Targeted incentives for key employees

Many companies are keen to provide specific, targeted incentives to key personnel. These incentives can be offered in the form of cash, shares or other assets. However, the use of shares has become increasingly popular in order to align the interests of the executives concerned with those of the existing shareholders.

Share incentives of this kind are normally structured as share options.[63] No tax is payable on the grant of a share option, whether statutory or non-statutory. The only other way to prevent tax arising at the inception of an employee share scheme, other than a statutory all-employee scheme, is by means of a deferred purchase plan which is a more complex arrangement and also exposes the employee to investment risk.

Tax will ultimately be payable on option gains but if the options are offered under a statutory scheme, significant tax savings may be available. 

In our opinion, the first consideration for directors when designing a targeted share incentive scheme should be the commercial objectives of the scheme. Issues for consideration will include:

If options are being offered, a further consideration is whether the employee should pay for the option. Unless such a payment is refundable if the option lapses (in which case it is really an advance of the exercise price) a paid-for option has some of the characteristics of a share purchase plan. It should be noted that the Companies Act 1985 prohibits directors from purchasing options over shares in their own company (or another group company) if the shares in question are listed. 

A more detailed list of scheme design issues is given on page 117. Only when the commercial considerations are decided should the Board consider the choice of scheme and specifically whether a statutory or non-statutory scheme should be used. We consider first non-statutory share options.

Non-statutory share option schemes

A share option is the right to buy shares at a date in the future at a price (or formula) fixed at the date of grant of the option. The number of shares that can be acquired may be subject to performance and/or loyalty criteria. If the value of the shares rises above the exercise price, the employee has made a potential profit which can be realised by exercising the option and selling the shares. If the value of the underlying shares falls, however, the option holder is not obliged to exercise. Providing there has been no payment for the option, it represents a “one-way ticket”: the holder can win but cannot lose.[64]

A major advantage of non-statutory schemes is that the grantor does not have to comply with any of the regulations that apply to statutory schemes. The grantor has freedom to choose the term of the option, the conditions attaching to it, the exercise price and other features. Quoted companies may decide to take account of the ABI guidelines although many choose to ignore them in whole or in part. Additionally, the rules of some major stock exchanges, including the London Stock Exchange and AIM, require that no options should be granted with an exercise price less than market value, except for all-employee plans such as the Approved Share Incentive Plan or the Approved SAYE Option Scheme. 

All the gains on a non-statutory option are taxed as income and may also be subject to national insurance contributions.[65] The tax however is deferred until option exercise, which means that employees can be given a valuable asset today (the “one-way ticket” mentioned above) and pay no tax on it until some future date. In a quoted company, the shares can then be sold, the tax paid and the net proceeds taken, assuming the shares have risen in value during the option term. In a private company, exercise of the option may well occur when the shares become quoted or the company is sold or bought out. 

This tax deferral is a valuable benefit and is available even if the option is granted at a discount to fair value. If the options are granted at a nil exercise price, the grantor is effectively making a deferred gift of the shares and the recipient pays no tax until it is clear that the value of the options has risen and he has made a profit. If options are exercised at nil cost, the shares must be credited as fully paid before they are allotted. This will normally require the company to have distributable reserves. 

Difficulties can arise with non-statutory options in private companies. If the recipient exercises at a time when there is no market or buyer for the shares, he will have to find the money to pay the tax. Many people in the USA, where the rules for non-qualified options are similar in some respects, experienced large losses during the dot.com boom; they exercised when the stock price was high, but when they came to pay the tax the stock price had collapsed, leaving them out of pocket.

If there is a market for the shares at exercise, or a cash buyer, both employer and employee national insurance contributions (“NICs”) will also be due. This can create a special problem for fast growing, quoted companies who need all their cash to finance growth. However, an employer and employee can agree that the employee will pay the employer’s NIC bill. For further details see page 37. 

If there is a market for the shares in question, and the shares acquired through option exercise are immediately sold, the cash proceeds can be transferred into a self-invested personal pension plan and the tax relief will offset the tax due on exercise. However, there may be a significant timing difference between the collection of income tax through PAYE and the receipt of relief on the pension investment, which for higher rate taxpayers will be done partly through PAYE and partly through self-assessment.

A further consideration is dilution, that is, the extent to which the grant of a share option results in a permanent reduction in the interests of existing shareholders. For a brief discussion of this issue see page 15.

If a share option scheme is operated within the rules of one of the statutory schemes, then no NICs will normally be payable by either employee or employer. Moreover, the gains will not be subject to income tax, but instead to capital gains tax. The amount of CGT payable may be reduced by use of available reliefs. 

There are three types of share option schemes which are “statutory”, that is, subject to detailed regulations but also tax efficient. One of these, the Approved SAYE Option Scheme, is an all-employee scheme which involves exercising a share option with the proceeds of a savings plan. We deal with this under “Share purchase by employees”. The other two schemes are the Enterprise Management Incentive and the Approved CSOP Scheme. In each case the employer is allowed complete discretion in selecting the recipients, and can also attach performance conditions to the grant and/or to the exercise of options. The use of performance conditions for both grant and exercise can create a powerful double incentive for selected staff.[66] 

The Enterprise Management Incentive

This scheme (“EMI”) was introduced in the Finance Act 2000. It is designed specifically for use by smaller firms, and offers great flexibility with considerable tax advantages. No tax or NICs are due on the grant or exercise of a qualifying option as long as the exercise price is not less than fair market value at the date of exercise. On sale of the shares acquired, gains will be taxed as capital gains and any tax payable will be reduced by business asset taper relief.

Independence

Companies offering EMI options must be independent, that is, not owned by any other company, or by any company together with one or more connected parties. The definition of “connected” parties is complex (see Glossary) but includes situations where parties act together to secure control of a company, perhaps through a shareholders’ agreement. For example, if an individual enters into an agreement with company A to control company B, the individual will be connected with company A and company B will fail the independence test. 

A similar problem arises if a controlling shareholder transfers shares to any corporate body including the corporate trustees of a family or employee trust. In practice, however, if a private individual retains majority control HM Revenue & Customs will not seek to disqualify the company from offering EMI options.

Even if a company is independent today, it will fail the independence test if there any arrangements whereby it could come under the control of another company (with or without associates) in the future. This could include situations where a minority venture capital investor has an option to acquire a controlling stake if certain performance criteria are not met. 

Exercise price

EMI options can in principle be offered at any exercise price, whether at fair value, above it or below it. There is no need to agree valuation with HM Revenue & Customs before option grant although it is usually advisable to do so.

A company may decide to offer options with an exercise price above fair value if it feels that the value agreed with HM Revenue & Customs does not reflect the full commercial value of the shares. Alternatively, the company can introduce an element of gift into the arrangements by offering the options at a low exercise price or even at nil cost. This may be appropriate if the intention is to transfer value unconditionally to the participant, or if a promise of equity was made a long time previously and the participant needs to be compensated for the increase in equity value since then. 

If EMI options are granted with an exercise price less than fair value, then income tax (plus employer and employee NICs if appropriate – see page 34) is payable. However the tax is not payable until option exercise. The amount on which tax will be due is the difference between the exercise price and the lower of the actual market value at the date of exercise (taking account of any restrictions to which the shares are subject) and the actual market value at the date of grant. 

It is perfectly acceptable to offer EMI options over restricted shares as long as they are part of the ordinary share capital (see Glossary). Common restrictions on shares include a prohibition on share transfer unless certain conditions are satisfied, or limitations on voting power in comparison to other shares of the same class. HM Revenue & Customs takes the view that in such a case fair market value can be determined by reference to the restricted value.[67] The effect of this is that if the restrictions fall away at exercise (for example on a company sale) then any additional gain will also be subject to capital gains tax (with the potential for business asset taper relief) instead of income tax. HM Revenue & Customs has stated that it will withdraw this favourable treatment in cases where it concludes that the restrictions are not “normal” commercial restrictions or where there is attempted tax avoidance.

If the shares are restricted, the option agreement must contain details of those restrictions. This is usually done by attaching the articles of association and/or any shareholder agreement setting out the restrictions.

When an EMI option is exercised over restricted shares, then if the exercise price is equal to the actual market value at the date of exercise a section 432(1) election is deemed to have been made. This ensures that no part of any subsequent capital gain is subject to income tax. However if the option is granted at a discount, there is no such deeming provision.

Other option terms

The terms of an option must be set down in writing, including when and how it may be exercised. Broadly speaking, however, a company can attach any conditions it likes to the exercise of an option. These may include loyalty conditions – for example that an option holder must serve a minimum period before an option can be exercised – and performance conditions, such as the achievement of a target level of turnover or profit. Other conditions are sometimes imposed. For example a private company may stipulate that no option can be exercised until the company has been sold or floated.

HM Revenue & Customs will accept indeterminate conditions, such as where the satisfaction of a loyalty or performance term is partly or wholly at the discretion of the Board. This is on the grounds that although the condition involves discretion, the existence of this discretion has at least been set down in writing. HM Revenue & Custom will also usually agree to a change in a performance or loyalty condition even after the option has been granted. In these cases it is advisable to check with an officer of HMRC’s Small Companies Enterprise Centre. Officials are often prepared to give rulings informally over the telephone but it is prudent to ask for written confirmation where possible.

There are certain changes which HM Revenue & Customs will not accept, specifically any change in the minimum or maximum term of an option or to its exercise price. Any change which has the effect of increasing the value of a share subject to the option will constitute a “disqualifying event” which will affect the tax treatment of any gains.

Options are sometimes written so that if an employee fails to meet a performance or loyalty requirement (by leaving the company, for example) the Board can exercise discretion as to whether the option can be exercised. This will normally be acceptable (although if an option holder leaves employment this is another “disqualifying event”), but any such discretion should not result in the possibility of an option being exercised more than 12 months after the death of a participant. The possibility of such an exercise, however slight, will be enough to disqualify a scheme since a valid EMI option cannot be so exercised. 

Scheme limits

The maximum value of shares over which options can be offered under an EMI scheme to any one employee is £100,000, measured at the date of grant. If the employee also holds unexercised options under an Approved CSOP Scheme, then these will count towards the £100,000 limit. There is an overall limit of £3 million on the value of shares that can be offered to all employees by a single company. These are “all-time” limits; once reached, options must be exercised or released before further tax-efficient options can be granted. Of course, the company is at liberty to offer any number of non-statutory shares options, which carry no specific tax advantages.

In calculating the value of shares subject to an EMI option, HM Revenue & Customs applies the unrestricted market value. There is therefore potentially one value to be agreed in relation to the exercise price (the restricted or “actual” market value, known as AMV) and another in relation to the £100,000 scheme limit (the “unrestricted” market value, known as UMV). HM Revenue & Customs will often agree just one valuation figure. This is usually the restricted market value although the letter of agreement may fail to mention this fact.

Enterprise Management Incentive: Summary

Care is needed to notify HM Revenue & Customs in cases where an award valued on an unrestricted value basis may breach the £100,000 limit. In these cases, if prompted, Shares Valuation will normally negotiate the unrestricted value as well as the restricted value but companies must take the initiative on this point otherwise they may unknowingly grant options in excess of the limit. Where options are granted under an EMI scheme over shares worth more than £100,000 the excess options are treated for tax purposes as ordinary non-statutory options and accordingly lose their tax advantages. The tax treatment of the remaining options is unchanged. If the options are subsequently exercised in part, the holder can specify whether the exercise is in relation to the EMI or the unapproved portion.

Where the UMV of the option shares is exactly £100,000 then, if any of these options are exercised within a three year period from grant, no further options may be offered to that participant under the EMI scheme within the 3 year period. The same may apply if the UMV exceeds £100,000 since in this case the UMV of the shares within the EMI regime will be deemed to be exactly £100,000. If there is a possibility that EMI options may be exercised and further options granted within a three year period then the initial grant should be in respect of shares worth £99,999 or less. If the initial grant is to be larger than this, the balance could be issued by means of a separate grant of unapproved options.

There is no minimum or maximum exercise period for an EMI option, although the option must be capable of exercise within 10 years. In practice it is rare for employee share options of any kind to be granted with a maximum life of more than 10 years because very long incentive periods become commercially meaningless.

Because the scheme is designed for smaller firms, companies with gross assets of more than £30 million are not eligible (gross assets being the sum of all the assets in the balance sheet without deduction of any liabilities).[68] In determining gross assets, HM Revenue & Customs will apply generally accepted accounting treatment. However if gross assets subsequently rise above £30 million the options retain their tax-advantaged status.

Eligibility of employees

Participants must work at least 25 hours per week for the sponsoring company, or 75 per cent. of working time if less. An employee could in theory work 25 hours per week for more than one employer and thus be able to participate in more than one EMI scheme. That person would be eligible to receive options over shares worth up to £100,000 in each as long as the companies were not members of the same group. It is also possible for someone who works for example on only one day a week to qualify for participation in an EMI scheme, if that day is the only day on which the person is available for work. If an employee’s working hours fall below the above requirements this will be a “disqualifying event”.

A participant may not be awarded options if at the date of grant that person has, directly or with associates[69] an interest of more than 30 per cent. in the share capital or, in the case of a close company (see Glossary) a direct or indirect interest in more than 30 per cent. of the assets available on liquidation. However any shares which are already the subject of an EMI option at the date of grant of the new option do not count towards this total, and nor do the shares over which the new option is to be granted. It is therefore be possible for an individual to receive a grant of EMI options over more than 30 per cent. of the company, and subsequently to receive further EMI options, as long as the total value of the shares under option at the respective dates of grant does not exceed £100,000.[70]

Eligible activities

If a business is engaged in certain “non-qualifying activities” it will not be able to offer options under the EMI scheme. Non-qualifying activities are, broadly, property development, financial activities such as banking, insurance and leasing (including the leasing of property), legal and accounting services, farming, the operation or management of hotels and nursing homes, and dealing in land, securities or other assets. 

The terms financial service, and legal and accounting services, are not defined in the legislation and HM Revenue & Customs has issued guidance on how they should be interpreted, as follows: 

¨ “Financial services” means the provision of such services by a company acting as principal, such as a bank and insurance company. It does not include companies offering a service of introduction, such as an insurance broker. In practice this means that many firms of independent financial advisers are able to offer EMI options, on the basis that although they offer advice about providers of financial services, they do not themselves offer the financial services in question. This interpretation assumes that the contract for the provision of financial services is between the client and the provider. It also assumes that the adviser is acting genuinely as an introducer and not as an agent for a single provider, or only a very small number of providers. Clearly this interpretation will not apply if the financial adviser also offers a service as principal, for example fund management.

Receiving royalties or licence fees is not a qualifying business activity unless these receipts relate to intellectual property (for example computer software) of which at least half was created by the company or a group company.

Companies may engage in non-qualifying activities (either directly or through their subsidiaries) as long as these are only “incidental” to the main business. HM Revenue & Customs regards activities that do not constitute more than 20 per cent. of the business as “incidental”. However there is uncertainty as to how this test applies if, say, the activity involves less than 20 per cent. of the business on some measures (such as turnover, profits or employees) but more than 20 per cent. on another (such as assets).

If a company has a subsidiary engaged wholly or mainly in the holding or managing of land, or any property deriving its value from land, then the parent will not be able to offer EMI options unless the subsidiary is owned as to at least 90 per cent. and there are no arrangements in place whereby ownership could fall below this level. 

Research and development from which a qualifying trade will be derived or benefit, is treated as a qualifying trade, but merely preparing to carry on such research activity does not qualify. The derived or benefiting trade must be carried on by the same company, or by another company in the same group. This treatment applies to all activities that are classed as research and development for accounting purposes, except for oil and gas exploration or appraisal. 

EMI options can be offered over the shares of a company that is not UK resident. However, irrespective of its residence, if the company is a single corporate entity its main business must be carried on “wholly or mainly” in the UK. If the company is the parent of a group of companies, at least one member of that group must satisfy this condition. Where the shares are denominated in a foreign current, UMV and AMV must be converted to sterling for the purposes of the Notice of Grant but the exercise price can be expressed in local currency.

If the company has subsidiaries, they must be at least 51 per cent. owned and not engaged in disqualifying activities of a scale that would disqualify the parent. Difficulties arise in the case of joint ventures, which are not normally regarded as subsidiaries. However HM Revenue & Customs takes the view that, generally, a joint venture cannot be successfully managed unless each joint venture investor co-operates with the other. This co-operation causes each party to be connected with the other for tax purposes. Because the definition of control in this context applies to any company acting alone or with “connected” parties, it is argued that the joint venture is actually controlled by both parties and is therefore a controlled company owned as to less than 51 per cent. Indeed it is conceivable that situations could arise where a company owns much less than 50 per cent. of another, but is nevertheless deemed to control it because of superior rights accorded to it by a shareholders’ agreement. This definition of control in the context of joint ventures does not appear to be well supported by case law and HM Revenue & Customs has stated that it is prepared to look at individual cases on their merits.

Disqualifying events

If a disqualifying event occurs, then unless the options are exercised within 40 days of the event, they will lose their tax advantages. This will usually mean that further gains in the value of the option prior to exercise will be subject to income tax rather than capital gains tax, and business asset taper relief will apply only from the date of exercise of the option, and not from the date of grant.

The principal disqualifying events are:

Note that exceeding the gross assets requirement after option grant is not a disqualifying event, and neither is acquiring a non-qualifying subsidiary[74] so that companies that grant EMI options are not penalised if they grow. 

Implementation

In general, the EMI has been designed to be as simple as possible to implement. There is no formal approval process. Instead, companies are required only to register the options. A simple registration form (“Notice of Grant”) is completed, giving details of the recipient, the option grantor, the number of shares over which the option is granted, the exercise price, and certain other matters. Registration must take place within 92 days of the date of grant. HM Revenue & Customs has 12 months after the end of the 92-day period to notify the company if it believes that there are any irregularities in the registration.

It is not necessary to submit the rules, articles of association, shareholders’ agreements or other documents that may affect the rights attaching to the options or the underlying shares. However, HM Revenue & Customs has the right to inspect these documents. 

EMI agreements should be carefully drafted, not only in respect of potential inspection by HM Revenue & Customs, but also to protect the legal position of the company and the option recipients. In particular, agreements should deal accurately with contingencies such as redundancy, retirement or leaving work as a result of illness. If there are performance and/or loyalty conditions, they must be unambiguous and fair. The agreement should make clear that the option rights are separate from any provisions of the contract of employment. Careful thought should be given to the implications of a possible company sale, asset sale or flotation. Companies should also consider if the scheme should be operated through an employee trust.

If a company is unsure whether it, or any employee, is eligible to offer EMI options, application can be made to the Small Companies Enterprise Centre in Cardiff for a ruling. All the relevant facts should be presented in writing. A ruling will normally be provided within two to three weeks and officials are also prepared to enter into informal discussions over the telephone. Companies should not be tempted to withhold information or enter into artificial arrangements in order to secure clearance since any subsequent HM Revenue & Customs investigation is likely to identify and penalise irregularities.

The Approved CSOP Scheme

In view of the advantages, most eligible smaller companies now see the Enterprise Management Incentive as their preferred method for granting share options. However, some companies will not be able to offer EMI options, because of their size, the nature of their activities or for technical reasons. In such cases, an Approved Company Share Option Scheme (“Approved CSOP Scheme”) may be suitable.

The principal tax benefit of a CSOP is that, if the option is exercised after three years from the date of grant and within 10 years, there will be no charge to income tax or NICs on exercise. Gains on the sale of the shares acquired will be subject to capital gains tax, but some of this tax can be sheltered by personal exemptions. Business asset taper relief will be available for the period between exercise of the option and sale of the shares (if any), but not for the period between grant and exercise of the option (unlike the Enterprise Management Incentive). 

Under a CSOP, no employee may hold qualifying options over shares in a company (or any associated company)[75] with an aggregate value of more than £30,000 at any time. This figure is calculated by reference to the share value at the date of grant, or, if there has been more than one grant, at the respective grant dates. If options are granted in excess of this figure, all the CSOP options held by the participant are regarded as unapproved and the tax benefits are lost.

CSOP options must be offered with an exercise price not less than fair market value (as agreed with SV in the case of unlisted shares – page 90). If they are granted at a discount, income tax is payable in the year of grant on the benefit. For unlisted companies, fair value of the shares is negotiated with HM Revenue & Customs.

The relatively modest tax advantages, and the low value ceiling of £30,000, mean that the CSOP is rarely sufficient on its own for motivating senior management. However it can be useful in more broadly based schemes if the Enterprise Management Incentive is not available.

Eligibility

A company can offer Approved CSOP options to as many or few employees as it wishes, and can apply whatever selection criteria it chooses. However, all the participants must full-time directors or employees (full time or part time) of the company.

There are no restrictions on the activities of companies that may offer options under an Approved CSOP Scheme. However the company must be either independent (that is, not controlled by another company) or the subsidiary of a listed company. For further details see page 85. The shares must be ordinary shares (see Glossary) of the employer, or a company that controls the employer.[76] The shares must be fully paid up and not redeemable.

The shares must not be subject to restrictions by comparison with other shares of the same class, except that they can be non-voting and/or subject to a requirement that if the holder is an employee, and leaves employment, they must be offered for sale on the same terms as those applicable to other holders of shares of that class.

Where there is more than one class of share capital, the majority of the class used for a CSOP scheme must be owned (broadly speaking) by persons who did not acquire them through an employee share scheme, i.e. by virtue of being directors or employees.[77]

The Approved Company Share Option Plan: Summary

If the company is a close company (see Glossary) no employee with a direct or indirect interest of more than 25 per cent. in the share capital or assets of the company may participate (the shares subject to the proposed option count towards this limit). Performance and/or loyalty conditions can be attached to both the grant and the exercise of CSOP options. Any exercise conditions must be objective, but otherwise can be freely drafted. Conditions can be altered if events occur which make them inappropriate. However, new conditions must not be harder to satisfy than before and prior approval from HM Revenue & Customs must be obtained. Performance or loyalty conditions can include discretionary features, for example the power to waive a lapsing condition, but only if exercise of the discretion would operate in favour of participants.

A CSOP option may be exercised within three years from the date of grant and in this case it is treated for tax purposes as if it were a non-statutory option. Income tax and NICs (where applicable) will be due (except on death – see below). The employer can decide what events if any will give a participant the right to exercise early, but even if these are the so-called “good leaver” provisions, such as illness, disability or redundancy, income tax will still be payable on any early exercise. The early exercise of individual options within a scheme will not invalidate the scheme itself.

In the case of death, personal representatives may exercise, if the rules permit, even within the three year minimum vesting period. No income tax is payable but the options will lapse if not exercised within 12 months.

Employers can offer a “cashless exercise” facility, whereby the employee effectively pays the exercise price out of the proceeds from the sale of some or all of the shares acquired. However this must not create a restriction on the shares. Consequently the mechanism must be voluntary and the employee must own the shares to be disposed of before they are sold.

An Approved CSOP Scheme with a savings feature could be a viable alternative to an Approved SAYE Option Scheme. HM Revenue & Customs permits savings-linked CSOPs if the savings element is merely to ensure that employees will have sufficient funds to exercise their options. Unlike an SAYE Scheme, a CSOP Scheme allows the employer to select who will participate. A savings based CSOP also has no savings cap and provides more flexibility as to option term. Unlike the SAYE scheme, however, CSOP options cannot be offered at a discount. 

If a company operates an EMI scheme, it may also operate a CSOP. An employee can hold options under both arrangements at the same time, as long as the total value of shares over which options can be exercised, taking CSOP and EMI together, does not exceed £100,000 by reference to the respective dates of grant.

Before a CSOP can be introduced, the scheme documentation and ancillary papers must be submitted to HM Revenue & Customs for approval. Approval is likely to take a minimum of 4 weeks, or longer if there are queries. However once approval is obtained the options can be awarded immediately and the resolution(s) adopting the scheme can be forwarded to HM Revenue & Customs at a later stage.

[63] However, partly because of the growing burden of regulation on employee share schemes, including share options, a number of companies particularly in the US are now offering direct (taxable) gifts of shares and/or LTIPs.

[64] That is, the holder cannot lose from the option itself, but if he exercises the option and continues to hold the shares he will then be exposed to the full risks and rewards of ownership.

[65] Except following death; personal representatives pay no income tax on exercise as long as this occurs within 12 months of the death.

[66] For some reason the Association of British Insurers disapproves of the grant (as opposed to exercise) of share options being linked to performance conditions.

[67] This appears to be based on a misunderstanding of paragraph 55, Schedule 5, ITEPA 2003. However the concession has not been withdrawn.

[68] In a group of companies, the gross assets of each subsidiary are taken and summed. Because of intra-group balances, this may differ from the consolidated gross assets figure.

[69] see Glossary. Associates include relatives but in the case of EMI schemes, the term “relative” includes spouses, antecedents and descendants but not siblings or remoter relatives.

[70] The 30 per cent. limit applies to the nominal value of ordinary share capital of all classes, irresepective of the rights attaching to the shares. So if an employee holds 10 per cent. by nominal value of the ordinary shares in issue, but by virtue of voting, dividend or capital rights these shares have an ecomomic interest of more than 30 per cent. in the company, it will still be possible to grant such an employee EMI options (however shares with fixed income rights are not regarded as ordinary share capital).

[71] “Control” in this context means having the power to direct the affairs of a company, within the meaning of section 840 ICTA 1988 whether or not there is majority share ownership (for further details see footnote 49 on page 45).

[72] Except that in certain circumstances, EMI options can be rolled over into equivalent EMI options in an acquiring company

[73] One such purpose might be the alteration of a company’s articles of association to make it possible to float the shares on a public investment exchange.

[74] Insofar that this relates to the ownership structure. However, if the subsidiary is of significant size in relation to the parent then the trading activities of the subsidiary may be large enough to disqualify the parent.

[75] A company is associated with another if either controls the other if they are both controlled by the same person(s). The definition of control is that provided by section 416(2) ICTA 1988. For further details see footnote 49 on page 45. 

[76] The definition of control is provided by section 840 ICTA 1988 (for further details see footnote 49 on page 45). 

[77] This rule does not apply in respect of shares acquired through a public offer. It also does not apply if the majority of the class is owned by directors and/or employees who are able to control the company.