EMI - Common misunderstandings Flashcards
What does PLC list as the most common types of mistakes and misunderstandings?
1) Valuation of EMI options
2) The individual limit on EMI options
3) The interaction of the time limit on grant of EMI options with options grants under CSOPs
4) The time limit for notifying the grant of EMI options
5) The rules on disqualifying events, for both the EMI company and the EMI option holder
I think we would also add the point about restrictions, as this point continues to arise on transactions!
EMI individual limit - Is it optimal for an individual to ever be granted options up to the total limit?
No,
What does PLC list as the most common errors made in respect of disqualifying events?
1) Not recognising that a change of control is a disqualifying event.
2) Not appreciating that a change in the companies activities may cause a disqualifying event.
3) Mistakenly believing that a company becoming too large will cause a disqualifying event.
4) Not appreciating that a change to a employee’s hours may be a disqualifying event, as is the employee leaving employment.
5) Not appreciating the significance of a DQ event in the first one or two years.
Why is a change of control generally relevant to EMI?
For EMI options to remain valid, the company must be independent (i.e., it must not be under the control of another company).
This seems to exclude PE-backed companies from being able to pursue EMI, in most cases, as this will involve the PE backer having some control over the company.
What is a classic example of where a change of control may be missed?
Where the company is undergoing an internal reorganisation and a new holding company is being interposed atop the EMI company.
If a company changes its activities, and it falls within one of the prohibited activities, what will be the result?
The options will need to be exercised within 90 days.
If the options are not exercised within 90 days income tax will be due on the difference between the market value at the date immediately preceding the DQ event and the market value of exercise.
If the company becomes too large (i.e. it exceeds the gross assets or the total number of employees tests), what will the effect be?
Any further grants of options will not be within the scope of EMI. Existing EMI options will remain within the EMI tax treatment.
The way of remembering this is the fact that the purpose of EMI is to incentivise smaller companies, so it would be ill-conceived if it did not permit growth in said companies or was overly restrictive in this regard.
If an option holder changes their working hours, when will the disqualifying event occur from?
When will the options need to be exercised from, and for how long?
The disqualifying event will take effect from the end of the of the tax year in which the change occurs.
The options will need to be exercised from the end of the tax year, within 90 days (i.e. up until 5 July at the latest [that date could potentially be a weekend, so it might need to be before]).
When will options need to be exercised if an employee leaves employment (of the EMI or group company)?
Within 90 days.
What are the timing requirements as regards exercise of the options?
The options will need to be exercised within 90 days of the change. `
