What happens when there’s a material change to an option agreement?

Understanding when a release and regrant may be needed if you want to change the terms of an option agreement.

When creating an option agreement, it's important to know what the key commercial terms of the agreement will be. 

For instance, will it be an exit-only scheme or will option holders be able to exercise options once they vest? 

One of the reasons this is so important is that making material changes to the commercial terms once the agreement is in place can have detrimental effects.

What is a material change?

There’s no set definition of what a material change is, but it’s generally considered to be a fundamental change to the terms of the agreement. 

For example, if the option agreement initially states the exercise clause is “Exit Only” and you change it to “Exercisable,” there’s a strong risk that HMRC would consider this a material change. 

However, small changes such as fixing typos or addresses are seen as administrative changes and are therefore lower risk. 

While this uncertainty can make assessing the risk of the change difficult, it can be thought of in terms of whether the amendment is fundamentally changing what was previously agreed.

If you’re unsure how material your proposed change may be, it is best to speak to your professional advisor.

What are the risks?

If HMRC considers the change to be a material change to the commercial terms, they will treat it as a surrender and regrant on the date of such change. 

This means that the previous agreement and any benefits associated with it will fall away and be replaced by the “new” agreement with the amended term. This applies to both EMI and unapproved options. 

It also means the relevant figures such as the Actual Market Value (AMV) of the shares be recalculated as of the date of the new agreement. 

For EMI option agreements, all benefits previously accrued under the original agreement will fall away and all of the ‘clocks’ will restart (i.e. the tax benefits, vesting schedule, and grant date). 


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