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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: Conditional exercise of options for corporate events

Scheme rules will often contain provisions to allow for exercise of options if the scheme organiser becomes subject to a takeover (see ETASSUM44430) or public listing (see ETASSUM44200).

A takeover can cause practical difficulties because after the change of control it may not be possible to exercise the option either because:

  • the options will normally be expressed to be over shares that satisfy paragraphs 16-20 (and such shares may not exist following the takeover), or
  • the relevant requirements of paragraph 17 cease to be satisfied which constitutes a disqualifying event.

A further complication of shares failing to satisfy paragraph 17 is that if the option is exercised after the change of control there will be a loss of CT relief under Part 12 CTA 2009. In some circumstances these difficulties can be addressed by paragraph 25A.

Paragraph 25A

From 6 April 2014, where the scheme rules allow exercise in these circumstances, they may also allow for:

  • a ‘conditional exercise’ in the period of 20 days immediately prior to the event (paragraph 25A(7E)).  If no change of control occurs, the plan rules must provide that the exercise is treated as having no effect (paragraph 25A(7F));
  • the options to be exercised no later than 20 days after the change of control, but the options may not be exercised outside the normal six month exercise period (paragraph 25A(7B)) (see ETASSUM44440).

If the option is exercised within the 20 day period under paragraph 25A(7B), the exercise will have been made “in accordance with the provisions of the Schedule 4 CSOP scheme” (section 524(1)) even if the shares no longer satisfy the requirements of paragraphs 16 to 20.

Where a scheme provides for the exercise of options if the scheme organiser becomes subject to a takeover (see ETASSUM44430) or public listing (see ETASSUM44200) and after 6 April 2014 the scheme organiser alters the scheme to include the 20 day period of grace provisions under paragraph 25A(7B) or paragraph 25A(7E), HMRC will not consider this to be the creation of a new right. This means that options can have the benefit of the 20 day period of grace whether granted before or after the date of the alteration.

It is acceptable for the rules to provide discretion to invoke the 20 day provisions on a particular takeover (provided that the discretion is exercised “fairly and reasonably”).

It is acceptable for this right to exercise to be made available only in the circumstances where an exchange of options is not offered (see ETASSUM45120). The restrictions 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)).