Losing Control: The EMI Independence Test

When a company becomes a subsidiary of another company, it clearly loses its independence – this is a fundamental test for any company that wishes to grant EMI options.

However, the EMI independence test is much broader than just looking at share capital ownership. An EMI company must:

  1. Not be a 51% subsidiary of another company;
  2. Not be under the control of another company, even without being a 51% subsidiary;
  3. Not be under the control of another company and any other person connected with that company, even without being a 51% subsidiary.

Furthermore, there must be “no arrangements in existence” as a result of which the company could become a subsidiary or be so controlled. For example:

  • If you have any corporate investors, are they connected with any other individual shareholder? e.g. if you have a corporate investor holding, say, 30% of the share capital which is controlled by an individual who also owns 30% of the shares (or perhaps whose wife owns 30% of the shares), then the part of the test set out in paragraph (c) above is unlikely to be met.
  • What powers does your Investors’ Agreement give to your corporate investors? Are there any triggers whereby the corporate investor could take control – and if so how likely are those triggers to occur? To what extent does the corporate investor have control of the day to day running of the company – for example, does it have control of the board?
  • Are any “arrangements” in place? This term is deliberately broad. It might mean the arrangements set out in your Investors’ Agreement. Or it might mean the point at which initial discussions with a potential acquirer tip into “arrangements” for a sale. In HMRC’s view, Heads of Terms will usually amount to “arrangements”. So be aware that if you have EMI options in place, and negotiations for a sale are underway and being put in writing, a disqualifying event may be nearer than you think.

These examples are not exclusive. Where there is any doubt as to the independence of your company, this should be looked at on a case by case basis. It is usually possible to obtain advance clearance from HMRC as to whether your company qualifies as “independent” for EMI.