EMI options and Employee Ownerships Trusts (EOTs)

One of the challenges with a sale to an EOT is ensuring that the business continues to operate profitably, not least because a significant proportion of the sale proceeds will be on deferred terms. Management must remain incentivised and to achieve this an EMI scheme can sit along side a sale of a business to an EOT. There are some challenges given the highly prescriptive nature of the EOT legislation. The EOT must have a controlling interest in the shares of the underlying company or group. The rights associated with options over EMI shares cannot in substance mean the trustees lose control and the following should be considered: 

If HMRC can establish that the EOT lacks genuine control, then this will likely lead to a taxable event for either the vendor or the trustees depending on timing. 

It is usually recommended that the EMI scheme is put in place before the sale to an EOT whilst the vendor has control. 

Where an EMI scheme is already in place, the sale to an EOT may be a trigger event so this must be considered. Whilst amending or updating existing option agreements can be considered, a fundamental variation can cause an option to lose its favourable tax status.