Covid 19 – what it means for EMI options

EMI (enterprise management incentive options) are the most flexible and tax-efficient way to help recruit key employees and incentivise them to stay and help grow the businesses in which they work by giving them an EMI option to acquire shares in the company.  Because of the significant tax advantages (10% capital gains tax on growth in value after the options are granted as long as certain conditions are satisfied) and the ability for companies to grant them on terms which suit them (often that employees have to be ‘in it to win it’ and still be employed at an exit) they are a powerful tool but that power can be diminished by events after they have been granted.  There is no better example than the current Covid 19 crisis.  We have all seen the value of listed companies’ shares take a hit but what of shares in private trading companies?  Independent share valuer Mick Ruse’s view is that, of course the effects of Covid 19 will differ depending on the nature of a company’s trade, but as a rule of thumb, it would not be unreasonable to expect a decrease of around 30% for many businesses.

So what does that mean for companies who have granted, or are about to grant, EMI options to employees or to companies which may not have even thought about granting them? 

In the vast majority of cases companies agree the market value of their shares with HMRC when they grant EMI options - the facility exists so why not make use of it?  The exercise price payable by employees is generally that agreed market value but even when the exercise price is less (so that the discount is subject to income tax, and often NICs, when the option is exercised) it is still a good idea to know what it is.  And the market value is relevant to the individual limit on EMI options (£250k-worth of shares maximum). From an incentive perspective it is also good for employees to know what the upside is - if an option is ‘underwater’ when it is granted (where the exercise price is higher than the current value of the shares) that is not much of an incentive. 

The effects of Covid 19 on private company share values are therefore very relevant on so many different levels:

• For companies which have already agreed the market value of their shares with HMRC but have not yet granted the options, will that agreed market value mean that the options are already underwater when they are granted or that any discount subject to income tax and NICs is higher than it need be?
• For companies which have already granted EMI options, particularly those which will be underwater because the exercise price is higher than current market value, should they consider inviting employees to surrender those options and issuing new options over shares at the current new (lower) market value?
• Some companies make corporate performance or the enterprise value on an exit an additional vesting condition – should those conditions be varied?
• Other companies which may not have even thought of granting EMI options to employees may want to start thinking about doing so when a potentially valuable stake in the equity might be the only thing they can offer them right now.

We understand that HMRC are intending to publish a bulletin on the effect of Covid 19 on tax-advantaged share schemes (company and SAYE share option plans and share incentive plans as well as EMI options) so we will let you know more about that as soon as we do.  In the meantime, if you would like to talk about EMI options with one of our specialist tax partners please contact Sara Cohen or Matthew Rowbotham.