Managing share plans when you sell your business

Many private companies use employee share option plans, including Enterprise Management Incentives (EMI) and Company Share Option Plan (CSOP), to deliver a reward to employees when the company is sold. 

If you’re considering selling your company, it’s important to make sure your share plan is in good shape.  Leaving it to the last minute may be costly for you and your employee option holders.

Here are a few things you’ll need to think about.

Due diligence process

Your buyer’s lawyers will ask plenty of questions about your business generally, and if you’ve got a share plan that will be subject to the same due diligence enquiries.

Typically, you’ll be asked for copies of the share plan documents and evidence of valuation agreements with HMRC.  Buyers will also want to be sure that you’ve carried out all necessary share plan annual returns filing correctly.

They’ll also ask for proof that you’ve registered the plan and the options correctly.  That’s particularly important for EMI options, where the tax benefits will only apply if you’ve registered the options within 92 days of the date of the option grant.

If there’s any doubt about the validity of your share plan, the buyer may have concerns about unexpected income tax and National Insurance Contributions (NICs).  This may lead to price chipping and burdensome warranties in the sale documents.

Income tax and NICs

EMI and CSOP should deliver income tax and NICs free exercise, but in some cases PAYE and NICs will be due, including for non-tax advantaged arrangements, or if EMI options have been granted at less than market value. 

You will need to ensure that you’re accounting to HMRC for any income tax (PAYE) and NICs due on option exercise.  The buyer will usually seek tax warranties/indemnities to cover this. 

Also, consider whether your employees will be liable for any employer’s NICs that is due on the exercise of share options.  The option agreements and plan rules should state whether this is the case or not. 

Corporation tax relief

It’s easy to forget about the corporation tax (CT) relief that may be available for gains on exercise of employee share options.  The amount of CT relief is based on the option gain (ie the amount by which the market value of the shares on the date of exercise exceeds the exercise price) and can be a significant amount.

Make sure you take this into account at an early stage in the negotiations or you risk losing out on a valuable relief that the buyer should give credit for on a sale of the company. 

Managing the exercise process

It sounds obvious, but do check that the options are exercisable! In particular, if there are performance conditions attached to the options, you should make sure that they’ve been met, or if a sale will override them.  In some situations, you can change the conditions, but you need to take care that this doesn’t invalidate the options or impact on the expected tax treatment.

You’ll need to think about practicalities and paperwork.   There will be confidentiality issues so you’ll need to think about how and when you tell option holders that an upcoming sale will mean they can exercise the options.  Will the employees need to sign up to any warranties, or enter into a separate sale agreement?  You may need to manage the excitement at a windfall with the natural concerns about a change of ownership in the business.

Importantly, how will the option exercise price be covered?  There may be a cashless exercise facility allowed for in the scheme rules, or option holders may need to give an undertaking to pay the exercise price out of their sale proceeds.

Next steps

Preparing for a sale is always a stressful time but good planning and preparation can reduce the headaches.  RM2 has significant experience in helping our share schemes clients through the sale process to deliver a positive outcome for both the seller and the employee shareholders. 

If you need advice on getting your share scheme shipshape for a sale, contact us on enquiries@rm2.co.uk  for a free, no commitment initial consultation with one of our expert share plan advisers.