PROFESSIONAL advisors wrestle with the issue of “who is your client?” and this is particularly true when it comes to drafting share option schemes. An EMI share option scheme needs to be a tax-efficient way to reward employees. However, it is also important that the employer, as the client, gets a scheme that works for them without leaving the company at risk of having an unmanageable gaggle of ex-employees who will make trouble, or at the very least be uncontactable, on an exit.
It is important to get the balance right. Confluence Tax sees lots of schemes that are so intent on protecting the company that they actually do damage. For example, the inability for departing employees to exercise options. This means the leaver exercises later, so cannot cause trouble in the interim. So what’s the problem? When they exercise, this will be an unapproved rather than an EMI option. As a result, the exercise triggers tax for the company, in the form of PAYE and NIC. But on a company sale, that bill needs settling during the new period of ownership by the acquirer. The acquirer will want mechanics in place to ensure this comes out of the seller’s pockets, not theirs. Hence, the sale process gets negatively affected.
The fix is easy. Allow board discretion for leavers to exercise when they go, provided they sign away their voting rights at exercise. This doesn’t set an expectation that leavers can exercise, but it does allow the issue to be considered and managed. Crucially, from an implementation point of view, the rules have to reflect this discretion when the options are granted. If you have an existing EMI scheme without this flexibility, you can always re-grant the options, provided the value of the shares has not increased and an exit is unlikely within 12 months.
At the end of the day, having a scheme with the flexibility to treat employees well for tax and non-tax purposes is in the company’s best interests. Being nice is also being right.