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Execute options and sell shares

Discussion in 'Legal' started by wesn, Jul 16, 2012.

  1. wesn

    wesn UKBF Newcomer Free Member

    Posts: 6 Likes: 0
    Hey,

    I own a few percent in my current company but would like to now move on. I haven't yet executed my options and am unsure of the steps I need to take.

    1. Could anyone provide the steps I'll need to go through?
    2. Please recommended lawyers and any accountants that I could use.
    3. How long should I expect the process to take?

    Thanks for your help,
    Wes
     
    Posted: Jul 16, 2012 By: wesn Member since: Jul 16, 2012
    #1
  2. Andrew46

    Andrew46 UKBF Regular Full Member

    Posts: 231 Likes: 45
    It is difficult to comment meaningfully without more information. Is this a private company? Are there willing buyers of the shares? You mention options but are these options to take up new shares or options to sell existing shares?
    Whether you actually need lawyers or accountants depends on the value involved and complexity or otherwise of the share arrangements.
     
    Posted: Jul 16, 2012 By: Andrew46 Member since: May 20, 2011
    #2
  3. wesn

    wesn UKBF Newcomer Free Member

    Posts: 6 Likes: 0
    Thanks for replying and I appreciate the questions because I'm not experienced enough to know what's important to divulge.

    - It is a private company
    - I've kept my cards close to my chest and not let on that I'm going but I'm quite sure there are other shareholders who'd want them
    - Options to take up new shares
    - The share arrangement that stands was established by several lawyers over a few months so I assume a fair level of complexity

    So I think that I need to exercise the options so that I actually hold shares and then sell them?

    At a high-level - based on my contract - I think that I can try to sell them but the board can compel me to sell the shares to them at the offered price.

    Wes
     
    Posted: Jul 16, 2012 By: wesn Member since: Jul 16, 2012
    #3
  4. Andrew46

    Andrew46 UKBF Regular Full Member

    Posts: 231 Likes: 45
    The option agreement or rules should spell out the timing for exercise by you of the options and the issue by the company of the shares.
    When the shares are issued then subject to anything in the articles of association or the shareholder agreement, you should be able to sell the shares. However from what you say it seems the existing shareholders have as is common a right of first refusal at the offer price (check this as sometimes the articles allow the board to have the shares valued by the auditors rather than having to buy at the price offered to you).
    The articles or shareholder agreement will set out the procedure and timetable for the right of first refusal.
    Is there an established internal market for these shares? Commonly in a private company the only buyers of a small minority of shares would be the existing shareholders. Do you have any information as to the value of the shares and the price at which shares have been sold recently?
    Be aware also of the tax implications. Are the share options within a tax efficient scheme? The worst case is to exercise options, trigger an income tax liability and then be unable to sell the shares.
     
    Posted: Jul 16, 2012 By: Andrew46 Member since: May 20, 2011
    #4
  5. wesn

    wesn UKBF Newcomer Free Member

    Posts: 6 Likes: 0
    Once again thanks for your help.

    My options have fully vested (I think that's the right way to phrase it?) and I have the document to exercise my options. There are events which would automatically exercise my options but none of them are relevant.

    The company is fairly young - but very successful - and we have taken investment from another company. Perhaps I'm wrong but I think this would set a market value at that point in time i.e. they paid £x for y% creating a value of £z per share? If this is the case then each share is worth a few thousand pounds.

    I own around 5% of this company, is this considered a small minority? I have begun the process of trying to find an internal buyer although I feel a little out of my depth at this point since no shares have been sold recently.

    The share options have an exercise price of around a pound per share, is this what you mean by tax efficient? Or are you talking about timing?

    Your signature implies you're a professional in this area? If so how much would it cost to get someone with your skills to look through my documents? How long would it take?

    Much appreciated,
    Wes
     
    Posted: Jul 16, 2012 By: wesn Member since: Jul 16, 2012
    #5
  6. Mitchells Bristol

    Mitchells Bristol UKBF Ace Full Member

    Posts: 1,362 Likes: 384
    Hello Wes

    Whether the shares are "tax efficient" will be based on the type of scheme, more than the exercise price. There are various tax approved share schemes which carry favourable tax treatment. One such scheme is an Enterprise Management Incentive (EMI) scheme, and these are typically used to incentivise key workers within an organisation.

    The share scheme may be unapproved, which may carry a higher tax liability at the date of exercise. If the market value of your shares is, say, £5 per share now, then you will be liable to pay income tax at your marginal rate on £4 per share (based on an exercise price of £1 per share). This could be at as much as 40% or 50%. The transaction may also be liable to class 1 National Insurance.

    Compare this to an EMI scheme, if you exercise and sell the shares immediately, you could be looking at a tax rate of 10% (capital gains tax).

    Hope this is a useful overview.
     
    Last edited: Jul 16, 2012
    Posted: Jul 16, 2012 By: Mitchells Bristol Member since: Nov 24, 2011
    #6
  7. jim_price

    jim_price UKBF Regular Free Member

    Posts: 456 Likes: 100
    Couple of quick points:
    - Am I right in thinking the option agreement includes a condition that you will enter into a shareholders agreement upon exercising the option?
    - If so, what happens to your shares may be governed by that shareholders agreement.
    - Previous answer rightly raises the issue of income tax. Do you know what, if any, value was agreed with HMRC by your employer at the date options were granted?
    - One correction to previous answer is that you need a 12 month holding period of the shares to get the 10% rate, which you won't have if you exercise and sell immediately.
     
    Posted: Jul 17, 2012 By: jim_price Member since: Aug 25, 2009
    #7
  8. The Resolver

    The Resolver UKBF Ace Full Member

    Posts: 2,827 Likes: 917
    I would need to see the scheme documents. I can provide a translation into layman's language and advice of the process, the potential gains and the generalities of the tax issues. If you can email them to me I can give you a fee quote. You will have to be careful given your wish to leave fairly soon afterwards.
     
    Posted: Jul 17, 2012 By: The Resolver Member since: Mar 31, 2006
    #8
  9. wesn

    wesn UKBF Newcomer Free Member

    Posts: 6 Likes: 0
    jim_price:

    - yes I'll be entered into a shareholders agreement
    - I have a digi copy of these docs now and am looking for quotes to help me interpret the docs and potentially execute, interested?
    - The value agreed was 25c (euro)
    - Any idea what taxation rate would be applied?
    - Thanks for your help :)

    TheResolver

    - Could you PM me your email address please?

    Thanks all
     
    Posted: Jul 23, 2012 By: wesn Member since: Jul 16, 2012
    #9
  10. jim_price

    jim_price UKBF Regular Free Member

    Posts: 456 Likes: 100
    I'll quickly deal with the tax part. If the exercise price is £1 per share (let's say 80c in Euro), and the value at the date of the options being awarded was 25c, there is no income tax to pay, and therefore the applicable income tax rate is a moot point. I'm assuming this is an approved scheme or an EMI given that you've said a value was agreed with HMRC.

    The base cost for CGT will become the price you pay on exercise, the difference between the base cost and what you subsequently sell them for will be a chargeable gain. You presumably have an annual exemption of gains up to £10,600. Assuming that you sell withing a year of exercising, anything beyond the £10,600 will be taxed at 18% or 28% depending on whether or not you are a higher rate tax payer.
     
    Posted: Jul 23, 2012 By: jim_price Member since: Aug 25, 2009
    #10
  11. wesn

    wesn UKBF Newcomer Free Member

    Posts: 6 Likes: 0
    Thanks for your help everyone. I got The Resolver to give me some professional advice and am extremely happy with the results.

    Wes
     
    Posted: Aug 3, 2012 By: wesn Member since: Jul 16, 2012
    #11