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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

Schedule 4 Company Share Option Plan (CSOP): Requirements relating to options: Terms of an option

The terms of share options must be stated at the time the option is granted (paragraph 21A(1)) and must be notified to the employee as soon as practicable after the grant of the option (paragraph 21A(4)). This enables the employee to know at the outset when they may exercise the options and how many shares they may acquire in the process. The following must be stated (paragraph 21A(1)):

  • the price at which shares may be acquired by the exercise of the option (see ETASSUM44110);
  • the number and description of the shares which may be acquired by the exercise of the option;
  • details of the restrictions to which the shares may be subject (which may include clawback provisions that would enable the employer to require the employee to retransfer the shares received and/or to repay a cash sum of equivalent value);
  • the times at which the option may be exercised, whether in whole or in part; and
  • the circumstances under which the option will lapse or be cancelled either wholly or in part, including any conditions to which the exercise of the option is subject, both in whole or in part. Performance conditions may include a malus provision i.e. a proposal that a share option that has not yet vested in whole or in part and is not yet exercisable should, under certain performance circumstances vest only in part or not at all.

Paragraph 21A(2) permits the terms, stated at the grant of the option, to be varied, but:

  • the acquisition price can be varied only in accordance with paragraph 22 (see ETASSUM44230);
  • the number and description of the shares can be varied either in accordance with paragraph 22 or by way of a mechanism specified when the option was granted;
  • in any other case by way of a mechanism specified when the option was granted.

An example of a mechanism would be a condition which related the maximum number of shares under option to the profits or ‘EBITDA’ (earnings before interest, taxes, depreciation and amortisation) of the company for a specified period; another example would be where the number of shares are pro-rated according to the time elapsed since the date of grant for an option holder who has ceased employment.

An example of a formula to adjust a subsisting option on a variation of share capital under paragraph 22 in the event of a rights issue would be the formula at ETASSUM44250.

The mechanism stated must be applied in a way that is fair and reasonable. The ‘fairly and reasonably’ criteria are derived from Vinelott J’s judgement in the case of CIR v Burton Group plc (63 TC 191) - see ETASSUM47250.