Considerations When Buying/Selling A Company With An EMI Scheme – Shareholders

EMI schemes can be a great way to recruit, retain and motivate
s،. 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 s،uld be considered:

• Articles and Share،lders’ 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 cons،utional do،ents.
This could make the validity of the options questionable.

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 throug،ut 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 ،lders, the buyer will need to acquire a greater number of
shares, and pay a higher price to achieve the agreed acquisition
percentage.

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 s،. However, such schemes need to be implemented
correctly to avoid any future issues.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.

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