ETASSUM35260 - Schedule 3 SAYE option schemes: Requirements relating to share options – The exercise price: Rights issues

Adjustments to reflect rights issues are more difficult and where a company has contacted ESSU with proposals for clarification in this respect, ESSU technical advisors should normally refer the company's proposals to HMRC Shares and Assets Valuation (SAV) for advice on whether the adjustments are acceptable.

The basic principle is that the 'necessary' adjustment is one which would adjust the acquisition price (which is based on the market value of the shares at the date of grant) and the number of shares, to what it would have been had the new share structure been in place when the options were first granted.

SAV accept that the following forumla is acceptable for computing the adjustment to be applied to the original option acquisition price to take account of a rights issue. But it is not necessarily the only method of adjustment acceptable to SAV.

Adjustment:

A divided by M

Where:

  • A is the average value of a share following the rights issue (the theoretical ex-rights price)
  • M is the mid-market value of a share on the last day the shares were listed cumulative rights

The average value of a share following the rights issue (A) is computed by:

  • N multiplied by M
  • plus
  • R multiplied by P
  • divided by
  • R plus N
  • equals A

Where:

  • N is the number of shares required to entitle the holder to ‘rights’ shares
  • M is the mid-market price of each of those shares on the last dealing day cumulative rights
  • R is the number of ‘rights’ shares offered per N
  • P is the price at which each ‘rights’ share is offered

The number of shares in the option is then adjusted by the reciprocal of the above.

Example

Existing option over 1000 shares at 40p per share.

Company makes 1 for 4 rights issue at 50p per share:

  • N equals 4
  • R equals 1
  • P equals 50 pence
  • Mid-market price of a share on last day listed cumulative rights (M) = 65 pence

The calculation is as follows:

  • 4 multiplied by 60 pence
  • plus
  • 1 multiplied by 50 pence
  • equals 310
  • divided by 5
  • equals 62 pence

Average price (A) equals 62 pence per share

Adjusted option exercise price is 40 multiplied by 62 divided by 65 equals 38.153 pence

Adjusted number of shares is 1000 multiplied by 65 divided by 62 equals 1048.4 shares

Aggregate option exercise price remains as £400 now 1048.4 shares multiplied by 38.153 pence each