EMI Options for Employers

What are EMI options?


Enterprise Management Incentives (EMIs) are a tax-efficient approved employee share scheme that can be used to reward and incentivise valued employees. A company may offer an option to purchase shares in its own business or that of a subsidiary. The price of the shares under option is fixed on the date when the options are granted. The company must notify HMRC of this price within 92 days.
 

Which employers qualify to offer EMI options?


Companies eligible to offer EMI options must meet several criteria. Firstly, the company must have no more than £30m in gross assets. It must also have fewer than 250 full-time employees, a permanent establishment in the UK, and it must conduct a qualifying trade.
 

What is a qualifying trade?


This is a trade that is “conducted on a commercial basis with a view to making profits” and is not “wholly or to a substantial part” an “excluded activity”. The qualifying trade test is more complicated if the company proposing to grant the EMI options is part of a group of companies. Essentially, the business of the group as a whole must not consist wholly or substantially of excluded activities. Furthermore, at least one company in the group must exist wholly for the purposes of carrying out a qualifying trade and must be conducting that trade or preparing to do so. As a result of these stipulations, it is not unforeseeable that a company might find itself unable to offer EMI options as a result of the excluded activities conducted by another company in the group.
 

What are excluded activities?


Excluded activities are defined in law. Some of these activities, such as legal and accountancy services, are fairly self-explanatory. Others, such as “banking, insurance, money-lending, debt-factoring, hire purchase financing or other financial activities” are less clear-cut and require close analysis of the precise nature of the activities being undertaken. HMRC’s Venture Capital Schemes Manual provides further guidance, which may be helpful. Companies prohibited from offering EMIs due to excluded activities may wish to consider alternatives such as Company Share Option Plans (CSOPs), even if these are less tax-efficient.
 

What value of EMI options may be granted?


Eligible individuals can receive options up to the value of £250,000 over a three-year period.
 

What are the benefits of EMI schemes for companies?


Most EMI schemes have two main aims, firstly to reward staff for past efforts, and secondly to incentivise them for the future. The commercial element is noteworthy as EMI options must not be granted with the main aim, or one of the main aims, of avoiding tax. Properly conducted, EMI schemes can be an excellent method of retaining valued staff members in a golden handcuffs’ arrangement. Unlike with pay rises and bonuses, EMI schemes allow the company to defer the financial reward. This is particularly helpful for new start-ups that may lack the necessary capital to reward staff straightaway.
 

What are the disadvantages of EMI schemes?


The chief disadvantage is that the company cannot reassume ownership over shares held by departing employees or directors. These individuals retain ownership and the corresponding rights to dividends and voting. They are also entitled to the benefit of any gain on the subsequent sale of those shares. Ex-employees and directors who retain company shares can prove problematic for a number of reasons. They have the potential power to hold up decision-making processes within the company and, at worst, they could block the sale of the company.
 

Mitigating the disadvantages of EMI schemes?


A common solution to the potential problems posed by shares held by ex-employees and directors is to ensure that the shareholders’ agreement contains good and bad leaver provisions. For practical reasons it is usually sensible for these follow the definitions set out in the employment contract or directors’ service agreement.
 

Good leavers and bad leavers


There is no legally prescribed definition but a good leaver is typically someone who leaves due to ill-health or redundancy; or resigns following a minimum number of years’ service. On the other hand, a bad leaver is usually someone who breaches the terms of their service contract or shareholder’s agreement; or resigns after less than a prescribed minimum period of service. It is permissible for the company to reserve the right to decide whether someone is a good or bad leaver.
 

Treating good leavers and bad leavers differently


When determining what happens to the shares held by someone who leaves the company, it is permissible to offer preferential treatment to a good leaver. This has the dual advantage of being an important motivational tool for employers and directors while also ensuring that the company retains an element of control over what happens to its shares. Precisely what happens will depend on the terms of the shareholders’ agreement but it is common for good leavers to be required to sell back their shares at “fair value”. Conversely, bad leavers might not receive “fair value” but may be required to sell back their shares either for the price paid for them or at face value.
 

Need help from an expert EMI lawyer?


Submit your enquiry to Lexoo and get quotes from expert EMI lawyers who can help draft your agreement or help with any related issues.
 

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