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HMRC internal manual

Employee Tax Advantaged Share Scheme User Manual

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HM Revenue & Customs
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Schedule 4 Company Share Option Plan (CSOP): Requirements relating to options: Variations of share capital

Paragraph 22(3) permits a Schedule 4 CSOP scheme to provide for the option exercise price to be varied to take account of a variation in the share capital of which the scheme shares form part. The adjustment permitted is “so far as necessary” to take account of the variation.

It is not a statutory requirement that scheme rules must contain provisions to adjust option acquisition prices to take account of a variation of share capital.

The events which constitute a “variation in the share capital” are not defined in the legislation.  The most obvious situations, and those most commonly referred to in Schedule 4 CSOP schemes, are capitalisation or rights issues, consolidations, subdivisions or reductions of share capital.

Other events which can be considered to result in a variation in the share capital are:

  • Vendor placing’s with clawback - these are placing’s where the shares are offered to existing shareholders in proportion to their existing holdings. If the clawback is operated in full, all the new shares end up in the hands of the existing shareholders exactly as if a rights issue had taken place.
  • Vendor rights offers - every existing shareholder is entitled to apply for a pro rata number of shares pursuant to the offer, but the shares being applied for are not newly issued shares. They will have been issued to the “vendor” shareholders of another company which the issuing company is acquiring, as part of the consideration for the acquisition of their shares, with the vendors agreeing to offer to sell the whole or part of these consideration shares to the existing shareholders of the acquiring company concerned.
  • Cash open offers - under these arrangements a third party such as a bank subscribes or undertakes to procure subscribers for new shares and, on behalf of the company, offers existing shareholders the opportunity to apply for a pro rata entitlement. The shares may be allotted in the first instance to the bank which may sub-underwrite its obligation to subscribe for new shares.

All of these situations are closely analogous to “discounted” rights issues under which existing shareholders are offered an opportunity to subscribe for new shares, pro rata to their existing share holdings and at a discount to market value. 

A demerger does not result in a variation in the share capital of the company which is merely de-merging some of the assets it owns. Paragraph 22 does not therefore provide statutory authority to adjust options in the event of a demerger.

Whether a particular event triggers the right to adjust existing options will depend on the precise provision of the scheme rules to which the options are subject. Only if:

  • the scheme contains a provisions to adjust the option acquisition price in the event of a variation of share capital, and
  • the particular event falls within the definition of “variation of share capital” contained in the scheme rules, can the options be adjusted.

While it is not acceptable to adjust options in these circumstances it is acceptable for scheme rules to provide for exercise in relation to such an event. There is an example of a suitable rule for this purpose at ETASSUM44220.