EMI options, due diligence and the data room
Many private companies implement Enterprise Management Incentive ("EMI") share options (and other types of share plan) with the specific intention of sharing sale proceeds with employees if the company is ever sold.
Selling a company can be a stressful time for company owners, with acquirers poring over every detail of the business. If share options have been granted, particularly tax advantaged EMI options, the acquirer will want to carry out due diligence on the company’s share option arrangements as well.
This is where good record keeping and share plan administration really comes into its own, especially if an option plan has been operating for many years. The due diligence questionnaire may look daunting at first but in fact the questions are usually fairly straightforward, as long as your records are correct and the options were correctly implemented to begin with.
Typically, the acquirer’s advisers will ask for the following information:
- Total number of options granted and their current status (eg if employees have left, did their options lapse?)
- Copies of all executed option agreements
- Confirmation that all EMI options were qualifying both at the date of grant and on an ongoing basis (i.e. that no events have disqualified the options since the grant date)
- Evidence that valuations have been agreed with HMRC each time an EMI option was granted
- Evidence that options have been correctly registered with HMRC following grant – for options granted before 6 April 2014, this will include paper copies of registration documents; for options granted since then, screenshots of the registration via the Employment Related Securities portal will be required.
- Have you filed all your annual returns for your share schemes correctly?
If you can provide this information easily – including uploading evidence into a data room – this part of the sale process should prove relatively painless. If you can’t, you may find yourself subject to much closer scrutiny and, in the worst case scenario, to price chipping if the buyer is at all concerned about any likely tax issues that might arise, for example if there is a risk that some or all of the EMI options didn’t qualify.
If you need assistance getting your company’s share option plans shipshape for a sale, RM2 can help you with the process. Our administration team handles record keeping, returns and all elements of share plan administration and will be able to advise you fully on your compliance position. We can also assist with the sale process in connection with your share options and share awards, including helping with exercise procedures, and closing down plans following completion.
For more information, contact us on 0208 9495522 or email firstname.lastname@example.org