How to create B Ordinary non-voting shares for your EMI Option Scheme

At SeedLegals we recommend companies issue their employees with EMI share options that convert into non-voting shares.

There are two reasons we recommend this:

1. If the company’s last funding round was on SeedLegals, we structure the consent rights and management reporting so that only voting shareholders get management reports or need to be consulted on investor consent matters. By giving employees options that convert into non-voting shares, this allows the company to avoid needing to ask employees (after they have exercised their options) for their consent on company matters, or needing to share company information reports and management accounts with employees.
2. By issuing an employee with non-voting option shares, those shares will have a lower value to investors (who will want consent rights and management reports), which allows for a larger EMI valuation discount for the employee share options.

The result is a better overall package for employees who can pay less when exercising their options, and for the company.

We typically call these shares B Ordinary (non-voting) shares, though it’s worth noting that the name is unimportant (they could equally have been called Ordinary (non-voting), or ESOP Shares, or anything else), this is just our convention.

With the increasing number of EMI schemes being done on SeedLegals (the data suggests around one in six of all EMI schemes is now on SeedLegals) we’re seeing increasing interest in our approach to the creation of dedicated share classes for EMI Option Schemes, and so we put together this post to answer the most common questions.

What does the EMI Code say about this new share class?

It’s a requirement of the EMI Code that the option entitles the employee to acquire a share that forms part of the company’s share capital. This makes sense, it would not be possible to allot a share of a class that has not been created.

We encourage our users to create the new share class as early as possible.

If you have an Option Scheme that mentions a share class you have not yet created, go ahead and create it now. Here’s how to do that on SeedLegals:

How do I create this new share class?

It’s important to know that there is no statutory provision that governs the creation of a new share class – in other words nowhere does it say that the Articles need to be modified and in fact a much simpler method is available:

• Is your company still on the Model Articles?
  If yes, then there is no need to modify your Articles and all you need is a Shareholder Resolution which can be adopted by an ordinary resolution in addition to any consents that your shareholders agreement may require. That Shareholder Resolution will be provided to you by SeedLegals (contact us if you need that). It’s a 2-page document that you’ll need to get signed by at least 50% of the shareholders by number of voting shares held).
  Make sure that you specify the same share class properties in the Shareholder Resolution (voting rights, dividend rights, etc.), to match the choices you made in your EMI Option Scheme.
• Was your last funding round on SeedLegals?
  If, yes, your SeedLegals-created Articles include references to the Model Articles sections mentioned above, and all you need is the Shareholder Resolution described above (plus any investor consents as per your last shareholders agreement).
• Was your last funding round done elsewhere?
  If you have custom Articles that are based on the Model Articles and don’t exclude Model Article 22 then the above applies, the Shareholder Resolution described above is likely available to you as well. If in doubt, check with the law firm that did the documentation for your last round.

Do I need to update my company’s Articles?

There is no need to update your company’s Articles to create a new share class, unless it is required by your company’s Articles.

Normally, the Articles do describe the company’s share classes. But, updating the Articles is a major admin exercise:

• The shareholders need to pass a special resolution (which requires 75% of votes) in order to adopt new Articles.
• And then you’ll need to update the Articles with the extra share class definitions, in all relevant places where they may be referenced.

The simpler approach is to use a Shareholders Resolution to create the new share class now, and then when there’s some other reason to update your Articles (e.g. as part of your next funding round), you’ll supplement them with the share class description then.

If you need more information on this, feel free to contact us directly.

This is not intended as legal or tax advice on which you can rely. If you are still uncertain, you should obtain professional advice.