F7. Options to employees

EMI OPTIONS

- Qualifying option

- Must meet the requirements of Sch 5 at the time when the option is granted.

Working time requirement

- Must be required to spend at least 25 hours per week or 75% of working time working for group (ETASSUM54080).

- No longer required to sign a working time declaration.

Vesting in general

- Discretion to accelerate vesting (e.g. by waiving performance conditions) is acceptable provided it does not bring forward date on which option would otherwise become exercisable (ETASSUM54310).

Vesting and performance conditions

- No requirements re type of performance conditions that may be imposed (ETASSUM54030).

- On amending performance conditions see CIR v. Burton Group and ETASSUM54070 and ETASSUM54310.

Exercise events

- Once option is granted, not acceptable to amend rules or use discretion to do the following unless amendment is de minimis (ETASSUM54310):

- create new right of exercise; or

- introduce a discretion; or

- change date of exercise.

- Amendment of time when right may be exercise means that there is a different right:

- "On that footing the 'right to acquire' spoken of in s 185 cannot be regarded as being independent of any notion of time. For tax relief it must be regarded as a right to be exercised within certain time limits. If that be so it follows that an alteration in the time limits affecting a right to acquire is an alteration of the right. Put more simply, the Act contemplates a right to acquire as a right to acquire a specified number of shares at a specified price within a specified time span. If the time span is altered the right is altered. My view therefore is that the right to acquire which Mr Wood obtained in 1987 is not the same right as he will have if effect is given to the proposed amendment and he can buy in 1993 instead of having to wait until 1996." (IRC v. Eurocopy Plc)

- Discretion over exercise must be limited:

"It is not acceptable for an option to become exercisable in circumstances where the board has complete discretion to choose the circumstances under which an option may be exercised. For example, discretion that allows for the option to be exercised at any time the board so wishes or where there are specified terms of exercise in the option agreement from the outset, but the board may allow exercise at any other time or in any other circumstances, would not be acceptable. Any use of discretion in this way would amount to the grant of a new right within the principles in Eurocopy and Reed International." (ETASSUM54310).

- Sale of PISCES can be a perissible an exercise event (ETASSUM54065).

Advance assurance

- Companies can request advance assurance that they meet the qualifying conditions (ETASSUM52020).

Legislation:

Cases:

CIR v. Burton Group Plc 63 TC 191;

IRC v. Eurocopy Plc [1991] STC 707, Mervyn Davies J;

HMRC manuals:

ETASSUM54070 - Amendments to performance conditions;

ETASSUM54310 - Discretion: Key Principles;

Commentary:

- Form of granting options

Written agreement

- Written agreement must state the matters in para 37 (date of grant, number of shares, price, exercise, performance conditions etc.).

- May be set out in the option agreement or may be contained in another document attached to the agreement and incorporated by reference (ETASSUM54030).

- E.g. articles of association, scheme rules, shareholder's agreement.

- Written agreement will need to specify title + date of document + date of any amendments (ETASSUM54030).

- Performance conditions must be identified for participants (rather than buried in another document).

Execution

- Electronic execution is possible but provision must be made to ensure employees are able to retain copies of the agreement (ETASSUM54030).

Grant by deed + written agreement

- HMRC say option may be granted by deed but in that case, "a separate written agreement to the terms of the option will need to be signed by the option holder" (ETASSUM54040).

- HMRC say date of grant is date on which is executed but "option is not a qualifying EMI option, however, until the agreement has been signed" (ETASSUM54040).

- Query how this fits with the requirement that

Non-compliance

- Previously, para 37 also required details of any restrictions on the shares to be included in the written agreement (para 37(4)).

- "In the case that restrictions were omitted from grant documentation, HMRC would take into consideration for compliance purposes any evidence that the restrictions had been otherwise brought to a Participant’s attention in a meaningful way at or near the date of option grant. Failure to state a trivial restriction would not be a compliance issue." (ETASSUM54030).