The current turmoil caused by the coronavirus pandemic is creating unforeseen challenges for many businesses. However, despite the lack of short-term certainty, this could actually be the right moment for companies to re-examine their existing employee share based incentive arrangements and even an opportunity to make new cost-efficient awards.
This article sheds light on some points that companies operating share plans could consider at the current time. It also highlights a particular issue concerning the potential impact that the use of the government’s Job Retention Scheme could have upon Enterprise Management Incentive (or EMI) share options.
1) Performance conditions – are they still relevant and can they be adjusted?
The vesting of share awards/exercise of options is often made subject to the achievement of carefully designed personal and/or corporate performance conditions.
Although the full impact of the coronavirus upon the economy remains unknown at this stage, it is clear that many businesses are experiencing a downturn in sales, profits and turnover. In some cases this will mean that the existing performance conditions to which share awards are subject may not be achieved or will be unachievable, with the result that the incentive behind such awards is severely diminished or lost.
To counteract this, it may now be appropriate to look at adjusting existing performance conditions to create greater alignment with current forecasts, breathing new life into what are in danger of becoming defunct awards. However, whether such adjustment is feasible will depend upon the type of share scheme being used and the terms of the award/performance conditions themselves. The rationale behind and process around the adjustments will also need to be appropriately documented and relevant stakeholders’ views be factored in.
2) Share values – are awards underwater and can they be rebased?
The detrimental impact of the coronavirus on certain companies may mean that the buy-in price for existing awards may now be in excess of their current market value. Depending upon timescales this could result in awards continuing to be “underwater” or “out of the money” up until they vest. Such awards have no intrinsic value other than “hope” or “aspiration” value based on the potential future growth. The impact of this can be to frustrate the incentive behind the award.
In cases where awards have become “underwater” and the prospect of regaining that value is deemed slim, it may now be considered appropriate to invite employees to surrender those awards and make new awards by reference to the current (lower) market value. Again, relevant stakeholder views are likely to be key in determining the feasibility of such surrenders and regrants.
3) Incentivising employees – is it an opportune time to make new awards?
Companies need to motivate their best employees as they look to the future and the economy adjusts to the impact of the coronavirus. At a time when cash is more scarce, making share incentive awards which provide employees with a stake in the company they work for can be a great way of doing this with no cash outlay to employees at award. Some companies are even considering making incentive awards in compensation for employees agreeing to reduce their salaries.
Companies may also wish to take advantage of low share values which currently prevail by making awards now (and thereby looking to maximise relevant HMRC limits and also the potential upside for employees).
4) EMI options and the Working Time Requirement
Many businesses are opting to make use of government’s Coronavirus Job Retention Scheme. The fact that employees who are furloughed under this scheme are prohibited from working may create unintended complications for any such employees holding EMI options or who are intended to be granted EMI options.
This is due to the fact that such employees would not be required to spend any time on the business of the company and would not therefore meet the “working time requirement” for the purposes of the EMI code. On a strict interpretation this could result in a disqualifying event (and potential loss of tax advantages) in respect of existing options and preclude the grant of new options to such employees. We understand that this issue has been raised with HMRC and our hope is that HMRC will provide a relaxation to the existing rules to cover this circumstance along with other such exemptions.
Please contact one of our team if it would be useful to discuss any of these issues in more detail.
