The Enterprise Management Incentive (EMI) scheme is a highly flexible share option scheme which is widely used by growing businesses to recruit, reward and incentivise their employees. It offers significant tax benefits to both the employees participating in the scheme, and the business operating the scheme. However, in order for the scheme to be successful, you should take expert legal advice to fully address all your legal requirements.
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Why correct EMI legal documentation is crucial
It is critical that you seek expert legal advice to prepare the legal documentation for the scheme.
Investing the time and cost to obtain correctly drafted documentation will help your business to operate the scheme effectively, maximising the benefits.
It will also reduce the risk of issues arising during the life of the scheme which take up management time and cost to fix. Often these issues are uncovered by advisers on a transaction when the EMI scheme is expected to deliver financial benefits. These issues can then delay the progress of the transaction and undermine the EMI scheme benefits, defeating the objectives of the scheme.
Essential documents for an EMI scheme
These can include the following:
Valuation agreement with HMRC
We strongly advise you to agree the valuation of the shares under option with HMRC in advance of granting EMI options. Unlike non-tax advantaged share schemes, HMRC continues to offer a valuation check service for EMI options which is generally fairly light touch.
Agreeing the tax value of the shares under option is provides assurance to your employees and your business of the expected tax consequences of the scheme. It also provides assurance to a buyer at the time of a transaction when the buyer conducts due diligence to identify legal and tax risks relating to the target.
Legal advisers will ensure the valuation agreement is robustly prepared and all relevant information is disclosed to HMRC, which reduces the risk of challenge by a buyer’s advisers on a liquidity event, when options are exercised. Legal advisers can also help you agree a pragmatic position based on their experience of agreeing and negotiating valuations with HMRC.
Advance assurance from HMRC
This is not mandatory but if there is any doubt as to whether your business qualifies for the EMI scheme, legal advisers can support you to request clearance from HMRC regarding your business’s eligibility for the scheme. Similar to the valuation agreement process, legal advisers will be able to advise you on what information needs to be disclosed to HMRC, providing you with the benefit of their experience of agreeing EMI eligibility with HMRC to obtain certainty.
Plan rules and/or option agreements
These are the documents which set out the key terms of the option. Where multiple grants of EMI options are planned, it is usual practice for a business to adopt a framework set of plan rules which set out common and consistent terms for all option grants. If you want to make a one-off grant of an EMI option, the terms of the option may be fully dealt with in the option agreement between your business and your employee.
It is mandatory to secure EMI tax benefits for there to be a written agreement between your business and the employee who is being granted the option. This must set out the key terms of the option, including the number of shares under option, the exercise price for the option and when the option can be exercised.
Board resolutions/investor director consents
Legal advisers will be able to review your company’s constitutional documents to fully advise on Board resolutions and investor director consents for the implementation of the EMI scheme and the grant of options under the EMI scheme. This removes this responsibility from your business and will ensure the scheme is effectively implemented and options are legally granted under the EMI scheme.
Shareholder resolutions/consents
Sometimes formal shareholder resolutions and/or shareholder consents will also be required in connection with the grant of EMI options.
Circumstances where this will be relevant are where your business wishes to sub-divide the shares which will be subject to the EMI options to provide flexibility in relation to the number of shares under option or where changes are needed to the articles of association, which set out the rights of the shares subject to the EMI option.
A shareholder consent to the terms of the option may be required under a shareholders’ agreement or a subscription agreement relating to particular shareholders.
Legal advisers can help you navigate shareholder resolutions and consents, which can be complex.
Amendments to the articles of association
You may need to amend your business's articles of association, depending on the terms of the option and the shares being offered under the option. It may be possible to structure and implement the EMI scheme without amending the articles of association, but this will depend on the commercial terms of the EMI scheme.
Exercise notices
Legal advisers can draft exercise notices and other documentation to enable the employee to effectively exercise their option and acquire shares under the EMI scheme.
Why you should seek expert legal advice for setting up EMI schemes
Legal advisors will ensure that all the relevant steps are carried out and the scheme and grants of options are effectively documented. This will reduce the risk of problems arising in relation to the operation of the scheme following implementation.
EMI schemes are a proven method of providing significant benefits to employees in growing businesses, but in order to secure these benefits, it is important to take legal advice at the time of implementation to ensure the schemes are properly set up.
Having helped many early-stage businesses design and launch EMI schemes tailored to their unique needs, our solicitors will ensure you make the most of this effective tool to enable business growth.
Contact us on 0800 689 1700 or fill out our short enquiry form below and a member of our team will be in contact.
