Using an Enterprise Management Incentive ("EMI") Scheme: Checklist of points to consider
Set out below are some of the key points that a company should consider before implementing an EMI scheme.
Qualifying criteria
In order to qualify for the benefits under an EMI scheme there are specific limits and conditions that must be met. The main requirement which must be satisfied in relation to: (1) the company; and (2) the employee, are set out below.
1) Does the company qualify?
In order to qualify the company must:
(i) be independent (company must not be controlled by another company);
(ii) be trading in the UK (more than 50%);
(iii) not have gross assets in excess of £30 million (this is measured at the time the option is granted and applies to the consolidated assets of the group where there is more than 1 company);
(iv) have fewer than 250 employees (at the date of grant); and
(v) not undertake certain excluded activities (e.g. dealing in shares, property development, provision of legal or accountancy services, shipbuilding, coal and steel production, etc.)
2) Is the employee eligible to participate?
For an employee to be eligible to receive qualifying EMI options, they must:
(i) work for the company, or one of its group companies for at least 25 hours per week, or, if less, for 75% of their working time per week; and
(ii) not own more than 30% of the ordinary share capital of the company.
In addition, there are further points relating to the type of share and the reason for using a share option scheme which would be considered as part of any initial review.
Key issues to consider specific to each company
As well as the general requirements applying to all companies and employees who are to receive a grant of an option under an EMI scheme, there are additional key issues which a company should consider before implementing an EMI scheme, these are:
1) Dilution
Where will the shares, to be used in the EMI scheme, come from (newly issued or transferred from another party)?
What level of dilution is acceptable for existing shareholders?
Are the shares, to be acquired by employees on exercise, to have the same rights as shares held by existing shareholders (e.g. rights to voting and dividend entitlement?)
If not, does a new class of share for use with the EMI scheme need to be created?
2) Company constitution and share capital structure
Does the company have the power to grant options over shares under its Memorandum or Articles of Association?
Does the company have sufficient authorised an unissued share capital to cover the grant of any options?
3) Cessation of employment/minority interests
Should an option holder be able to exercise their option if they are no longer employed by the company?
Should they be able to do so in certain “good leaver” situations?
If an employee has already exercised their option and acquired shares, will they be permitted to retain those shares if they cease to be an employee or must the share be sold back to the company on cessation of employment?
4) When are options to become exercisable?
Is the option to be capable of exercise on a defined exit event (e.g. on the sale or flotation of the company) (“Exit Event”), or on after the lapse of time?
If the option is to be exercisable based on the lapse of time, should it be capable of exercise at one point (cliff vesting) or is it to be in proportions on several dates (staggered vesting)?
5) Is the exercise of an option to be subject to the satisfaction of performance conditions?
The conditions to which an option can be subject are completely flexible: they can be time based or related to performance. The performance criteria can relate to an individual, the company or the group.
6) Exit Event
What, and in what time period, if any is the anticipated Exit Event for the company?
7) Valuation
The tax benefits for EMI options only apply if the options have been granted with an exercise price at least equal to the underlying shares’ market value.
Has there been any recent valuation of the company or any transactions in shares of the company? (e.g. have any investors recently acquired shares’ in the company and if so at what price?)