A share option is as an agreement allowing a party to acquire shares in a company at some date in the future. There are three basic types of option:
• Put option – where the owner of shares may require someone else to buy them from him
• Call option – where a person may require someone else to sell him shares
• Put and call option – where one party owns shares and the other may acquire them, and both parties have the ability to require the other to complete the sale of the shares
As well as share options requiring the transfer of shares from one person to another, share options may also be granted which require the issue of completely new shares in a company.
There are several situations in which share options might be used, including:
• to incentivise employees, by giving them the ability to acquire a stake in their employer
• to permit the owner of a business to buy back shares in his company which he has had to transfer to an investor as a condition of the investment
• to allow an investor in a company to make an exit
Terms of share options
A share option will be granted by a formal agreement. The matters to be considered when preparing the agreement include:
• is it to be a put, call or put and call option
• is any money to be paid for the grant of the option itself (this is separate from the price to be paid for the shares once the option is exercised). It is very common for this to be a nominal amount, such as £1
• when can the option be exercised (exercise of the option is when the person holding the option requires the other to sell, buy or issue the shares, depending on the type of option)
• what price is to be paid for the shares when the option is exercised
• are there any conditions that must be satisfied before the option can be exercised (this may be connected to the performance of the company, or specific events agreed between the parties)
• how long will the option last. Options are usually limited in time, but may expire early under agreed circumstances (for example, employee share options often end if the employee leaves the company)
• is any sort of approval required for the option. It is common in many companies of the consent of other shareholders to be required. Employee share options must be approved by the Inland Revenue if they are to benefit from certain tax advantages (EMI schemes)
• will any other agreements be required. When the exercise of a share option brings a new shareholder into a company, it is worth considering whether a shareholders agreement is necessary. For more information on shareholders agreements, click here.
How can we help?
We are very experienced in advising on and preparing share options, both for general use and for employees in approved EMI schemes and unapproved schemes. We can also advise on other legal issues that arise in running a business, such as property and employment matters and all kinds of commercial agreements. If you have any questions or are looking for information on share options or any other business law matter, please contact Catherine Drew