The ability to incentivise senior executives and other managers/employees effectively through equity participation is increasingly important in the current climate.
But the rules governing such arrangements are notoriously tricky and implementing such arrangements without advice can often result in unexpected and unwanted tax charges for both the individuals concerned and employers. Conversely, structuring such arrangements correctly can result in significant tax savings.
Our equity incentives team is made up of experts in each of our corporate, employment and tax groups who have significant experience advising in the context of tax efficient equity based incentivisation and performance related remuneration. We provide pragmatic high-quality advice tailored to each client’s needs and circumstances and combine excellent technical skills with a personable and user-friendly approach.
We advise listed companies, mid-tier corporates, owner-managed and/or venture capital backed businesses, and start- ups as well as individuals (entrepreneurs, senior executives and employees) in relation to both existing and new share plan and management incentive arrangements, including in the context of wider corporate transactions.
Our work often has an international dimension, whether we are advising overseas companies on setting up incentive arrangements for UK employees or internationally mobile employees on tax efficient share-based remuneration packages.
Where necessary, we are happy to work alongside existing external or overseas advisors, and we have access to a wide international network should non-UK tax advice be required.
Advised the management of a private equity backed company in respect of the growth shares awarded to them as part of a complex equity incentive package.
Advised a Toronto Stock Exchange listed client and other divisions within the wider multinational group on the tax and employee incentive issues arising in the context of a large number of UK target company acquisitions.
Advised a UK corporate group on various complex performance share and other equity-based incentive arrangements, including in relation to the demerger and listing of part of the group.
Advised a UK individual in relation to the valuation for tax purposes of sums received in the context of a joint share ownership plan (JSOP) over shares in a listed company.
Advised a UK corporate in negotiations with HMRC as to whether their EMI share option plan continued to qualify for tax advantaged treatment.
Advised the former CEO of a UK banking group on the tax treatment of damages received in the context of his high-profile claim against the bank for breach of his contractual entitlement to a performance-based share award.
Advised a US private equity fund on the tax and share scheme implications of its acquisition of a significant publishing company from two discretionary employee benefit trusts, a SIP Trustee and over 300 individual employee shareholders.
Advised a number of non-UK headquartered businesses on the permanent establishment and other tax issues arising in the context of their inward investment into, and the taking on of employees or consultants, in the UK.
Advised a UK individual on the tax treatment of sums received on settlement of a dispute involving their entitlement to EMI options following termination of their employment.
What are the most common equity incentive arrangements in private companies?
The most common way of giving employees an equity interest in a private company is through granting them Enterprise Management Incentive options (EMI Options). These have significant tax advantages for both the employee and the employing company. Some private companies will not meet the conditions required to grant EMI Options, and for these companies some form of bespoke growth share scheme is commonly used to replicate the economic return of an option but in a tax efficient form. We can advise further on the type of equity incentive scheme which would be best suited to your company.
Can I grant EMI options to non-executive directors or consultants?
EMI Options are a very tax efficient form of equity incentive arrangement. But EMI Options can only be granted to full time employees who work at least 25 hours a week, or spend 75% of their working time, in the business. EMI Options cannot therefore be used to provide equity interests to non-executive directors or consultants. Instead, many private companies look to incentivise non-employees through growth share arrangements which can be structured to provide similar economic returns in a tax efficient from.
On a disposal of the company, will the sale process be complicated by having employees who hold EMI options?
A sale process will likely trigger the exercise of any EMI options, so that the employees can dispose of the resulting shares as part of the sale. Due diligence will need to be undertaken to confirm whether this will be the case and whether the exercise of the options will trigger any income tax/NIC charges. The process of exercise and issue of shares to option holders also needs to be factored into the timetable and documentation. The exercise of the options could also give rise to a valuable tax deduction for the employing company. Advice on all these factors should be obtained early in the sale process to ensure that nothing is missed.
Chambers UK 2023
Chambers UK 2023
Legal 500 2022