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Will Coronavirus Affect Your Employee Share Option Scheme?

on Tuesday, 31 March 2020.

You may be an employee who holds share options or you may be an employer who has granted share options to employees. Either way, dependent on how your share scheme rules are drafted, the current coronavirus (COVID-19) crisis may have an impact on you.

What Is an Employee Share Option?

An employee share option is the right to acquire shares in a company (usually the employing company or a member of its corporate group) at a pre-set price, known as the 'exercise price'.

For example, an employee may have an option to buy 100 shares at a price of £1 per share.

Normally, the exercise price is the market value of the shares at the time the option is granted. An option to acquire shares for nothing is known as a 'nil-cost option'.

Employee share options can be very valuable. If the share price rises above the exercise price, the employee can make a profit by exercising the option and selling the shares. In essence, a share option means that an employee can buy a share for less than it is worth at the time of exercise.

Some employee share schemes are drafted so that the participants in the scheme are entitled to an increasing number of options over a certain period of time or upon the achievement of certain targets (commonly referred to as the options 'vesting'). The exercise of the option (ie the point at which the option can be used to acquire shares) may also be linked to the occurrence of particular events or the achievement of agreed targets.

Coronavirus Legal Advice

Potential Impact of Coronavirus

  • As the vesting of the options may be subject to performance targets linked to sales, profit or turnover, given the effect of the coronavirus on the economy, the option holder may not meet these targets, with the result that the options will not vest. Employers may wish to consider whether the scheme rules allow targets to be revised and options to vest in any event. This process would need to be appropriately documented, which we can assist with.

  • Where the option can only be exercised upon the occurrence of certain exit events, such as the company being sold or listed, the exercise of the options may be delayed as such exit events are unlikely in the current economic climate.

  • The share options may become 'under water', meaning that the exercise price to be paid by the option holder is more than the market value of the share. If the downturn in the economy lasts for a significant period of time and the market value of the share does not recover, the option holder is unlikely to exercise the option. The incentive nature of the option would therefore be lost and the employer may have to find another way of incentivising its employees (possibly by introducing a new share scheme which uses a lower exercise price).

  • Where there is the opportunity to argue a low share value, now may be a good time to consider implementing a share scheme to retain key staff.

For specialist legal advice with any of the issues discussed above, please contact Emma Cameron on 07939 261632 or Emma Bradley on 07747 462131 in our Corporate Law team, or complete the form below.

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