EMI options: What happens when there’s a change in control?

Understanding rollover options and how your employees can keep their EMI tax treatment in the event of a takeover or group reorganisation.

Please note, the following guide is designed to explain rollover options and how they work in practice. It should not be taken as legal advice. If your company is planning to offer rollover options, you must seek professional legal advice to guide you through the process. 


If a company that has granted EMI options comes under the control of another company, a “disqualifying event” will normally occur. This means that the EMI options – and your employees – will lose their beneficial tax treatment. 

However, if the change of control is caused by the sale of the company’s shares to another company (the new parent company), it is possible for the new parent company to grant replacement EMI options in exchange for the surrender and cancellation of the original EMI options.                                                                                                              

In other words, the original granting company would cancel the options, and the new parent company would regrant them with the same terms and conditions as before. This is known as a ‘rollover’ or ‘replacement options.’                                                        

Replacement options are effectively a direct replacement for the original options in terms of value, exercise price and vesting criteria. 

The good news is that any vested options are also carried forward to the new options, so the option holder doesn’t have to fulfil the criteria again. Likewise, the original grant date is still honoured, so the 2-year period in which the option holder must hold their EMI to get the tax benefits doesn’t reset. 

Rollover options are available in the event of an internal group reorganisation or a third-party takeover.                                                                                                              

The acquiring company doesn’t need to have an EMI option scheme in place already or create a new scheme, the replacement options are simply granted on the terms of the original option scheme but relate to shares in the new parent company.

Why use an EMI option rollover?

As well as allowing employees to keep their EMI options and respecting the work they have done up to the point of the reorganisation, rollovers also benefit the new parent company too. 

Surrendering the original EMI options for replacement EMI options over shares in the new parent company can remedy the following issues: 

  • Employees may be entitled to exercise their options early, which may not be desirable during an internal reorganisation.
  • Options may lapse if not exercised within a specified period after the change of control.
  • EMI options must be held over shares in the top company of a group. A disqualifying event occurs when the existing EMI options become options over shares in a subsidiary. If options are not exercised or rolled over, this would result in the loss of the EMI tax advantages.
  • Valuable Corporation Tax deductions may be lost.

An early exercise clause may be triggered or options may lapse

EMI option agreements often include a clause that allows employees to exercise their options early if an exit (including a takeover or an internal reorganisation) occurs. 

If the option is exercised early due to an exit, the clause will also state that: 

  • An employee’s entitlement to the underlying shares is to be reduced by time-passed pro-rating
  • Any options not exercised within the specified period will be cancelled

If the EMI option agreement has performance-related conditions attached, the number of options that can be exercised will depend on whether those conditions: 

  • Have been met 
  • Will fall away on the company reorganisation 
  • Can be waived or amended

Rather than allowing the options to be exercised early – and employees potentially losing their unvested options – rolling over the EMI to the new parent company may offer more value to your employees and the scheme as a whole, bearing in mind the potential disadvantages of early exercise.                                                                                                               

Finally, one of the key benefits of EMI is employee retention. If employees are forced into an early exercise, then the EMI has lost its retention incentive.                                                        

If you want to continue retaining and rewarding employees with EMI, offering a rollover keeps everyone’s EMI journey rolling on (pardon the pun) and preserves the EMI tax reliefs. 

When is a rollover available? 

EMI rollovers are available for both internal reorganisations and external takeovers. 

For company reorganisations, rollovers are possible when the new parent company: 

  • Obtains control by making a general offer 
  • Obtains control by a court-sanctioned scheme or arrangement 
  • Is bound or entitled to acquire shares through a squeeze-out or sell-out
  • Obtains all the shares through a qualifying exchange of shares

How does the rollover work in practice? 

  1. The EMI option agreement may include provisions for a “new for old” exchange arrangement (rollover). However, EMI code states this provision doesn’t need to be explicitly included in the original agreement. 
  2. The EMI option holder and the new parent company must both agree to the option exchange and will usually enter into a formal agreement to confirm the rollover. 
  3. The rights under the replacement option must be “equivalent” to those under the old option, but relate to shares in the new parent company instead. The rights and restrictions don’t need to be identical but as a whole should be at least substantially similar. 
  4. There should be an equivalence of market value of shares. The total market value of the shares in the new EMI option must, immediately after the grant of the replacement option, be the same as the total market value of the old EMI option immediately prior to their release. This requirement may change the number of shares under the new option agreement. 
  5. The total amount payable by the employee for the shares under the new EMI option must be equal to the total amount payable under the old option. So the exercise price per share may change, but the total exercise price must be the same. 
  6. The replacement option must be granted within 6 months of the new parent company obtaining control of the original company. 
  7. The option holder must continue to comply with the statutory working time requirement for EMI.
  8. IMPORTANT: Finally, the granting company must submit an initial notification to HMRC within 92 days of the grant of the replacement option. The same way you would if you were granting new EMI options. 

What are the tax implications of granting replacement options? 

In order to qualify for Business Asset Disposal Relief, EMI option holders must hold their options/shares for at least 2 years and remain employed by the company (whether old company or new parent company). 

The good news is that replacement options granted in accordance with EMI code honour the original grant date, meaning the 2-year ‘holding’ period doesn’t restart from the rollover. 

Also, any vested options are carried forward and the vesting schedule continues as if nothing has changed. 

This means that no new potential for an income tax charge is created. The replacement option will have a total exercise price equivalent to that of the original option, rather than the market value of the new shares on the date of grant of the replacement option. 

As a result, if share price growth has occurred, it is granted at a discount, but this has no negative tax consequences for the option holder.

What are the requirements for the new parent company? 

The requirements for granting rollover EMI options are much less strict than for a company wishing to grant new EMI options. The requirements that no longer apply to the new parent company are:

  • Gross assets do not exceed £30 million
  • Have fewer than 250 full-time employees
  • Any subsidiaries must be qualifying subsidiaries and any property managing subsidiaries must be qualifying 90% subsidiaries
  • The UK permanent establishment requirement

However, the independence and trading activities requirements still apply to the new parent company, and these must be met when the old option is released.                                                        

The £3 million limit on the total value of shares under option also applies to the new parent company.

What are the requirements for the option holder? 

The option holder must be employed by the new parent company or another member of the group. This means that the replacement option cannot be granted before the change of control has taken place. 

The option holder must also continue to meet the qualifying employee requirements too: 

  • Work at least 25 hours (or 75% of their working time) per week as an employee for the new parent company or another member of the group.
  • Does not have a material interest in the new parent company or any group member. A material interest is either:
    • beneficial ownership of, or the ability to control directly or indirectly, more than 30% of the ordinary share capital of the company, or
    • where the company is a close company, possession of or entitlement to acquire rights that would give 30% of the assets, if the company were to be wound up, and make them available for distribution among the participators.
  • Not an associate of someone with a material interest in the new parent company or group member. 

What if the option holder no longer meets these requirements? 

In short, a tax-advantaged rollover won’t be possible. You may still be able to offer a rollover, but the EMI tax benefits will be lost and the option will become an unapproved option. 

Learn about unapproved options tax for employees.

What other requirements are there for EMI rollover options? 

The EMI option must be granted for genuine commercial reasons in order to recruit and retain an employee and not as part of a scheme or arrangement to avoid tax. 


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