Employment Tax

Effect of company takeover on existing share scheme

Produced by Tolley in association with Ken Moody
  • 21 Dec 2021 16:41

The following Employment Tax guidance note Produced by Tolley in association with Ken Moody provides comprehensive and up to date tax information covering:

  • Effect of company takeover on existing share scheme
  • Brief overview
  • What is meant by a takeover?
  • Different forms of takeover
  • What are not takeovers but commonly covered in plan rules?
  • What is not a takeover but not commonly covered in plan rules?
  • What might be a takeover but normally is not intended to be treated as a takeover?
  • When does the board have to tell option holders or share scheme participants about a takeover?
  • What must a formal offer contain?
  • Tax treatment
  • More...

Effect of company takeover on existing share scheme

Brief overview

If a company (usually referred to as the target) is taken over, any employee or director holding options, awards or other rights over shares in that company will be concerned for their rights to be protected. Generally, the plan rules will give some fixed entitlements to participants and the acquirer of the company (the acquirer) may offer additional choices.

Common plan rules will allow participants in a share scheme the chance to acquire shares in the target to the extent that the rights have vested. Participants may then accept an offer, sell shares, receive cash / shares or a combination, or swap their options or share rights for ones in the acquirer. If participants do nothing, the rights usually lapse after a specified period, commonly less than six months, and all rights are lost.

The acquirer may offer a swap of options or share rights, pay participants to give up the rights, or offer participation in the acquirer’s plan.

Tax-advantaged plans have specific rules to enable continued qualifying status.

What is meant by a takeover?

A takeover is usually where the target company becomes controlled by a person (acquirer), whereby another company or an individual or group of individuals together acquire more than 50% of the shares or voting rights in the target.

Frequently, plan rules refer to a ‘change of control’ rather than a takeover. Control is commonly defined by reference to ITA 2007, s 995, ITEPA 2003, s 719 or the old reference in ICTA

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