In today's mini-Budget the UK chancellor announced that from April 2023, qualifying companies will be able to issue up to £60,000 of CSOP options to individual employees, double the current £30,000 limit. Furthermore the ‘worth having’ restriction on share classes within CSOP will be eased, better aligning the CSOP code with the EMI code and widening access to CSOP for growth companies.
This is potentially good news for a number of reasons.
More is more!
First, the obvious. Compared to the individual EMI limit of £250,000, the current CSOP limit of £30,000 is clearly less favourable. The new higher individual limit means more tax efficient CSOP options can be granted which should boost the attractiveness of CSOP, or at least make CSOP more worthy of consideration.
Greater flexibility - worth having
For companies with more than one class of shares, the CSOP code sets two tests, either of which if satisfied provide a useful indication that the CSOP shares are of a class “worth having”:
- either the CSOP shares will be worth having because they are “employee-control” shares which give the employees and directors (and ex-employees and ex-directors) control of the company (the employee-control test); or
- the CSOP shares will be worth having because the majority of the shares of that class are “open market shares” held by “outsiders” (i.e. non-employees and non-directors) who were presumably prepared to pay good money for them (the open market test).
For many private companies with different classes of shares, this 'worth having' requirement is often too much of an obstacle.
Whilst we need to wait and see how the 'worth having' rules will be eased, if the result is that companies will have greater flexibility and choice as to the class of CSOP shares over which options can be granted, then this is an extremely positive development.
As always when designing an equity incentive structure, flexibility is key.
The fact that the government wants to create greater opportunities for employees to acquire company shares is a clear indication that they recognise the importance and benefits of greater and potentially more widespread employee share ownership - which is tremendous.
Indeed why stop at CSOP? There are loads of easy wins that the government could do to improve access to company shares.
I am delighted to be writing about CSOP in a such a positive way! For years it is has languished in the shadows behind its sexier older brother - EMI.
The other main CSOP requirement for unlisted companies (which applies equally to EMI) is that the company must be independent, i.e. it cannot be under the control of another company. For example it is not possible to grant CSOP options over shares in a subsidiary company.
If this other requirement could also be 'eased' then it really would turbo-charge the attractiveness of CSOP.