ETASSUM35470 - Schedule 3 SAYE option schemes: Requirements relating to share options: Exercise rights: Ceasing to be in scheme related employment

Sub-paragraph 34(5) permits schemes to provide rights of early exercise when an option-holder ceases to be in scheme related employment due to the transfer of a business, which is not a TUPE transfer.

The only other rights of early exercise following cessation of employment are in the compulsory provisions of paragraph 34(2). Paragraph 34(2) exercises are tax advantaged, whereas paragraph 34(5) exercises are not (section 519 ITEPA).

Paragraphs 34(2), 34(5) and 36 are the only circumstances in which anyone not in eligible employment can participate (obtain or exercise options) in a Schedule 3 SAYE option scheme (paragraph 10).

Paragraph 34(5) covers circumstances in which, although the scheme related employment has ceased, the option-holder may still be working in the same job. It refers to the transfer, in non-TUPE circumstances, of the business (or part of the business) in which the employee works from a constituent company to a person who is not an associated company of the scheme organiser. The result is that the employer changes and the employees are no longer employed by the constituent company. This transfer may amount to “redundancy” within the Employment Protection Act. As of 17 July 2013 transfers of the employing business which fall under TUPE are dealt with in paragraph 34(2)(b).

Paragraph 34(5A) provides that for paragraph 34(5) transfers, in addition to the existing right of early option exercise triggered by the transfer itself, participants could alternatively be given a ‘deferred’ right of early option exercise if they subsequently left the ‘new’ company for one of the ‘good leaver’ reasons set out at paragraph 34(2).

So if the Scheme rules make option exercise provisions under paragraph 34(5) then the rules must specify which of the following applies:

• that the option may be exercised within six months of the termination date (the date when scheme related employment ends, i.e. the transfer date), or
• that the options may be exercised within 6 months after the date of cessation of employment in the “new” company for a reason within paragraph 34(2)(a), (b), (c) or (d) (see ETASSUM35370), That is the date of cessation of the employment, which prior to the termination date, was the scheme related employment.

The practical effect of this second alternative is that the participant would retain his option even though he was no longer employed in a company that has any connection with the scheme organiser. The fact that the scheme organiser would still have reporting obligations in relation to options held in these circumstances may mean that scheme rules will normally specify the first alternative. Paragraph 36 permits schemes to provide rights of exercise within 6 months of the bonus date when an option holder is not employed by a constituent company if, at the bonus date, the option holder holds an office or employment in a company which is:

• an associated company of the scheme organiser, but
• not a constituent company.