EMI: The Gymnast of the Share Scheme

Posted by admin at 15:51 on 13 Feb 2017

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Much like the incredible feats of the gymnastics teams at London 2012, the Enterprise Management Scheme (EMI) will stretch and flex in order to optimise success for your company.

Set your goals and aim high

The EMI scheme allows employers to freely tailor the vesting criteria (i.e. when the options become capable of exercise by the employees) by setting out clear goals and expectations. Employers can set targets relating to where they want the company to be overall i.e. in terms of turnover or profit, what they expect from each department in sales, and even create individual objectives perhaps based on key performance indicators (KPIs) or length of service criteria.

Work is undertaken upfront to align the goals of the company with the EMI options by way of bespoke vesting targets. This, as set out above, may align to company targets, individual target or may even be aligned to eventual sale targets. You can also set out what happens if targets are not hit. Are employees able to try and hit targets in the next year or does the option lapse? You could include stretch targets to drive over performance (an unexpected gold medal) and budget targets that are more readily achievable (the predicted bronze medal).

For example, the original goal is to sell the company for £10m in 3 years' time and employees will be rewarded with 100% of their allocated options. Should the Company be sold for less than £5m none of the options awarded are able to be exercised. 3 years later, the company is sold for £8m and the employees are rewarded with being able to exercise 60% of their option (a silver medal) in line with the agreed vesting targets.

Overriding discretion

Recipients of the EMI scheme are selected by the employer. Unlike a Share Incentive Plan (SIP) - whereby an employer is required to offer the scheme to all employees - the EMI allows you to select employees on an individual basis for participation.

It is worth remembering that an EMI scheme works on a promise of shares. There is no dilution of current shareholder interests until the options are exercised (when the promise is fulfilled).

Furthermore, this can dovetail with the creation of new share classes. For example, options can be granted over non-voting shares and/or shares which have different dividend rights, so as not to interfere with the existing shareholders control and dividends yield.

You may want options to vest only at the time of a sale event. It is worth noting that if this is the case the employees' rate of tax will be 28% (or 18% for base rate tax payers) under the capital gains tax regime.  If employees hold the options for at least a year prior to sale, they may be entitled to Entrepreneurs' Relief (reducing the tax charge to just 10%) provided certain conditions are met.  See here for more details.

The Good and The Bad

The EMI allows you to prescribe what happens should a member of staff leave. Below are some basic definitions and typical case scenarios relating to each type of leaver.

The Good: Good leavers can be allowed to exercise their options and sell any shares back to the Company for a fair price. These leavers are normally defined as members of staff who leave involuntarily because of injury, disability, retirement, mergers, or even on death.

The Bad: Schemes can be designed so that bad leavers have their unexercised options lapse and are forced to sell all shares upon leaving the company at a price equal to the price they paid to acquire their shares or, if lower, current fair value. This usually applies to resignations and dismissals.

For more information on EMIs, or any other share schemes, contact a member of the RM2 team directly on 020 89494 5522.