April 25, 2024
Full articleHow Can a Company Launch an EMI Scheme?
In our previous blog we explained what employee share scheme options are, and identified some of the key features. In this blog we will set out the steps required to launch an EMI scheme.
1. ELIGIBILITY
A company must first consider whether it is eligible or not. This is considered in blog 1 of this series which can be read here.
2. VALUATION
The second stage is to have your accountant value the business. EMI schemes are often drafted in such a way as to be tax efficient, and part of that is working within the parameters of the valuation. At this stage, the draft EMI scheme rules and options contracts are drawn up to reflect the nominal value of the shares so they comply with the requirements, and so that the tax advantage criteria is clearly identifiably sought. The drafting of the EMI options will usually include criteria on whether it will be exercisable or exit-based, what the vesting timelines will look like for each employee receiving EMI options, any performance based targets for grant of the options. It is important to note that within the drafting of the options contract, there must be a section outlining and specifically highlighting the relevant restrictions on the option shares being granted. Having the valuation and EMI draft documents will assist in filing the valuation with HMRC, and obtaining board/shareholder approval.
3. PRE-APPROVAL
The third stage is to apply to HMRC for pre-approval of your EMI Scheme. At this stage, you will need to file with HMRC to receive a valuation of your company. Obtaining the company valuation from HMRC provides confidence for the recipients of EMI options of their value at the time of exercise, essentially as they are backed by a written valuation by HMRC. Additionally, obtaining a pre-approved valuation provides a degree of certainty regarding tax treatment of the scheme for the company, and indeed the employees who will be benefiting from options, as long as all of the criteria and processes are followed. Once approved, the valuation is good for 90 days. This means the clock is ticking for implementation of the EMI option scheme.
4. GOVERNANCE
The fourth stage is what is known as the governance stage. This is where you have to obtain the necessary board and shareholder approvals for implementing the EMI scheme, dis-apply any necessary pre-emption rights, and adopt new articles of association to include the creation of the new option shares. At this stage, it is important to watch out for minority shareholder protection issues. If the shareholding structure includes minority shareholders, and they are to have either their stake, or their return on capital reduced, or if their shareholder class rights are being diminished or amended, then you will need to get the necessary shareholder consent approvals.
5. IMPLEMENTATION
The Fifth stage is the implementation stage. Once you have satisfied the governance stage, you can start granting the options to your employees. The options contract is signed and dated by the company and the employee, and the clock starts ticking on registration of the scheme and options with HMRC. At this stage, it is prudent to ensure the Companies House filing is up to date with the new company articles and any special resolutions which were passed at the time of the governance stage
6. REGISTRATION
The last stage is to register the scheme with HMRC. Once the EMI options have been granted, you must register your EMI scheme and its granted options with HMRC. This stage must be completed within 92 days of the grant of any option within the scheme. Once you have submitted your scheme for registration, HMRC typically send a confirmation of receipt within 7 days. You also need to inform HMRC of the individual employee option grants so that the tax benefits can be obtained. Upon receipt of the EMI scheme registration confirmation, and the notification of receipt of the option grants from HMRC, the process is concluded and the EMI options scheme is live.
If you would like to discuss the information outlined in this blog post, please get in touch with Daniel from our corporate team.
