"Arrangements" that disqualify new EMI option grants: updated HMRC guidance

HMRC has released updated guidance which impacts the grant of new Enterprise Management Incentive (EMI) options. The guidance sets out HMRC's view on circumstances that could lead to a company being unable to grant new EMI options due to the existence of "arrangements" that affect the company's independence.

To qualify for EMI, there must be no arrangements that would result in a company losing its independence. Specifically, a company must not be a 51% subsidiary or fall under the control of another entity (including with connected persons). Any arrangement by which the company could become such a subsidiary or fall under such control disqualifies it from granting new EMI options.

The updated guidance provides a non-exhaustive list of potential types of arrangements that may cause this, including deadlock provisions giving another company the deciding vote, investor director casting votes and swamping rights.

It also sets out HMRC's position in two key circumstances where arrangements might exist:

Mutual understanding regarding a sale

• If all relevant parties, including the potential purchaser, reach a mutual understanding that they will act in a certain way regarding a proposed sale or change in control, and there is an expectation that this will occur, this will constitute 'arrangements' and the independence requirement will not be met. 
• Evidence like agreed Heads of Terms or Letters of Intent can establish such arrangements exist - even without legally binding commitments. 
• However, the mere existence of an offer letter from a prospective purchaser will not necessarily constitute an arrangement in and of itself. 
• The guidance also helpfully states that HMRC will accept that arrangements do not exist where external approval, outside the control of the parties, is required for a sale to proceed and has not yet been given (or is not yet clear it will be given).  

Distress provisions

• Certain distress provisions allow corporate investors to gain control in specific situations to rescue a company from failure – such as through "swamping" rights. 
• HMRC accepts that these provisions do not necessarily constitute “arrangements” and prevent a company from granting EMI options - such as failing to redeem loan notes, breaching banking covenants, or proposing certain liquidations. 
• However, if the distress provisions come into effect and a corporate investor gains control of the company, this will be a disqualifying event. 
• Each case is assessed individually based on its facts and circumstances.

For companies looking to grant new EMI options, considering the updated guidance is crucial - ensuring corporate governance documents and potential sale discussions align with HMRC's requirements. Please consult our Incentives team for tailored advice, especially prior to the grant of any new EMI options.