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

For EMI purposes, a takeover of the company may well be classified as a disqualifying event, meaning employees will want to exercise their options within 90 days. This should cause no difficulty and normally the employees will sell the shares to the acquiring company at the same time as exercising their options. The employee will then need to pay capital gains tax on the amount they receive from the acquiring company less the amount the employee paid to exercise their option. Entrepreneur’s relief should be available to the option holder in this scenario, provided the qualifying conditions are met.

If a takeover is in exchange only for shares in the acquiring company, the EMI rules allow for an exchange of options, transferring the tax benefits to replacement options linked to shares in the acquiring company.
The share exchange is subject to certain conditions:
  • replacement options must be issued within six months of the takeover
  • EMI rules must be met in relation to the new options, except that the acquiring company does not need to satisfy the gross assets test; and it is permitted to have non-qualifying subsidiaries
  • the acquiring company must meet the rule that the value of unexercised options in existence must not be more than £3 million. 
  • the values of shares and amounts payable by the employee under the old and new options must remain unchanged

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