What is a share option?
A share option is a contract pursuant to which one party has the right (but not the obligation) to acquire shares from another person or to sell shares to another person at a specific price (or at a price calculated according to a specified formula) on a particular date or a range of dates or at any time during a period specified in the contract.
In general terms, there are 3 basic types of share option. These are:
(a) Share put options – A put option enables the optionholder to require another person to buy the optionholder’s shares (or, sometimes, some of them) in accordance with the terms and conditions specified in the put option agreement.
(b) Share call options – A call option enables the optionholder to require another person to sell their shares (or, sometimes, some of them) to the optionholder in accordance with the terms and conditions specified in the call option agreement.
(c) Share put and call options – A put and call option is a combination of a put option and a call option. These can be drafted in several ways. It may enable the optionholder to require another person to buy the optionholder’s shares (or, sometimes, some of them) or to require another person to sell their shares (or, sometimes, some of them) to the optionholder (as the optionholder determines) in accordance with the terms and conditions specified in the put and call option agreement.
What is a share option agreement?
A share option agreement is the document which sets out the terms and conditions of the arrangement between the holder of the share option and the person (the ‘Grantor’) who grants the right to put and/or call shares to the optionholder).
There are a number of key issues to be considered in connection with share option agreements. These include:
(a) Nature of the option – Will it be a put option, a call option or a put and call option?
(b) Option price – Will the optionholder have to pay the Grantor for the granting of the option rights to the optionholder? This is separate from the issue of the price to be paid for the purchase of shares pursuant to the share option. The price for the granting of the option rights is often a nominal amount.
(c) Exercise date or period – What is the date, series of dates or period during which the share option can be exercised?
(d) Exercise price – Will there be a specific price per share for the purchase of shares pursuant to the share option or a formula?
(e) Conditions – Will there be any conditions precedent to the exercise of any share option?
(f) Term of the share option agreement – How long will the share option agreement last? A share option agreement is usually granted for a defined period of time. It may also terminate early in certain circumstances.
(g) Approval – Will the approval of the shareholders, board and/or any third parties (for example, lenders or HMRC) be required? The approval of HMRC may be required in the case of share options pursuant to Employee Share Schemes.
(h) Other agreements – Will any other agreements be required? Sometimes, optionholders are required to enter into a shareholders’ agreement or to sign a deed of adherence to a shareholders’ agreement when exercising an option to acquire shares.
What is a share option scheme?
A share option scheme is simply a scheme established by a company pursuant to which members of the scheme may acquire shares or, in certain cases, rights relating to or equivalent to shares. A share option scheme may be a traditional unapproved scheme or it may be an approved scheme. Approved share option schemes are schemes which are approved by HMRC. They offer a range of tax benefits to employers and employees.
Share option schemes or plans which carry tax advantages include:
(a) Company Share Option Plans (CSOPs);
(b) Employee Ownership Trusts (EOTs);
(c) Enterprise Management Incentive Schemes (EMI Schemes);
(d) Save As You Earn Schemes (SAYE Schemes);
(e) Share Incentive Plans (SIPs).
If you would like more information about share options, share option agreements and/or share schemes or would like to discuss potential or existing share options, share option agreements and/or share schemes, please email us at firstname.lastname@example.org, complete an Enquiry Form or call us.