Share Option Schemes

What is a share option scheme?

A share option gives an individual the right—but not the obligation—to acquire shares in a company at a future date and at an agreed price.

The option may become exercisable after a particular period, when performance targets have been achieved or following an event such as the sale of the company. Until an option is exercised, the option holder does not generally become a shareholder or receive voting and dividend rights.

A scheme can be offered to selected employees or directors and, under some arrangements, consultants and other individuals who contribute to the business.

Why introduce a share option scheme?

For growing companies, offering competitive salaries may not always be possible. Share options can provide an additional incentive by allowing key people to participate in the value they help to create.

A scheme can help your business:

• recruit and retain talented employees;
• reward long-term commitment;align employees with the company’s growth plans;
• establish measurable performance incentives;
• preserve cash while offering a meaningful benefit;
• support succession planning; and
• prepare for future investment or a company sale.

The scheme should balance the interests of option holders, existing shareholders and future investors.

Types of share option scheme

The most appropriate arrangement will depend on the company, the intended participants and its commercial objectives.

Enterprise Management Incentives

Enterprise Management Incentives—or EMI options—are tax-advantaged options available to qualifying companies and eligible employees.

EMI schemes are commonly used by smaller and growing businesses. The company, its activities, the employee and the option must satisfy detailed statutory requirements for the available tax advantages to apply.

Company Share Option Plans

A Company Share Option Plan—or CSOP—is another tax-advantaged arrangement under which a company can grant options to selected eligible employees and directors.

A CSOP may be suitable for a company that cannot use EMI or wants to operate a different form of discretionary option arrangement.

What should a share option scheme cover?

The scheme rules and individual option agreements should clearly address:

• who is eligible to receive options;
• the number and class of shares covered;the option exercise price;the vesting period;
• performance or service conditions;
• when options can be exercised;
• what happens if an individual leaves the business;
• treatment on death, illness, redundancy or retirement;
• what happens if the company is sold or reorganised;
• when options lapse;restrictions applying to shares acquired on exercise; and
• the process for exercising an option.

The company should also consider the potential effect on its existing shareholders and capital structure, including the level of dilution that could arise if all options are exercised.

Company documents and approvals

A share option scheme does not operate in isolation. The company’s articles of association and shareholders’ agreement should be reviewed to ensure that the proposed options and resulting shares are permitted and treated as intended.

The company may also require:

• shareholder authority to allot shares;
• the disapplication or waiver of pre-emption rights;
• board and shareholder approvals;
• amendments to its articles of association;
• a new class of shares;
• an agreed company valuation;
• updates to its option and statutory records; and
• HMRC registration, notifications and annual reporting.

Tax-advantaged schemes are subject to detailed qualifying conditions and deadlines. We work alongside accountants, tax advisers and valuation specialists where appropriate.