INCENTIVISING MANAGEMENT THROUGH EMI SCHEMES

Many private companies chose to offer incentives to key members of staff by offering the managers the chance to participate in the growth of the company by taking shares. One of the most popular types of share option scheme is the Enterprise Management Incentive or EMI Scheme.

Reasons for using an EMI Scheme

The Manager is offered the opportunity to participate in the capital growth of the company. The company owners accept a certain degree of dilution for the sake of greater commitment to the development of the company. It is possible to set criteria including performance goals, to motivate managers to develop the business of the company. An EMI Scheme is a flexible tool for establishing goals and targets.

Which Companies can use the EMI Scheme?

EMI Schemes are aimed for smaller quoted or unquoted companies. Some types of company are excluded, for example certain financial or legal services, dealing and property companies. The Company must also be independent, not the subsidiary of another company, and must have gross assets not exceeding £30m at the date of the grant of the options.

Key features

Each employee can be offered options over shares worth up to £100,000 valued as at the date of grant. Any number of employees may participate save that the overall limit on the value of shares in the EMI is £3m. Providing the shares are valued at market value at the date of grant of the option, there is no tax to pay until the shares are actually sold by the employee. When the shares are sold, the employee is taxed for a disposal of a capital asset, and until recently would have had the benefit of business asset taper relief running from the date of the grant of the option. If current government proposals are implemented, the tax on capital gain will be 18% without indexation or taper relief.
All options must be exercised (i.e. the shares must be purchased) within a period of ten years, although this period can be shorter if the company decides.

Exit route

It is possible to provide that the options may be exercised prior to a sale or a floatation, enabling the employees to participate in the gain achieved by the company owners. Alternatively, companies sometimes provide that employees can convert their shares into cash before the Company is sold or floated. This can be done by creating any internal market in shares through an employee benefit trust.
If you wish to find out more about EMI Schemes, please contact David Dees (direct dial 01908 355405 or e-mail david.dees@healdlaw.com) or Nick Crook (direct dial 01908 355409 or e-mail nick.crook@healdlaw.com)

Filed: 10/11/2007 11:23:49