One of the requirements which a company must meet to qualify to grant EMI options to its employees is that it is independent. This means that the company must not be under the control of another company and must not be a 51% subsidiary. It can frequently cause issues, sometimes inadvertently, and mean that a company cannot enjoy the many benefits of granting EMI options.
The first test prevents a company from being controlled by another by means of voting power. The voting power may arise by holding or having the right to acquire more than 50% of the voting shares in the company or by virtue of any document which gives additional control. The 51% subsidiary condition means that a company holds or has the right to acquire more than 50% of the shares in the company. This is tested on the nominal value of the shares.
The favourable tax treatment available under the EMI scheme is often a key advantage for eligible companies in framing their remuneration strategy. Being unable to grant EMI options may put them at a significant disadvantage to other similar employers. The position is perhaps even worse if EMI status is lost after options are granted when employees may face unexpected and unwelcome tax bills.
It is sometimes possible to organise the share capital and voting rights in such a way that a company which would otherwise be ‘controlled’ for these purposes can qualify to grant EMI options.
This would allow the company to meet the independence condition and thus be eligible to grant EMI options provided that the other conditions are met. The corporate shareholder will need to consider if it has sufficient protection given the limits on those rights.
Generally it is easy to see whether or not these conditions are fulfilled but one problem area is where a corporate investor has options or convertible loans which could give it a right to acquire control of the company in the future. Depending on how these are structured it may be that the company has ceased to be independent when the options are granted or loans made, even if the corporate investor doesn’t actually have control at this time. So this issue should be addressed before these arrangements are put in place (rather than at the time of exercise or conversion). Again, it is possible to structure these arrangements so as to ensure they don’t result in a loss of independence.
Where it isn’t possible for the company to preserve its independence for EMI purposes, it may need to look at other share incentive schemes to deliver effective, tax-efficient rewards to employees – for example, growth shares or joint share ownership plans.