EMI Case Study 4

For Succession And Shareholder Investment Diversification (Note: Employee Share Schemes for Management Buy-Outs)

  • Company has grown steadily over many years and existing shareholders in their late 50s are contemplating retirement.
  • Engineering business with a long history but with strong potential for new product development and the capture of new markets.
  • Existing shareholder/directors have identified successors who as responsible individuals will be able to lead the workforce of some 220 individuals into this new era for the business.
  • Existing shareholders want to retain some interest but also want to realise some value for their shares with a view to diversifying their investment portfolio.

The Solution

  • Company establishes an employee share trust to enable the shareholder/directors initially to sell 24% of their combined shareholding and realise cash for investment elsewhere.
  • Company grants EMI share options to key management team members with top-up tax-unapproved share options to take the combined new management shareholding to 40% in five years time and to 75% in 7 years time.
  • Company has taken deliberate steps to train and to develop its new management team to the level of management that is required to run the company.

Interesting Scheme Features

  • Existing shareholder/directors realise cash through a capital gains tax transaction with the employee share trust at the CGT rates.
  • Existing shareholder/directors have in the short-term retained control of the company, even control of special resolutions, whilst at the same time ensuring that their investment portfolio is not restricted to shares in their own company.
  • The statutory corporation tax deduction is an attraction with the company benefiting from relief within its corporation tax computation based on the gain realised by the employees at exercise.
  • The new management team can envisage a future with their shareholding escalating over time and their own opportunity in time for a realisation of value through selling to the same employee share trust.