Subsidiaries can stop company EMI qualification

Companies wishing to grant Enterprise Management Incentive (“EMI”) options must meet certain requirements. One of these is that all of an EMI company’s subsidiary companies must be “qualifying subsidiaries”. This usually means that the EMI company must hold more than 50% of the share capital in any subsidiary, and it must also have control over that subsidiary. If this test is not met, then options granted may not qualify for EMI status. If you already have an Enterprise Management Incentive plan in place, changes to your subsidiary companies may mean that you cannot grant any more EMI options.

A recent case, Hunters Property PLC v HMRC 2018 UKFTT 0096 (TC), considered this test in some detail. The case related to the Enterprise Investment Scheme (“EIS”) but the issues analysed in the first instance judgement have some bearing on EMI options.

The case dealt with (1) whether the EIS claimant company (the appellant in the case) controlled a particular entity (“Greenrose”) which had been acquired after the EIS investment had been put in place; (2) whether Greenrose was a subsidiary of the appellant; and finally, (3) whether Greenrose was a “qualifying subsidiary” of the appellant.

Greenrose was a company limited by guarantee (ie with no share capital).
Accordingly, the judge decided the case could be quite straightforwardly resolved. His view was that the appellant controlled Greenrose. This was because an intermediate subsidiary was the sole member of Greenrose. Further, the appellant company had the power to remove directors and appoint a majority of directors, which amounted to indirect control of Greenrose.

Greenrose was therefore a subsidiary of the appellant company within the meaning of the Companies Act 2006. In addition, Greenrose could not be a “qualifying subsidiary” because nobody could hold more than 50% of its share capital – because it had no share capital to hold.

The judge felt that there was in fact no reason to cause “unnecessary violence” to the plain statutory language (as attempted by legal counsel for the appellant) which the judge (RM2 suspects) delighted in pointing out in his judgement.

This is a good example of a post-implementation event occurring which completely scuppered the original purpose of the investment. In an EMI context such an occurrence would have prevented the grant of further qualifying options by the company.

Be vigilant and be sure to notify your share scheme advisers of all significant corporate events (however seemingly innocuous) or the whole beneficial effect of your tax- advantaged employee share scheme could be lost.

RM2 can advise you on your existing share plans, and how best to ensure that proposed corporate events do not produce a negative impact. For more information contact us on 0208 949 5522 or by email at