Share Option Schemes

Author:Ms Sarah Gallagher
Profession:Dillon Eustace

This a high level overview of the issues that should be

considered and addressed when establishing and running a scheme

pursuant to which shares in a certain company will end up in the

hands of either the employees or directors of a company or both.

The issues have been divided into the following three broad


1. Practical Considerations

2. Relevant points under the Companies Acts 1963-2006

3. Taxation matters

1. Practical Considerations:

What is a share option? A share option is a right given to an

employee to buy a share in the company at some time in the future

at a price fixed on the date the option is granted. The number of

shares covered by the option, the date(s) on which the option can

be exercised (known as the "vesting date"), the option

price and any targets that must be achieved are commonly set out in

a share option scheme or an option agreement with the employee.

Before embarking on drafting of any such scheme, the matters set

out below should be fully considered. It is even possible that

after such discussions have taken place, it transpires that a share

option scheme is not the best choice for the employer after all;

their objectives may be served equally well or better by a simple

bonus scheme.

1.1 Review of key company documents:

Prior to establishment of a shareholders' scheme the

following documents should be reviewed:

The Articles of Association

Any Shareholders' Agreement in place

In reviewing the above documents, the following matters should

be considered:

Will shareholder or board approval be required for the

implementation of the plan – if shareholder approval is

required, is it easily obtainable? Are there any large or

institutional shareholders who may object?

What are the pre-emption rights on either allotment or transfer

or both?

What type of shares are currently in issue – will a

special class of shares be required?

Is it intended that employees will attend AGMs and have voting

rights or just share in the economic growth of a company? i.e.,

create a special class of non-voting shares (but beware of any

"deferred shares" since the changes introduced by the

Finance Act 2008 – see further below in taxation


1.2 The Beneficiaries

The intended beneficiaries must also be fully considered:-

Who does the company intend to benefit under the proposed

scheme or plan?

In a Revenue approved scheme, all eligible employees must be

able to participate on equal terms; options can be granted without

the "similar terms" conditions for "key

employees" over not more than 30% of the total options granted

under the scheme

In a non-revenue approved scheme, the company is free to use a

more selective approach - caution should nonetheless be exercised

to ensure compliance with equality laws, including in relation to

full and part-time employees

Consideration needs to be given to the compulsory transfer of

shares on cessation of service ("good and bad leaver") as

well as the "drag along" of employee shareholdings in the

event that the company is to be sold; again there is less

flexibility in this regard under a Revenue approved scheme than in

an unapproved scheme

1.3 Dilution

The possibility that the existing shareholders will be diluted

by the creation of the scheme needs to be considered.

If the scheme is being set up in an early stage company,

dilution probably won't be necessary. If there are existing

investors or institutional shareholders – their

willingness or not to dilute will have to be considered.

1.4 Performance Targets

If targets are to be to set, the employer company will be best

positioned to decide upon appropriate targets for its workforce.

Where there are several existing shareholders, including investors,

the efficacy and precision of the targets to be met may affect the

willingness or not to dilute.

The grant of options may be conditional upon the employee

continuing in service for a certain period of time and/or the

achievement of certain targets. (As stated above, in a Revenue

approved scheme – all eligible employees must be able to

participate on an equal basis; in addition, the basis of

calculation of entitlement needs to be submitted when seeking

Revenue approval.)

1.5 Private company concerns

The following are some practical issues that are of particular

concern to a private company:

1.5.1 Revenue approved scheme v unapproved

Although income tax exemption is afforded by adopting a revenue

approved scheme, it is difficult to accommodate the business

concerns of a private company within the framework of a Revenue

approved scheme, e.g., concerns about the transferability of shares

and ensuring that (employee) shares do not pass to persons

unconnected with the company. In a Revenue approved scheme the

ability of a company to limit the transferability of shares held by

employees when they leave employment of the company is


Thus if income tax exemption is not the primary motivation, an

unapproved scheme will offer greater flexibility for a private

company. There are, however, certain other concerns to be addressed

which are set out below.

1.5.2 Valuation of shares

As there is no quoted price for the shares in a private company,

it is more difficult in practice to establish the market value of

the shares which are the subject of the option grant. The market

value will be relevant in a number of scenarios, including the

calculation of any taxation liability; good and...

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