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Coronavirus: what to do about share schemes?

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The COVID-19 pandemic has had a profound effect on businesses and economies across the world, with increased uncertainty in the markets leading to depressed asset values and falling share prices.

While companies may feel the consequences of the pandemic for some time to come, there are still opportunities to plan for when the economy has stabilised and businesses begin to grow again.  There is no better time to consider reviewing existing share schemes or granting new options to key employees.

How are current schemes affected by the economic uncertainty around COVID-19?

Companies may have granted share options to employees some time ago.  Those options may be exercisable on a sale which has not taken place and now looks unlikely to happen before the options lapse automatically.  

Performance conditions may also need to be reconsidered.  Targets which seemed ambitious when the options were granted may now be unrealistic or, worse still, unachievable.

If your company has recently granted options, exercise prices based on the value of the option shares when the options were granted now be far higher than the current value of the shares under option.  Option holders may start to question whether the share price will recover in time to make exercising those options worthwhile.

In each of these situations, existing share options may no longer be the incentive to employees that they once were. Companies and option holders may be left wondering whether anything can be done to resolve these issues. 

Can anything be done to adjust existing options?

There may be scope to review and adjust performance conditions to match the business’ current expectations.  This will depend on the type of scheme and the terms of the options themselves. Changes to performance conditions to make them easier or harder to achieve are usually prohibited either under the terms of the scheme or, in the case of certain tax-advantaged schemes, statutory requirements.  

There may still be opportunities for directors to scale performance conditions back so that they are just as stretching, but better reflect the business’ current prospects. In some circumstances, directors may have the discretion to relax performance targets altogether if they see fit.

If you have granted options which were intended to be tax-advantaged but are defective, or could only grant non-tax-advantaged options because they did not meet the conditions to grant tax-advantaged ones, now may be a good time to review current arrangements.  Companies may be able to surrender those options and re-grant them as qualifying, tax-advantaged options on revised terms.  

Why grant employee share options now?

It is important for companies to incentivise the right people as they look to the future and the economy adjusts to the effects of COVID-19.  Share schemes provide an efficient way of doing this without companies having to make cash payments. Companies looking to plan for the future can take advantage of low share prices by deciding to grant options to employees now.

If a company grants EMI options, for example, with an exercise price set at or above today’s market value, and all of the statutory conditions are met, no income tax charge would arise when the employee exercises their option, and any gain made on disposal would be subject to CGT.  Under the current legislation governing Entrepreneurs’ Relief (ER), if the option holder exercises their option and sells their shares more than 2 years after the option is granted, they would benefit from a reduced rate of CGT on that sale (currently 10% rather than the usual 20%).

For companies considering tax-advantaged options, the various limits governing the number of shares which can they can grant under options (for example, the £30,000 per employee limit on shares under CSOP options, and the £250,000 limits applicable to EMI options) apply by reference to the market value of shares when those options are granted.  Granting options now would allow companies to maximise the number of shares available to employees under those schemes.

More guidance

For more information on the impact COVID-19 has had on share schemes and for further guidance, contact our expert listed below or visit our corona hub.

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