It’s cheap, your employees will love you forever and never leave!  True or False? True might say an over enthusiastic professional adviser.  False will be the reply of an MD who has not thought through what it is that their business really needs and who thought that just installing it would do the trick.

Done properly, for the right reasons and in the right circumstances we are enthusiastic proponents of EMI but only after making quite sure why it is that you think you want one and ensuring also that the larger issue of incentivised remuneration is dealt with properly as well. It is true to say that, although a well designed scheme can provide a simple and valuable way of rewarding future success, an inappropriate or badly-implemented scheme can result in serious problems for shareholders and management, and may even result in a deterioration in their relationship with employees.

WHAT IS AN EMI SCHEME?

The Scheme allows an Employer to issue share options to key employees to reward them for performance and to encourage them to stay with the business by offering them the prospect of owning shares in the existing business, or participating in the gain on a successful exit event, such as a sale or listing of the company.  Furthermore, EMI options are tax- efficient, because they may be exercised in circumstances chosen by the employer without the employee being subject to income tax.

WHAT ARE THE BENEFITS?

• Key employees are given an option to acquire a stake in the business but without immediately diluting the holdings of existing shareholders.
• Control is not affected until the options are exercised (and this is usually only on sale).
• It represents an effective way to engender loyalty and long service amongst key employees.
• It represents tangible evidence of a corporate culture that professes to be inclusive and team-based.
• EMI avoids the immediate tax and National Insurance costs involved in giving away shares to key employees.
• The administrative and tax costs for the employer of setting up and maintaining an EMI scheme are usually low.
• The Company enjoys a tax- deduction broadly equivalent to the value of shares awarded when the options are exercised.

A CHECKLIST OF CONSIDERATIONS BEFORE YOU DECIDE

Who should benefit?
Just the Senior Management Team? Won’t that cause resentment? Everyone in the Company? If so, how much of the equity will that leave you after exercise ? Work out what the actual benefit might be for junior employees and ask yourself whether or not the prospective value of the award will have a genuine incentive effect. 

Setting the exercise price
Having determined, and agreed with HM Revenue & Customs, the underlying present market value of the shares in the Company, you will need to decide whether the exercise price payable under the option should be set at this present market value, or at a premium or discount to this value.

Where the exercise price is set at the present value, then the option will begin to acquire value as soon as the underlying value of the Company grows, and there will no income tax to pay when the option is exercised in a future year regardless of the value of the shares of the Company at that time.  If the exercise price is set at a premium, then the option will only begin to acquire value after a certain threshold of growth in the underlying value of the company has been achieved, and there will similarly be no income tax to pay on exercise.

There is no reason why you should not issue EMI options with an exercise price that represents a discount to present market value or for free. Whilst this may make your employees even more happy, note that there will be income tax (and NI contributions) charged on the difference between the present market value of the shares and the exercise price, if any, that the employee is required to pay on exercise.

When should the options vest?
Many company owners are concerned to ensure that if they achieve a successful major disposal in a future year, on a listing of the company’s shares, or on a third party sale of the company or of its trade, the employees should participate in a share of the resulting disposal gain.  However, they may be equally concerned that their employees should not become shareholders in the company unless or until this “exit event”   takes place.  It is therefore fairly common for individual EMI options, or for all options granted under an EMI scheme, to carry a vesting condition which requires that exercise shall only take place if there is an exit event.

However, where it is intended that employees should have the opportunity to become shareholders after a certain period of service has been completed, or certain personal personal performance targets have been achieved, these requirements can be expressed in the vesting conditions of each individual EMI option. The option may, for example, be exercisable after (say) four years employment service, or the shares may vest in tranches according to completed periods of service, profits or turnover of the company, or the satisfaction of personal performance targets.   In these circumstances, make sure that you establish a single annual exercise date, or perhaps permit this to take place no more than once a year.  This will avoid the administrative nightmare of being required to issue shares and agreeing the value for the purpose of obtaining a corporation tax deduction at regular intervals.

Explaining the Scheme
As with all incentive packages, they will have little effect unless you introduce them properly. Just installing one is not enough. Explain the scheme properly to those who will benefit and explain to those who won’t how they could do so in the future.

Other Incentive Schemes
There are other share option and share granting schemes that have potential tax benefits if an EMI scheme isn’t for you, or the qualifying conditions of the EMI scheme cannot be satified.   Have you considered them all?

If the company does have any other share option schemes this can affect the maximum level of EMI options that may be granted to employees. 

Understanding the detail
Certain trades are excluded from having EMI schemes. Does yours qualify? Equally, there are some events that result in EMI options no longer qualifying as EMI options. Make sure you understand the rules. We touch on this further down.

The grant of options may not reflect in your P&L Accounts or Balance Sheet but it may need to be disclosed in your accounts.

It is essential to inform HM Revenue & Customs of the granting of new EMI options within 92 days of issue or the options will not have qualifying status.

Will I lose control?
Where the scheme is properly established, the future exercise of EMI should not result in any material loss of control.  In addition to being governed by the pre-emption rights that normally attach to shares in private companies, option shares can be subject to a restriction requiring that they must at all times be held by persons who are employees of the company. It is possible to set up an employee benefit trust to purchase shares from employees who wish to sell shares after exercising their options, or are required to do so upon leaving the company’s service, although such a trust will not normally be necessary. 

Do you Qualify for EMI?
Below is a brief outline, which is by no means an exhaustive guide, as to whether your Company, the employee and the options might qualify under the Scheme.

Your Company
For a company to grant qualifying EMI options, it must meet the following criteria:

• Purpose – the scheme must be established to attract or retain employees
• Independence – the company issuing the options over its shares must not be controlled by another company, as a subsidiary, or by any indirect form of control, and there must be no plans in place to make it such. Employees of subsidiaries may, however, be granted options over shares of the holding company
• Gross assets of the company or group must not exceed £30m
• The aggregate value of the shares under option must not exceed £3m
• The company must conduct a qualifying trade, carried on wholly or mainly in the UK. In addition to certain specific exclusions, investment companies, dealing companies, property development companies, and those engaged in leasing, insurance, and other financial activities are excluded. Where the company is the holding company of a group, then the group as a whole must generally conduct a qualifying trade or trades.

The Employee
For directors and employees to qualify for a company’s EMI scheme they must meet the following criteria:

• Be an employee of the Company or of a qualifying Subsidiary
• Work at least 25 hours per week or 75% of their working week for the company
• Have no material interest in the company – amongst other things this includes the definition of a 30% holding in the company
• You may also need to monitor  the qualifying status of employees throughout the period in which they are option holders

An employee cannot hold unexercised EMI options over shares with a total value of more than £100,000.

The Options/Shares

• Shares subject to options must be ordinary, fully paid up and not redeemable
• The option must be capable of exercise within 10 years
• The terms of the option, including the conditions of exercise must be clearly stated in writing, and the option must not be assignable

If you would like to know more about EMI Schemes, please call or email either This e-mail address is being protected from spam bots, you need JavaScript enabled to view it or This e-mail address is being protected from spam bots, you need JavaScript enabled to view it