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EMI Options and Furloughed Employees

In the midst of the coronavirus lock-down, many companies will likely look to make adjustments to its staff hours in order to weather the economic ramifications of the pandemic. Employers who have deployed EMI options and employees who have been awarded grants of EMI options should be careful to consider the impact of furlough status on EMI options.

See our previous blog on EMI options to learn more about them generally and how they work here (EMI Options – The Fundamentals) and our previous blog on EMI Options and Working Time requirements during lock-down.

Lapse

What will happen if an employee leaves the Company?

Companies should review their option schemes carefully and ensure they understand the terms of their lapsing provisions and any discretion allowed by the Board to suspend leaver provisions.

Normally, an option designed for general staff will lapse if the employee leaves the company. The board may have discretion to allow the employee to keep any options (sometimes restricted to those vested in line with a vesting schedule). If it is an exit-only option then the option would remain exit-only and so not capable of exercise until an exit.

Often options designed for senior staff or founders will allow the employee to retain options over vested option shares subject to how the employee leaves the company. Commonly referred to as “Good Leaver/Bad Leaver” provisions, the option may set out that if the employee leaves for a specific set of good reasons, they are a “Good Leaver” and keep the vested options. If the employee leaves as a “Bad Leaver” the whole option lapses. In such circumstances, companies will want to carefully check the terms of those definitions as they appear in their option scheme documentation as they can differ from scheme to scheme. For example, a Bad Leaver may be someone who is guilty of doing certain things and any other activity is automatically deemed a Good Leaver activity. Conversely, a Good Leaver definition may contain a specific list of things that deem someone a Good Leaver and this often includes serious ill health. Whether an employee contracting COVID-19 requires to leave employment altogether will depend on the particular employee and their health but it if they do have to leave employment because of such infection, it is possible they would be a Good Leaver under the terms of some option schemes.

Is an employee a Leaver if on furlough?

No, employees placed on “furlough” continue to be employees of the employer company. (for more on the employment aspects of furlough, see our employment team information (Furlough Leave and the Job Retention Scheme)

There may be repercussions of any employee option holder taking up secondary employment however and this may impact such employees ability to meet the working time requirement (see more on Working Time Requirements).

Vesting and Performance requirements

Many schemes award option shares that accrue to the employee over a period of time. For example, the company may have granted an option over 500 shares to an employee but only 100 vest each year. This encourages the employee to remain with the company for 5 years. These conditions will continue to apply even where an employee is furloughed as they are still employed. If remaining in employment is the only vesting condition then, provided no other disqualifying event has arisen, the employee should continue to benefit under the vesting schedule.

If the company has more complicated vesting criteria or performance conditions, such as hitting sales targets or completing projects within a specified time, such conditions may be hard to achieve in the current situation. The company may wish to review those conditions and any available discretion it has to relax them under the terms of its EMI scheme.

What next?

Watch this space for more information. Get in touch with the MBM Commercial Options Team at OptionsTeam@mbmcommercial.co.uk if you or your company require a review of your option scheme.

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