Share Option Schemes

Author:Ms Sarah Gallagher
Profession:Dillon Eustace

This a high level overview of the issues that should beconsidered and addressed when establishing and running a schemepursuant to which shares in a certain company will end up in thehands of either the employees or directors of a company or both.The issues have been divided into the following three broadcategories:1. Practical Considerations2. Relevant points under the Companies Acts 1963-20063. Taxation matters1. Practical Considerations:What is a share option? A share option is a right given to anemployee to buy a share in the company at some time in the futureat a price fixed on the date the option is granted. The number ofshares covered by the option, the date(s) on which the option canbe exercised (known as the "vesting date"), the optionprice and any targets that must be achieved are commonly set out ina share option scheme or an option agreement with the employee.Before embarking on drafting of any such scheme, the matters setout below should be fully considered. It is even possible thatafter such discussions have taken place, it transpires that a shareoption scheme is not the best choice for the employer after all;their objectives may be served equally well or better by a simplebonus scheme.1.1 Review of key company documents:Prior to establishment of a shareholders' scheme thefollowing documents should be reviewed:The Articles of AssociationAny Shareholders' Agreement in placeIn reviewing the above documents, the following matters shouldbe considered:Will shareholder or board approval be required for theimplementation of the plan – if shareholder approval isrequired, is it easily obtainable? Are there any large orinstitutional shareholders who may object?What are the pre-emption rights on either allotment or transferor both?What type of shares are currently in issue – will aspecial class of shares be required?Is it intended that employees will attend AGMs and have votingrights 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 theFinance Act 2008 – see further below in taxationsection).1.2 The BeneficiariesThe intended beneficiaries must also be fully considered:-Who does the company intend to benefit under the proposedscheme or plan?In a Revenue approved scheme, all eligible employees must beable to participate on equal terms; options can be granted withoutthe "similar terms" conditions for "keyemployees" over not more than 30% of the total options grantedunder the schemeIn a non-revenue approved scheme, the company is free to use amore selective approach - caution should nonetheless be exercisedto ensure compliance with equality laws, including in relation tofull and part-time employeesConsideration needs to be given to the compulsory transfer ofshares on cessation of service ("good and bad leaver") aswell as the "drag along" of employee shareholdings in theevent that the company is to be sold; again there is lessflexibility in this regard under a Revenue approved scheme than inan unapproved scheme1.3 DilutionThe possibility that the existing shareholders will be dilutedby 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 existinginvestors or institutional shareholders – theirwillingness or not to dilute will have to be considered.1.4 Performance TargetsIf targets are to be to set, the employer company will be bestpositioned 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 thewillingness or not to dilute.The grant of options may be conditional upon the employeecontinuing in service for a certain period of time and/or theachievement of certain targets. (As stated above, in a Revenueapproved scheme – all eligible employees must be able toparticipate on an equal basis; in addition, the basis ofcalculation of entitlement needs to be submitted when seekingRevenue approval.)1.5 Private company concernsThe following are some practical issues that are of particularconcern to a private company:1.5.1 Revenue approved scheme v unapprovedAlthough income tax exemption is afforded by adopting a revenueapproved scheme, it is difficult to accommodate the businessconcerns of a private company within the framework of a Revenueapproved...

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