ETASSUM54330 - Enterprise Management Incentives (EMI): Requirements relating to options: Discretion: Discretion clauses

Paragraph 37, Schedule 5 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA)

The inclusion of a discretion clause does not in itself mean that the option is not a right to acquire shares, or that the option is not capable of being a qualifying EMI option. It is the way in which such discretion is used after grant which has the potential to be an issue.

The inclusion of a widely drafted discretion clause will not in itself be problematic so long as it does not undermine the requirements of paragraph 37(2) Schedule 5, ITEPA.

Having a discretion clause included in an option agreement does not allow the board complete freedom to make amendments. Any changes stemming from the use of discretion must still adhere to the requirements of Schedule 5.

If the discretion clause is applied in such a way that the use of discretion alters when the option may be exercised, other than a change which has a minimal effect, this would amount to a change to a fundamental term of the option and should be treated as the creation of a new right accordingly.

Please see ETASSUM54060 and ETASSUM54070 for more information on the key distinctions between fundamental terms and non-fundamental terms when considering discretion.

Inclusion of a Discretion Clause after Grant

Any amendment of an option agreement to include a discretion clause after grant of the option must itself change when and how the option may be exercised in no more than a minimal way to be permissible. Further to this, the discretion afforded by that new clause would also need to be in a manner which would not change the fundamental terms of the option in more than a minimal way.