Following a takeover it may not be practical for employees to
hold options over shares in a company which has become a
subsidiary.
The relevant legislation provides a facility to "roll over"
tax advantaged options when a company is taken over by another
company whose shares satisfy the appropriate legislation.
Number of shares
The relevant requirement is that the aggregate market value
of shares under the old and the new options shall be equal at the
time the rollover/exchange takes place. This fixes the number of
shares under the new options.
The aggregate market value of shares under the old and the
new options is a valuation matter on which SAV will nearly always
need to be consulted. Again, many cases involve quoted companies
and you should base the calculation on the agreed share for share
exchange terms, for example, 2 Company B shares for every Company A
share. Unless there are compelling reasons stick to this simple
approach even if the quoted price of the shares in the two
companies have diverged from the prices prevailing at the
announcement. This approach should be used even where there are
alternatives, such as cash or a mix of, say, cash, loan notes and
shares. Only in the very rare case that the acquiring quoted
company is paying wholly cash will you need to consider the example
below (suitably amended). Multiple references to SAV can be avoided
by companies arranging for all exchanges to take place on the same
date or within a very limited period.
You can normally agree that the terms for the exchange can
be based on the approach outlined above and that they will hold
good for 21 days. Option holders can then be invited to exchange
their options on those terms and within that period.
Company A is taken over by company B for £1m.
The calculation to make is to show how many shares in B are
equal to a share in A.
Company A has an issued share capital of 100,000, so its
shares are worth £10 each.
Company B has an issued share capital of 1m, and is worth
£10m (also £10 per share) immediately before the
takeover.
However, an uninfluential minority in company B is worth
£2.50 per share. You might therefore think that the adjustment
for share options is 4 shares in company B for 1 share in company
A.
However, because we have to do the comparison on a like for
like basis we compare the undiscounted value of company B with the
take-over price of company A and so the adjustment is 1 share in
company B for 1 share in company A.
The relevant legislation requires that the aggregate exercise price payable by a participant under the new option must be equal to the aggregate exercise price under his/her old option. As the number of shares under the new option has been fixed, (see above) this enables the exercise price per share under the new option to be determined.
| Additional Guidance: SVM150000 |
