One of the most popular employee share option schemes is the Enterprise Management Incentives option (EMI option). It is popular because it enjoys favourable tax treatment and is specifically targeted at small, higher-risk trading companies.
It is therefore used by many early stage, high growth companies that wish to retain key personnel but which don’t necessarily have the financial resources to pay competitive salaries.
EMI options may be granted under a set of plan rules, or by way of stand-alone EMI option agreements. The EMI option terms are included in a written agreement between the option holder and the employer which incorporates the main terms of the option, including how and when it may be exercised.
To qualify to grant EMI options, an employer/ company must be an independent trading company with:
1. Gross assets of no more than £30 million; and
2. Fewer than the equivalent of 250 full-time employees.
Certain business and trading activities will not qualify. Guidance relating to the independence requirement and the trading requirement for EMI options can be found at the United Kingdom HMRC website.
It is possible for EMI option shares to be a different class of share to the existing shares, and with different class rights. It is common for the EMI option shares to be non-voting, non-dividend but with the right to participate in a trade sale, or any combination of such rights.
To be eligible to be granted an EMI option, an employee must work for the employer for at least 25 hours per week, or if less, 75% of his working time. Employees cannot be granted EMI options if they (or their "associates") have a "material interest" in the employer, or in certain of its related companies.
It should be noted that EMI options can only be granted to employees and they cannot be granted to non-executive directors or consultants. In the event that you wish to offer share options to non-employees then commercial option schemes such as put-option or call-option schemes will be appropriate but such schemes are generally not as tax efficient as employee share option schemes.
An employee can hold unexercised EMI options over shares worth up to the current EMI individual limit and current details can be found on the HMRC website. An employer cannot grant EMI options over more than £3 million worth of shares at any time.
EMI options must be capable of being exercised within 10 years of the date of grant. Otherwise, there are no restrictions on the exercise provisions that can apply to EMI options. The most common triggers for exercise of EMI options include:
1. Specific time/ vesting periods upon which the EMI Option can be exercised;
2. Financial targets, whether personal or business;
3. Trigger events such as the sale of the company or business.
It is very common for EMI options to be exercised in instalments and not just in a one-off situation. Once the EMI option is exercised the option holder becomes the owner of the shares and in such circumstances it is prudent for there to be an obligation on the new owner of the shares to enter into a shareholders agreement with the other shareholders of the company which regulates the rights and obligations of all the shareholders. In certain circumstances it might be advantageous to include good leaver/ bad leaver clauses in the shareholders agreement.
