When preparing to sell a company you should consider the impact on any share schemes which are in place. The tax considerations depend on the type of scheme in place.
EMI
When a company comes under the control of another company this will usually be a ‘disqualifying event’ under the EMI rules and can mean that the employee loses their tax benefits unless the option is exercised within 90 days. There are, however, some specific rules designed to assist in these circumstances. For the rules to apply there must be a ‘company reorganisation’ where a company:
- obtains control of the company which has issued EMI options, either by making an offer for the entire share capital or all of the shares of the same class as the option shares;
- obtains control of the company which has issued EMI options by a court approved scheme of arrangement;
- becomes either entitled or bound to buy out minority shareholders; or
- obtains control of the company via a share for share exchange (essentially the insertion of a new holding company).
Where a company reorganisation has taken place, the company which has acquired another has six months to grant replacement options to the EMI option holders. Where certain conditions are met, the options are treated as if they were the same options as those originally granted. Those conditions are:
- The options must be granted within the 6 month time frame set out above;
- The employee must agree to cancel the original EMI options and receive the replacement options instead;
- The options must be granted over shares in the acquirer company;
- The new options must be equivalent to the old, ie the total exercise price and value of the shares under option must be the same;
- The individual must enter into employment with either the acquiring company or one of its subsidiaries;
- The options must be issued for commercial reasons to recruit or retain an individual and not for tax avoidance purposes;
- The issue of the options must not cause the £250,000 per employee limit or the £3m per company limit to be breached;
- The usual requirement regarding terms of an EMI option must be met;
- The acquiring company must not be under the control of another company and must conduct a qualifying trade; and
- HMRC must be notified of the options within 90 days.
As replacement options are treated as being the same option as originally granted, the holder of replacement options will be entitled to Business Asset Disposal Relief once two years have elapsed since the first option was granted.
CSOP
Where a company issuing CSOP options is taken over by another company, it is often possible for the employees holding options to exercise them before the usual 3 year minimum exercise period without losing tax benefits.
Provided that the option agreement allows, options can be exercised within 6 months of the date on which:
- Control of the company changes to a person who offered to purchase all the shares in the company;
- There is a court sanctioned compromise or arrangement scheme;
- There is a non UK reorganisation (further conditions must be met); or
- A person becomes entitled or bound to acquire shares under ‘dragalong’ or ‘tagalong’ provisions.
If the shares will no longer qualify for CSOP following the transaction then the employee has 20 days to exercise the option. It is also possible for replacement options to be granted under certain circumstances.
If you’d like to discuss the impact of a company sale with our Chartered Tax Advisers then make a free enquiry here https://allegro-tax.com/free-enquiry/
