Our last two newsletters looked at the key questions to ask yourself to know what kind of employee share scheme will work for you and your business, and how to value your company. The next two newsletters will focus on the EMI (Enterprise Management Incentives) Scheme, which is a tax advantaged HMRC share scheme aimed to assist smaller companies in attracting and retaining key employees.
What is an EMI Option?
The EMI Scheme was introduced by the Finance Act 2002 and allows a qualifying company to grant options over shares with a value of up to £250,000 per employee (up to a maximum of £3,000,000 total shares in the company to all employees) on flexible terms. The favourable tax treatment (detailed in our next newsletter) makes an EMI Scheme attractive to both employees and the companies involved.
What companies qualify to implement an EMI Scheme?
In order to qualify for an EMI Scheme, companies must satisfy the following conditions:
1) the gross assets of the company (or group) must not exceed £30 million. Gross assets broadly comprise all assets shown in the balance sheet when drawn up in accordance with standard accounting practice;
2) the company must have no more than 250 full-time employees;
3) the company must not be under the control of any other company and must be independent i.e. shares in a subsidiary cannot be used in an EMI option;
4) group companies can, however, offer EMI options to employees of both the parent and the subsidiary companies provided that all the subsidiaries in the group are qualifying subsidiaries. This means that the parent must own at least 75% of the share capital and no other person or entity should control that subsidiary;
5) the company must not carry on an “Excluded Trade”. This includes leasing, financial activities, property development, ship building, steel and coal producing companies. If the trade is merely incidental to the trade carried on by the company or group, it can be disregarded; and
6) there is no requirement that the company be resident or incorporated in the UK, but the trading activities must be carried out wholly or mainly in the UK to qualify.
What employees qualify to receive EMI Options?
In order to be eligible for EMI options, employees must:
1) work for the company for at least 25 hours a week or for at least 75% of their working time; and
2) not have a “material interest” in the company (defined widely by reference to a holding of more than 30% of that company).
Are there any other requirements?
Employees must be prohibited under the terms of the grant of the option from transferring their rights. If the option is capable of being exercised after the employee’s death, it must not be capable of being exercised more than one year after the date of death.
There are provisions within the legislation for dealing with the EMI options if the company which granted them is the target of a successful takeover. In certain circumstances the holder of the option can agree with the acquiring company to surrender his option in return for a replacement option to acquire shares in the new company.
Companies are free to set their own option period, but options must only be capable of exercise within 10 years of being granted. Companies are also free to set the option price which may be more or less than the market value of the shares on the date the option is granted.
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The successful design of a share scheme involves a complex interplay of commercial, tax, valuation and legal issues. You will want to engage a legal adviser with sufficient experience to co-ordinate this on your behalf.
If you would like further information on employee share schemes or EMI options, please visit our dedicated Employee Share Scheme page or contact us to talk through your options by phone on 0845 686 0960 or by email: james.hunt@everymanlegal.com.
