Considerations when buying/selling a company with an EMI scheme

EMI schemes can be a great way to recruit, retain and motivate staff. However, issues can arise where EMI options become exercisable on an exit, or for any other reason, in the run up to completion of an acquisition. EMI schemes impact both buyers and sellers:

• Buyers will require certainty that the correct procedures have been followed, including compliance with the relevant legal formalities; and
• Sellers will want to avoid providing indemnities in relation to the scheme, so will need to be sure that the scheme has been validly implemented.

The following key points should be considered:

• Articles and Shareholders’ Agreement (SHA)

At the point the EMI options were granted, the company’s articles and SHA must have allowed the grant. If the correct procedures have not been followed, there will have been a breach of the company’s constitutional documents. This could make the validity of the options questionable.

• HMRC and tax

If approved by HMRC, EMI schemes can benefit from tax advantaged status. However, favourable tax treatment only applies if qualifying criteria are satisfied. Complexities can arise where the company and the employee believe that the EMI scheme has tax advantaged status, but HMRC confirmation has not been formally obtained – there then is a risk that favourable tax treatment will not apply when the options are exercised. Even if HMRC approval has been obtained, there are deadlines to comply with and if these are missed there is a risk that the beneficial tax treatment is lost.

• Qualifying criteria and disqualifying events

To implement a tax advantaged EMI scheme, there are statutory requirements in the form of qualifying criteria. The criteria apply to the company, the shares under option, and the employees. Some requirements only need to be met at the time the options are granted. However, others must be met throughout the entirety of the scheme. If a disqualifying event occurs which causes the condition to cease to be satisfied, there will be an impact on the tax treatment.

• Acquisition of the EMI shares

A buyer will need certainty that it is acquiring the agreed percentage of shares in the company. For example, if new shares are allotted and issued to the option holders, the buyer will need to acquire a greater number of shares, and pay a higher price to achieve the agreed acquisition percentage.

• Indemnities

If there is any uncertainty as to the status of EMI options, a solution is for the sellers to provide the buyer with an indemnity. The scope of the indemnity will depend on the risk(s) identified. In conclusion, EMI schemes are incredibly beneficial as a way of incentivising staff. However, such schemes need to be implemented correctly to avoid any future issues. If you require any further information on assessing EMI options, please contact us to speak to a member of our Corporate Team.