Board Discretion And EMI Share Option Schemes - Jonathan Lea Network

Board Discretion And EMI Share Option Schemes

It is common for EMI documentation to contain discretion clauses to provide the board of directors with flexibility to allow options to be exercised in certain circumstances, such as termination of employment or events such as the sale of the company.

The exercise of board discretion can be problematic for professionals dealing with EMI Share Option Schemes. To qualify for the EMI tax reliefs a number of conditions must be met, both on the grant and during the life of an option. In certain circumstances, the exercise of a discretion may change the tax treatment of an EMI option because it would be deemed by HMRC to amount to an amendment of a fundamental term of the EMI option. Such amendment would result in the release and regrant of the option for legal purposes and would mean that potential tax relief on gains accruing prior to the regrant is lost.

On 14th October 2022 HMRC published key changes to its guidance on the exercise of board discretion with regard to Enterprise Management Incentives (‘EMI’) Share Option Schemes.  These changes are set out in a new section of their ‘Employee Tax Advantaged Share Scheme User Manual’ (‘HMRC: ETASSUM’) specifically contained in ‘HMRC: ETASSUM54300’. See also ‘HMRC: ETASSUM54310’ for HMRC’s Key Principles on Discretion.

In summary, discretion clauses are used in relation to:

  • leaver provisions;
  • ‘exit only’ plans; and
  • performance and vesting conditions.

The new guidance clarifies the use of discretion in regard to the above clauses and what is or not permissible.

Leaver Provisions

The practice of allowing board discretion with regard to ‘good leaver’ treatment and whether someone falls within a specific good leaver category or not continues to be allowed.

‘Exit Only’ Plans

This is where the option may only be exercised on the occurrence of ‘a specified event’, e.g., the sale of a company, or a change in ownership or control.  HMRC stipulates that ‘it must be clear in what circumstances and when an EMI option is exercisable from the outset’ (ETASSUM54310).

Provisions which state that such options may not be exercised on the advent of such events without the discretion of the board are not permitted. Allowing discretion to exercise an option in other circumstances is equally prohibited but would not of itself invalidate the option except if the discretion were to be exercised.

Performance and Vesting Conditions

These pertain to plans where the option vests and is exercisable over a period of years, commonly contingent upon meeting set financial performance targets.  It is a well-established rule of case law that amending a ‘fundamental term’ of an option is treated as the grant of a new option (triggering the disqualification of the existing EMI option in the process).  HMRC has made no change to these provisions and considers that an amendment to the vesting schedule that changes when the options can be exercised will be considered a change to the ‘fundamental terms’ which would cause a release and regrant of the option.

In addition to this, there are important distinctions to be made, in that while it is not permissible to have a discretion to change the term when the option vests and becomes exercisable, there are two circumstances when this is allowed:

  • a discretion to change the vesting/performance conditions with the proviso that the earliest exercise date remains unchanged; and

board discretion to allow accelerated vesting and exercise upon a ‘specified event’ (e.g., an exit), provided this discretion was in the initial plan.

An EMI option must state ‘when and how’ an option may be exercised

ETASSUM54320 states that ‘(…) an EMI option which allows the board unlimited discretion to choose, after grant, the circumstances under which it permits exercise, does not provide option holders with a right of exercise’ in contravention of the statutory requirements of paragraph 37(2)(e) Schedule 5, Income Tax (Earnings and Pensions) Act 2003 (‘ITEPA’).

The use of a widely-drafted discretion clause does not prevent the qualification of an EMI option

ETASSUM54330 states that ‘the inclusion of a widely-drafted discretion clause will not in itself be problematic’ provided that the option states when and how it may be exercised.

Discretion in relation to ‘specified’ events

EMI options may permit exercise (of discretion) only upon the occurrence of a ‘specified event’.

ETASSUM54340 sets out when discretion may be exercised e.g., in the case of an ‘exit-only’ scheme or upon cessation of employment.  This ETASSUM provision states that these specified events are permissible because they do not entail a change in the time of exercise of the option, given that a right of exercise following the precipitating specified event is incorporated in the option terms.

This also applies to the exercise of discretion as to whether an option holder should be classified as a ‘good leaver’ and is thus able to exercise an option with the proviso that the discretion is exercised ‘fairly and reasonably’.

For acceptable and unacceptable discretion provisions with regard to specified events, see ETASSUM54350 and ETASSUM54360.

Discretion in relation to time-vesting options

In accordance with ETASSUM54340 ‘in respect of time-based options, changes to the timetable for vesting will typically amount to a change to the fundamental terms of the option’.

For acceptable and unacceptable discretion provisions with regard to time-vesting options see ETASSUM54350 and ETASSUM54360.

Inclusion of a discretion clause after grant

ETASSUM54330 provides that: ‘any amendment of an option agreement to include a discretion clause after grant of the option must itself change when and how the option may be exercised in no more than a minimal way to be permissible’.

Further, ETASSUM54350 stipulates that amending an option after grant to include a discretion to permit exercise on a specified event is not permissible and will be treated as a grant of a new option.


It is important when implementing an EMI share option scheme to ensure the options meet eligibility requirements and the proposed discretions do not invalidate the option or affect the tax relief to be obtained by the employee who will be exercising the option in the future.

If you would like to understand more about the process of implementing EMI share option schemes, our experienced solicitors can help. For most new matters, we offer a 20-minute introductory call to find out more and discuss the issues before providing you with a relevant fee quote.

Please email providing us with any relevant information so we can ensure that any call we have with you is as productive as possible.

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited 2024.

About Andrew Haimdas

Andrew is currently a full-time trainee solicitor at the Jonathan Lea Network. Andrew recently finished the Legal Practice Course (LPC) at BPP University, where he focused on commercial and civil litigation; commercial property law; intellectual property law; and company law.

The Jonathan Lea Network is an SRA regulated firm that employs solicitors, trainees and paralegals who work from a modern office in Haywards Heath. This close-knit retain team is enhanced by a trusted network of specialist self-employed solicitors who, where relevant, combine seamlessly with the central team.

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