HM Insights

All you need to know about Enterprise Management Incentives options

What is an EMI Option?

It is an employee share option which allows employees the opportunity to purchase shares in the company over a prescribed period. The price of the option is fixed at the date the EMI option is offered and this is what the employee will pay for the shares should they decide to exercise the option.

Why do companies use EMI Options?

They are specifically targeted at relatively small, higher-risk trading companies and attract favourable tax treatment. The policy goal of the EMI legislation was to help these companies to recruit and retain high calibre individuals by allowing them to offer EMI options, so benefiting the company and in turn the overall economy.
In practice EMI options can help to reduce employment costs as an employee may be more willing to accept a reduced salary. Also, with the incentive of tax efficient share options the theory is that the employee will be highly motivated and perform to their best ability.

EMI options also benefit from being very flexible as they can be tailored for each individual employee.

Which companies can grant EMI options?

To qualify to grant EMI options, a company must be an independent trading company with:

  • gross assets of no more than £30 million; and
  • fewer than the equivalent of 250 full-time employees.

Certain trading activities will not qualify and there are detailed rules relating to the independence requirement, the trading requirement and the shares that can be used for EMI options.

Who can be granted EMI options?

To be eligible to be granted an EMI option, an employee must work for the company for at least 25 hours per week, or if less, 75% of his working time. Employees cannot be granted EMI options if they (or their “associates”) have a “material interest” in the company whose shares are used for the scheme, or in certain related companies.

When can an EMI option be exercised?

The EMI legislation requires that EMI options must be capable of being exercised within 10 years of the date of grant, and options can only be exercised within a period of 12 months after the option holder’s death. Otherwise, there are no restrictions on the exercise provisions that can apply to EMI options, and this flexibility means that they can be used for exit-only arrangements, as well as for options exercisable at the end of a performance or vesting period. Commonly, companies find it useful to link exercise to performance targets e.g. a certain percentage of the option can be exercised at one trigger point and the rest at another.

When do EMI options lapse?

Apart from the legislative requirements for the exercise of EMI options, there are no restrictions on when EMI options can be exercised or will lapse. However, often the EMI option agreement will provide that options will lapse on the option holder leaving employment, becoming bankrupt, trying to transfer the options or use them as security.

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