PRACTICE NOTES
UK Share Incentives for Private Equity-Backed Companies: Control Tests, EMI/CSOP, PAYE/NICs, BADR and Alternative Equity Structures
Private equity backed companies
The challenges encountered by private equity backed businesses when deploying shares to motivate staff broadly mirror those experienced by other organisations. Nonetheless, these entities have certain distinctive characteristics that warrant attention. Private equity deals are commonly arranged through a parent company that, in turn, owns shares in the trading company. It is also frequent to see one or more intermediary holding companies positioned between the top holding entity and the trading company. The ultimate owners of the holding company, alongside management investors, will typically comprise one or more partnerships or investment funds.
Control: Qualifying to grant tax-advantaged options
Depending on the stake held by a private equity investor, and the control rights conferred by the company’s articles of association and any investment agreement, the company that issues the shares (the 'issuing company') may be regarded as controlled by another company. This presents a difficulty where the issuing company intends to run tax-advantaged enterprise management incentives (EMI) options and company share option plan (CSOP) options (see: EMI and CSOPs below). By way of illustration, for EMI options, paragraph 9 of Schedule 5, Part 3 to the Income Tax (Earnings and Pensions) Act 2003 is relevant in particular...
Share Incentives