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Enterprise Management Incentive Schemes (“EMIs”) are employee share options that enjoy favourable tax treatment. They are specifically targeted at small, higher-risk trading companies.
They have become a popular share scheme for private companies to incentivise and reward employees. The acronym ‘EMI’ is often casually used, but many are unsure of what the scheme actually entails. So here is my useful guide on what you need to know about all things EMI.
Who can affect an EMI Scheme?
There are specific requirements to qualify for an EMI Scheme, both for the company issuing the EMI Options and the individuals involved. That said, it is an option that is popular and available to many private companies within England and Wales. However, you should note that:-
- An EMI Option cannot be issued in relation to a subsidiary trading co and needs to be issued at the top level of a group if there is a group structure in place.
- The gross assets of the company cannot exceed £30 million.
- An EMI Option can only be granted if the company has less than 250 full-time employees.
- There is a ‘trading activities’ requirement which means that the company must conduct trade on a commercial basis with a view to making profit, and that trade cannot be an excluded activity (e.g. dealing in land, banking, insurance, or money lending all of which are excluded).
- To be eligible to be granted EMI options, an employee must work for the company (or company within the group) for at least 25 hours per week, or if less, 75% of their working time.
What shares are subject to an EMI Scheme?
Any full-time employee of a qualifying company may be granted these options over shares with a market value of up to £250,000 at the time of the grant, subject to an overall company limit of £3 million.
An EMI Option has to be granted over ‘ordinary’ share capital. As a share option plan, the EMI offers selected participants the opportunity to purchase certain ordinary shares at a specified time and price agreed upon when the options are granted.
The price of the shares is tied with the value of the shares at the point the option is granted, rather than market value at the point of purchase, which allows employees to benefit from their hard work and benefit from the increase in the company value between the point of grant, and the point of exercise.
The more the company increases in value after the option is granted, the more it stands to benefit. However, for this reason it is advisable to obtain clearance from HMRC before proceeding.
When is the Option Exercisable?
An EMI plan is extremely flexible, and options can be:
- exercisable immediately;
- exercisable on an ‘exit only’ or ‘sale only’ basis; and/or
- subject to performance conditions.
Therefore, there is no easy answer to this question and ultimately when the option vests will be dictated by your EMI Option Deed (see How do I effect an EMI Scheme below).
However, I would stress that the grant of an EMI Option is different from the exercise of it.
When you grant the option (on entry into the EMI Option Deed) you are committing to issue shares in the company on satisfaction of any relevant criteria. The relevant individuals do not get shares when the option is granted, therefore they do not become entitled to dividends, capital or to vote simply because they enter into the deed and are granted the option.
They get these rights (as applicable) when they get the shares, that is when they exercise the option they are issued with the promised shares. Therefore, this can be a preferential mechanism compared to simply giving employees shares (which can lead not only to their immediate interest in the company but often unforeseen tax consequences for those concerned).
Why would you affect an EMI Scheme?
The driving factor behind an EMI Scheme is incentivisation. They are a great way to reward loyal employees, incentivise the growth of a business, and give key staff an opportunity to benefit from that growth in a tax-efficient way. An EMI can therefore help a company to:
- attract top candidates;
- encourage growth by linking awards to performance conditions;
- promotes long-term retention of key employees; and
- protect current shareholders from immediate dilution and loss of control.
Provided the scheme has been properly executed, the EMI Scheme can receive favourable tax treatment for both the company and the individuals involved.
This is why we always work closely with your tax advisor and accountant to ensure that you are appraised of any tax implications and/or benefits and that the scheme qualifies accordingly.
How do I implement an EMI Scheme?
The options must take the form of a written option agreement (often in the form of an EMI Option Deed) that contains the fundamental details of the option, that is:
- the grant date;
- the number or maximum number of shares under the option;
- the exercise price; and
- the method of determining when the option may be exercised.
In addition to the formal EMI Option Deed itself, you will need to consider the company’s Articles of Association in the context of what happens on exercise of the EMI Option and how you will regulate the relationship with minority shareholders.
The Articles of Association may therefore require amending to include specific rights or limits for the shares subject to the option (noting that they must satisfy the criteria of being ordinary shares) as well as various provisions on what they can, or can’t, do with those shares on receipt.
For example, you may want to consider including:
- restrictions on who they can transfer those shares to;
- a right for the company to buy back the shares if the employee leaves the business; and
- ‘drag and tag’ rights so that if the majority wish to sell the company in the future, a minority shareholder cannot frustrate the sale.
The above are just a few considerations that you should have, and we can discuss these with you further if you want to put in place an EMI Scheme.
There will also be a series of ancillary legal documents required to effect the scheme such as board minutes, notices, etc. which will also need to be prepared.