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Company disposals and share schemes

11 May 2010

With the recent upturn in company disposals, it is worth remembering some basic housekeeping points where share schemes are involved.

Unfortunately, these are sometimes left as an afterthought, when in fact they can provide some valuable additional consideration for the seller as well as a useful negotiating tool. There are a number of points that are relevant.

Corporate tax deduction for options

It has become increasingly commonplace for companies to grant options to their employees.

Typically these are exercisable on a sale of the company. Where options have been granted to employees the company can obtain a corporation tax deduction equal to the difference between the exercise price of the options and the market value of the shares at the time of exercise.

For the relief to be available the options must be exercised before control passes to the buyer.  Sometimes the rules of a share option scheme do not permit exercise until control has passed; normally it is possible to amend the scheme without affecting the tax advantages.

The exercise of the options can give rise to a large corporation tax deduction which, in turn, can increase the proceeds received by the selling shareholders. It is generally advisable for sellers to include this in any heads of terms so as to make it clear that this relief ‘belongs’ to them.

Cancellation of options

Another important point to note is that sometimes a buyer would prefer to satisfy the employee’s options by a cash cancellation scheme.

What this means is that rather than the employee exercising the options, acquiring the shares and selling them to the buyer, the buyer simply gives the employee the cash equivalent to what he would have received had he exercised the options and sold the shares.

If this route is adopted the company will not receive a corporation tax deduction as no shares are issued.

For an employee with approved options the consequences are likely to be even more serious as the money he receives will be subject to income tax and national insurance, as opposed to capital gains tax had he exercised the options and sold his shares. For unapproved options the route chosen makes no difference to the employee.

Given the potential significant benefits it is worth considering these points sooner rather than later in any transaction.

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