Enterprise Management Incentives (EMI): Requirements relating to options: Terms of option to be agreed in writing
The option must be in the form of a written agreement between the person granting the option and the employee. The agreement must be retained by the company so that it can be inspected by HMRC if an enquiry is opened into the option.
The agreement must state:
- the date the option is granted,
- that it is granted under the provisions of Schedule 5,
- the number, or maximum number, of shares that may be acquired or the formula that will be used for calculating this,
- the price (if any) the employee will pay to acquire the shares, or the method by which that price will be determined,
- when and how the option may be exercised,
- details of any restrictions on the shares,
- any conditions such as performance conditions affecting the employee’s entitlement, and
- whether there is a risk of forfeiture (shares are subject to risk of forfeiture if the interest in shares that may be acquired is only conditional within the meaning of S423 ITEPA, (Paragraph 37)) (see ERSM30310).
The option agreement can either set out details of the restrictions on the shares, performance conditions or forfeiture conditions in the text of the option agreement itself or alternatively, the details may be contained in another document attached to the agreement and incorporated into the agreement by reference to the document (this means that the restrictions must be identified for participants and it is not sufficient for the company to refer generally to its articles of association or shareholder agreement for example). Examples of other documents include:
- the Articles of Association,
- the share scheme rules (where a formal scheme exists), or
- a shareholders’ agreement which an option holder is required to enter into as a condition of exercising his option (if this exists).
Where the details are included by reference to a separate document, the option agreement will need to specify the title of the document, when it was dated or adopted and the dates of any amendments.
Restrictions stated in accordance with HMRC’s ESSUM/ETASSUM guidance in force at the time of particular option grants will be considered to have been stated in a manner acceptable to HMRC.
In the case that restrictions are omitted from grant documentation, HMRC will take into consideration for compliance purposes any evidence that the restrictions have been otherwise brought to a Participant’s attention in a meaningful way at or near the date of option grant.
Failure to state a trivial restriction will not be a compliance issue.
There are no requirements in Schedule 5 about the type of performance conditions that can be imposed or whether such conditions must be objective.