What happens if the company is sold before the options have been exercised?

📘 Overview

If your company is sold before employees have exercised their Enterprise Management Incentive (EMI) options, it can trigger what’s known as a disqualifying event under HMRC’s EMI rules.

However, this doesn’t necessarily cause problems, with the right timing and structure, employees can still exercise and sell their shares tax efficiently.

This guide explains what happens in a takeover or sale, the tax treatment for option holders, and the rules for replacing options with those in the acquiring company.

⚠️ The Impact of a Takeover on EMI Options

A takeover or sale of the company will usually count as a disqualifying event for EMI purposes.

When this happens:

• Employees have 90 days from the date of the disqualifying event to exercise their EMI options.
• If exercised within that window, the EMI tax benefits are retained.
• Exercising after 90 days means the EMI tax advantages are lost, and income tax may apply on the gain at exercise.

In most cases, EMI option holders will exercise and sell their shares at the same time as the company sale, often referred to as a cashless exercise.

💰 Scenario 1: Cash Sale (Most Common)

In a typical cash sale, the acquiring company buys all shares from existing shareholders, including those just acquired through EMI exercise.

Example:

1. An employee exercises their EMI options at £1 per share.
2. The acquiring company immediately buys those shares for £10 each.
3. The employee receives £9 per share in gain.

That £9 gain is subject to Capital Gains Tax (CGT), not Income Tax, because the EMI options were exercised within the 90-day post-sale window.

If the option holder meets the qualifying conditions (typically holding the option for at least 24 months from grant), they may also qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), reducing CGT to 10%.

🔁 Scenario 2: Share-for-Share Exchange

In some takeovers, the acquiring company may offer shares instead of cash.

In this case, EMI rules allow employees to exchange their original EMI options for replacement options over shares in the acquiring company, without losing tax advantages.

Key Conditions for a Qualifying Exchange:

• Replacement options must be granted within six months of the takeover.

  The new options must meet EMI rules, except:

  • The acquiring company does not need to meet the EMI gross assets test (£30 million limit).
  • The acquiring company may have non-qualifying subsidiaries.
• The total value of unexercised EMI options across the group must not exceed £3 million.
• The value and exercise price of the new options must be equivalent to the old ones.

When structured properly, the replacement options retain the original EMI tax benefits and continue as if no disqualifying event had occurred.

🧮 Tax Treatment Summary

🧩 Practical Tips

✅ Plan early: EMI option holders should be informed of a pending sale well in advance so they can exercise within the 90-day window.

✅ Coordinate with advisors: Ensure legal, tax, and share transfer documents align with HMRC timelines.

✅ Document carefully: If replacement options are issued, keep detailed board minutes and agreements showing compliance with EMI exchange rules.

💼 How Barnes & Scott Can Help

We assist companies and employees through:

• EMI due diligence and pre-sale reviews
• Valuation and tax analysis before a sale or exchange
• Drafting replacement option documentation
• HMRC reporting and compliance post-takeover

💡 Our team ensures EMI tax advantages are protected during a sale or restructure, keeping your team and investors aligned.