On Bank Holiday Monday I visited the Beatles Story at Albert Dock in Liverpool. This caused me to muse that if you were to ask anyone what the initials EMI mean to them, they would probably suggest the Beatles' record company (Electrical and Musical Industries Limited, I discover on Wikipedia).
However, for employers and employees the more important meaning of EMI could be Enterprise Management Incentives.
Do You Want To Know A Secret?
This type of EMI is a tax-favoured share option scheme that permits the issue of share options to an employee up to a value of £100,000 at the date the options are granted.
There are some restrictions on the types of company that can issue EMI’s. Companies with land-based assets (e.g. hotels, nursing homes) cannot issue EMI options, and nor can professional services companies. So Simpson Burgess Nash Limited cannot issue EMI options to its employees, although we obviously would if we could.
Please Please Me
An EMI option is tax favoured in the sense that the employee only pays tax on the increase in value once he or she has both exercised the option and sold the shares. And the chances are that by that time they will be eligible for a 75% discount on the capital gain they make on sale. With an ordinary share option the employee would pay income tax instead of capital gains tax, with no 75% discount.
8 Days A Week
The idea of EMIs is to issue them to key employees to give them an additional incentive to work hard to ensure the continuing success of the company, as they will have a stake in the company’s equity.
From Me To You
It is usually most efficient for the existing shareholders to grant EMI options to employees, as this means that the shareholders can usually enjoy their own 75% discount on the disposal, and will be personally entitled to the amount paid for the shares by the employees. It is equally possible for the company to issue the options.
We Can Work It Out
One of the great advantages of EMIs is that the parties can effectively write their own scheme, within certain general constraints, so it is not necessary to follow a standard format and squeeze the arrangements within it.
Long and Winding Road
It is necessary for the options to be capable of exercise within a 10-year period, so they should be seen as a long-term incentive and not a quick fix. Indeed, it is a requirement that the options be issued so as to recruit or retain key employees, although this hardly qualifies as an objective test.
Yesterday
It is possible, and indeed usual, to include performance criteria as a condition for the exercise of options. Often employers will stipulate that options can only be exercised in the event of sale or flotation of the company, but this can cause a problem with the 10-year rule mentioned above. One way round this is to set a performance target for exercise which is potentially achievable but unlikely to be met in practice, and another is to allow exercise of the options the day after grant; this will not happen in practice but it causes the criteria to be met.
Help
Whilst the EMI is a relatively simple concept, it is advisable to take professional advice on implementation to ensure that the necessary criteria are met to make the scheme valid as an EMI for tax purposes. In particular it is necessary to agree with the Revenue that the value placed on the shares at grant is mot less than market value (it can be more) and share valuation expertise is required here.
I Feel Fine
The EMI option can be seen as a one-way bet for both parties. If the company meets the performance criteria and the options are granted, the shareholders will reap enormous financial rewards, and will not (hopefully) begrudge sharing those with the key employees who have helped to make the success possible. If the company does not succeed the employee will not exercise the options and nothing will have been lost.
Why
EMI options are a much under-used way of providing incentives to key employees in a highly tax-efficient manner. They can be used by a wide variety of businesses; among those for whom I have set up schemes are:
Employment agency
Oil industry equipment manufacturer
Clothing wholesaler
Telecommunications on-seller
Office equipment sales and maintenance company
They tend to be very successful as a motivational tool for key employees, contributing to lasting success for the business.
Mark Simpson
3 July 2007
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