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Frequently asked due diligence questions on a major investment or an exit

When a company is receiving a significant investment or is going through an exit, the investor or party purchasing the company will conduct due diligence (“DD”). The DD process will involve reviewing various documents to which the company is party, such as option agreements. While questions that arise in DD will vary between companies, below we address some of the more common ones that occur for our customers.

Will HMRC take issue with Vestd EMI option agreements that allow vesting to be accelerated at board discretion?

Where option agreements do not have vesting provisions other than allowing the options to be accelerated at board discretion, HMRC may see this as allowing the company to change the material commercial terms of the agreement and thus invalidate its EMI treatment. However, HMRC have confirmed that where the contract has clear vesting provisions and then also allowed acceleration at board discretion (as in the Vestd EMI option agreements) this will not adversely affect the EMI treatment of the options.

How are the option agreements signed?

The option agreements are accepted through the Vestd platform. This constituted an electronic signature for the purposes of the agreement.

Is electronic acceptance of the Vestd EMI option agreement sufficient to satisfy HMRC that the working time declaration has been signed?

Acceptance of the Vestd EMI option agreement, which contains a working time declaration stating that the option holder works at least 25 hours a week or 75% of their working time for the granting company, is sufficient to satisfy the need to sign the working time declaration. Electronic acceptance is widely used as a "signature" for the purposes of contracts formed online.

What happens if the options no longer qualify for EMI?

If EMI options cease to qualify for EMI (e.g., due to a disqualifying event) the option will instead be treated as an unapproved option. More information on unapproved options can be found here.

Are the restrictions in clause 5 of the Vestd EMI agreement sufficient?

Yes. The Vestd EMI agreement is drafted in line with the contents of the Vestd platform articles of association. Clause 5 of the Vestd EMI agreement lists the restrictions that can be found in the Vestd platform articles of association, but includes the wording “include (but may not be limited to)” to account for amendments that may have been made to the articles by companies. Similarly, when creating an option pool on the Vestd Platform you will have been asked to include information on class restrictions if EMI options will be distributed from this option pool. These restrictions will be shared with the recipients of such options.


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