class rights are properly set out and/or to create separate classes of shares.
It may also be worth considering introducing drag along rights into the articles to ensure that minority shareholders are forced to sell on a sale of shares by the majority shareholders.
Other points to consider are set out in our section on shareholders’ agreements.
Before considering adopting any form of share option scheme, you need to liaise with your accountant/tax advisor to make sure that your company, the shares and employees will qualify for an approved tax option scheme.
Contact our Corporate Company Solicitors
If you would like to speak to an experienced solicitor about a share option scheme or if you have any questions, please contact our specialist Corporate / Company team on 0161 941 4000 or email email@example.com and we will be happy to assist and guide you.