Why board discretion matters

Enterprise Management Incentives (EMI) option plans often include board discretion so the scheme can adapt to unforeseen events. Without it, you can’t tailor outcomes for leavers, reward stellar performance, or accelerate vesting ahead of a sale.

But when discretion is too broad or applied incorrectly, it can unintentionally invalidate EMI tax benefits. That risk has real costs, for both the company and participants.

The three fundamental EMI terms

Every EMI option agreement must clearly state three fundamental terms:

1. 1. The number of shares available under the option
   2. The exercise price for each share
   3. When the option can be exercised and shares acquired

    
   Altering any of these materially (other than minor tweaks) is treated by HMRC as a “release and regrant”.

   Common discretionary powers

   Boards typically use discretion to:

   • Assess good leavers – Allow departing employees who leave on good terms to retain or exercise vested options
   • Vary or waive performance conditions – Lighten overly tough targets that participants couldn’t reasonably meet
   • Accelerate vesting – Reward option-holders by bringing forward vesting around an exit event

   Safe vs. unsafe uses of discretion

   Discretion type	Safe when…	Risky when…
   Good-leaver carve-outs	Agreement explicitly covers this scenario	Clause added after grant or applied inconsistently
   Waiving performance conditions	Conditions were genuinely unattainable and waiver is documented	Waiver brings forward exercise date or changes share count
   Accelerating vesting (exit-only plans)	Vesting remains tied to the exit event	Used outside a defined exit event, or accelerates exercise date
   Broad power to amend fundamental terms	Never – by design, HMRC won’t allow general alteration	Grants board arbitrary power to change price, timing, or quantity

    
   Consequences of misuse

   If discretion changes a fundamental term, HMRC treats the original option as released and a fresh option re-granted. This can lead to:

   • Loss of EMI eligibility if the participant is no longer an employee or doesn’t meet the working time requirement
   • Unexpected Income Tax and National Insurance charges on exercise
   • Restarted clocks for Business Asset Disposal Relief, altering Capital Gains Tax rates
   • Administrative burden: re-notification to HMRC and revised annual returns
   • Frustrated employees and red flags in investor due diligence

   Practical tips for drafting and applying discretion

   • Include all discretion clauses in the original grant documents.
   • Tie powers explicitly to events (e.g., “on a change of control” or “where good leaver criteria met”).
   • Limit discretion to non-fundamental adjustments – never price, share count, or exercise window.
   • Maintain clear records of every decision, rationale, and board resolution.
   • Seek specialist tax and legal review before deploying discretion in edge cases.

   Speak to the team today to discuss EMI option schemes and how to effectively manage them within your business.